Fair and Reasonable Price

Cost analysis and Value Analysis, are two methods for obtaining the information with which to negotiate a good price. Competitive bidding and an investigation of published price lists, where available, are two other ways for assuring that the price you arrive at will be a fair and reason­able one. In competitive bidding, it is important, however, not to accept the lowest price, unless it is clear that the vendor will be able to deliver and make a reasonable profit on the sale.

It is rarely to your advantage to accept an exceptionally low price from an inexperienced vendor, or one which is the result of an error.

Competitive bidding is appropriate in situations where:

the bids are easy to obtain (through a phone call or simple letter)

the value of the purchase is large enough to justify the expense to obtain and evaluate bids

the specifications of the item or service to be purchased are simple and clear to both the buyer and seller

there are an adequate number of sellers in the market who wish to bid on the contract and are willing to price competitively to get it

there is sufficient time to utilize this method of purchasing

Negotiating Terms of Sale

To run your business efficiently you must have reliable and prompt delivery. Furthermore, you want to keep the lowest inventory possible while keeping enough stock on hand to satisfy customer needs. You also would like to sell as many units of a new shipment as possible, before you have to pay for it. When negotiating a purchase, therefore, you want to obtain:

prompt delivery

split shipments

as much time as possible, after delivery, to pay the bill (dating of invoices)

cash discounts

lowest possible freight costs

Obviously, you cannot expect to get everything from your supplier all the time and still be considered a desirable customer. There­fore, you must use judgment on how hard you want to push.

Split shipments are important only when there are quantity dis­counts; if the vendor grants such split shipments to other customers then there is no reason why you should not get them too.

The same is true of "dating" of invoices, a practice in which, at least at certain times of the year, some suppliers will permit you to buy and accept delivery but pay as much as 60 to 120 days after receipt of the merchandise.

Cash discounts usually are shown on vendor invoices. Sometimes, however, they have to be requested. These discounts can be 1 or 2 percent off the total order if you pay in full within 10 days. While 1% may seem unimportant, a 2% discount does represent a small saving. Besides, paying promptly may create better rela­tions with vendors and may lead to better credit ratings. This, in turn, can lead to better deals with suppliers.

Freight costs can be an important item, especially if purchased components are either bulky or heavy. Sometimes a good buyer can get the vendor to absorb freight costs or, if that is not possi­ble, obtain special freight arrangements in which the supplier routes and schedules shipments in such a way that shipping costs are minimized.

Sometimes, if you do not ask for it, the representative may not tell you that split shipments or dating or cash discounts can be granted. It is up to you, therefore, to bargain for them.

Reciprocal Buying. One type of negotiation which deserves special mention is reciprocal buying. Reciprocal buying is simply the practice of giving preference to suppliers who are also customers. Since it is rare that a customer can also be a supplier, recipro­cal buying is not a widespread practice.

Obviously in those situations where it is possible, it can be good business to buy from companies that are also customers if all factors of service, quality and price are equal, since this practice strengthens the relationship and turns a customer into an even better one.

Unfortunately, reciprocity is not used only when quality price and service are equal. If either party is less than a highly de­sirable supplier, problems can develop.

Furthermore, although reciprocity is not against the law by itself, it could develop into conspiracy and commercial bribery, which are illegal. In the case of large corporations, it may be a violation of the anti-trust laws.

Reciprocity, for all these reasons, should be approached with caution. If you are in a situation where it can be important, it would be wise not to use your customer as a sole source of supply for the product or service involved.

Determination of Purchasing Contract Type

The type of purchasing contract selected for any given order always affects the purchase price of the order. It is, there­fore, important to consider different contract types.

There are two basic types of contract: Fixed price contracts and cost type contracts.

Fixed price contracts

Firm fixed price contract is a type of contract which is most preferred by all buyers and perhaps most frequently used in small businesses. Whenever a fair and reasonable price can be determined, a fixed price contract is desirable to use. Such a contract provides the vendor with a maximum incentive to produce efficiently and all financial risks are borne entirely by the vendor.

Fixed price contract with an escalation clause is often used for contracts involving purchases upwards of $200,000 and a long pro­duction period. The escalation clause allows for an upward or downward change in price as a result of changes in either materi­al prices or labor rates. This type of contract is often used         in construction industries.

Fixed price contract with redetermination is often selected in situations where the amounts of labor and/or material (as well as prices in some cases) are difficult to estimate because changes in specifications or other requirements are likely to occur. In such uncertainty, a firm fixed price contract would be impractical but a fixed price can still be useful since it establishes a mutually agreed-upon base which covers the bulk of the purchase and establishes a formula for calculating fair prices for the expected changes from the basic package.

