SCM 355: Pricing

Direct Costs

- Can be specifically and accurately assigned to a given unit of production of a product or service - Most direct costs are "variable"

Contract Options for Pricing

- Firm-fixed-price (FFP) - Cost-plus-fixed-fee (CPFF) - Cost-no-fee (CNF)

Firm-fixed-price (FFP)

Price not subject to change, under any circumstances

Cost-plus-fixed-fee (CPFF)

- If the item is experimental and the specifications are not firm, or if future costs cannot be predicted • Buyer to reimburse supplier for all reasonable costs incurred (under a set of definite policies under which "reasonable" is determined) in doing the job or producing the required item or service, plus a specified dollar amount of profit • A maximum amount may be specified for the cost

Indirect Cost

- Incurred in the operation of a production plant or service process, but normally cannot be related directly to any given unit of production of a product or service - Often referred to as "overhead"

Fair Price

- The lowest price that ensures a continuous supply of the proper quality where and when needed. • A continuous supply is possible in the long run only when suppliers are making reasonable profit • Reasonable: margins aren't ridiculous based on what they are selling for and what the market will bare • A fair price to one supplier may not be a fair price to another depending on their cost structures • But high costs do not justify high price—Market value • Supply managers' knowledge, experience, and judgment needed

Cost-plus-incentive-fee (CPIF)

Both buyer and seller agree on a target cost figure, a fixed fee, and a formula under which any cost over- or underruns are shared

Cost-no-fee (CNF)

Buyer must persuade supplier that there will be enough subsidiary benefits from doing a particular job