PURCHASING and SALES FAQ’s, Part I
Robert Menard, Certified Purchasing Professional, Certified Professional Purchasing Consultant
Editor’s note: This is Part I of a two part series on the basics of purchasing and sales negotiation. Part I deals with price and Total Cost of Ownership and Part II deals with P-Cards, sales pros, and Win-Win
How do I know if I’m getting the best price?
That depends on how you define “best price.” Price alone does not tell the whole story. Quality, Service, and Delivery, along with Price are the four elements of the Total Cost of Ownership. Driving for a lower price at the expense of the other three elements may generate undesirable results. The “best price.” is one which actually produces the lowest Total Cost of Ownership.
What is the Total Cost Of Ownership (TCO) and how is it determined?
The TCO accounts for the cost impact of Quality, Service, Delivery, and Price. Quality, Service and Delivery each may have several sub categories which affect the cost of acquiring, holding and processing the product or service before it is consumed by our customer. For example, a low Priced product may cause production breakdowns(Quality), longer lead times (Delivery). and threaten the relationship with our customer(Service). The Total Cost Of Ownership is calculable and has a significant impact on the ability of our business to remain competetiveand viable.
How do I negotiate better prices?
Pricing is sometimes an inexact science. Depending upon the sophistication and size of the seller (relative to the buyer), sometimes merely asking will result in a concession. Pricing strategies may result from market demand, competitve forces or other influences. The buyer must seek to learn the seller’s motivations for clues on pricing flexibility.
Focus on the vendor’s costs, since higher costs will ultimately yield higher prices. Prices may be tied to costs or they may be arbitrary. In either case, exploration of the price and cost structures provide negotiation opportunities.