Everyone needs To be knowledgeable about the Decision Making Process. We all rely on advice, and techniques or tools, to assist us
in our everyday lives.

When we head out To eat, the restaurant is the instrument that supplies us with all the information needed to decide what to
purchase and how much to spend.

Running a Business also requires making decisions using information and techniques - how much inventory to preserve, what price to
sell it in, what credit agreements to provide, just how many people to hire.

Decision Making Procedure in company is the systematic process of identifying and solving problems, of asking questions and
finding answers. Decisions are made under conditions of uncertainty. The future is not understood and sometimes even the last is
suspect. This manual opens the door for business owners and managers to learn about the selection of techniques that may be
utilised to boost your decision making process in a world of doubt, change, and uncontrollable circumstances.

A General Approach to Decision Making Process. Whether or not a scientist, or an executive of a significant company, or a small
business owner you can benefit from boosting your decision making skills. The overall approach to systematically solving issues is
the same. The next 7 step method to better management decision making may be used to examine virtually all issues faced by a
business.

State that the problem. A problem first must exist and be realized. What's the issue and why is it a issue. What is perfect and
how do present operations vary from this ideal. Identify why the symptoms (what's going wrong) and also the triggers (why is it
going wrong). Try to specify all terms, concepts, factors, and relationships. Quantify the problem to the extent possible. If the
issue, not accurately and fast fulfilling customer orders, then attempt to ascertain how many orders were incorrectly filled and
how long it took to fulfill them.

Define the Objectives. What are the goals of the study. Which goals are the most critical. Objectives are stated by means of an
action verb like to decrease, to grow, or to enhance. Returning to the customer order problem, the significant goals is: 1) to
increase the percentage of orders filled correctly, and 2) to decrease the time necessary to process and order. A sub-objective
could include to simplify and streamline the order fulfilling procedure.

Develop a Diagnostic Framework. Next set a diagnostic framework, that is, determine what methods are going to be used, what types
of information are needed, and also how and where the information is to be found. Is there going to be a consumer questionnaire, a
summary of business documents, time and movement tests, or some thing else. Which are the assumptions (facts assumed to be right )
of the analysis. What are the criteria used to judge the study. What time, budget, or other limitations are there. What kind of
quantitative or other specific techniques are going to be used to examine the data. (Some of that will be covered shortly). In
other words, the diagnostic framework establishes the extent and processes of the whole study.

Collect and Assess the Data. The next step is to gather the information (by following the methods established in Step 3. Raw
information is then tabulated and coordinated to facilitate analysis. Tables, charts, graphs, indicators and matrices are a number
of the standard tactics to organize raw data. Analysis is your important requirement of audio business decision making. What does
the data reveal. What facts, patterns, and trends can be viewed in the information. Many of the qualitative methods covered under
may be utilized during the step to ascertain facts, patterns, and trends in data. Obviously, computers have been used extensively
during this measure.

Generate Alternative Solutions. After the analysis was finished, some specific conclusions about the nature of the problem and its
resolution must have been achieved. The next step is to develop alternative solutions to the problem and rank them in order of the
net benefits. But how are choices best generated. Again, there are several well established techniques like the Nominal Group
Method, the Delphi Method and Brainstorming, among others. In all these methods a team is included, all people who have examined
the data and analysis. The approach is to get an informed group suggesting a variety of feasible solutions.

Develop an Action Plan and Implement. Pick the ideal solution to the issue but be sure to understand clearly why it's best, that
is, the way that it achieves the goals created in Step 2 better than its alternatives. Then develop a productive method (Action
Plan) to implement the solution. At this point an important organizational consideration arises - who will be accountable for
seeing the implementation through and what authority does he have. The chosen manager ought to be responsible for seeing that all
of deadlines, tasks, and reports have been performed, fulfilled, and written. Details are all important in this measure:
schedules, reports, activities, and communication will be the key elements of any action plan. There are lots of methods available
to decision makers implementing an action plan. The PERT method is a way of laying out an entire period such as an action plan.
PERT will be covered soon.

Evaluate, Obtain Feedback and Monitor. Following the Action Plan has been implemented to Solve a issue, management has to evaluate
its effectiveness. Evaluation Standards have to be ascertained, feedback channels developed, and monitoring performed. This
Measure should be done following 3 to 5 weeks and at 6 weeks. The goal is to answer the bottom line question. Has the problem been
solved?

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