SourcingApps Price Analysis

 for Specific quantities

for Range of quantities

 based on Experience Effect

 based on Economic Order Quantity

SourcingApps Range Quantity Discount Analysis Show Example

In range pricing there is a price for range of quantities (1-4 units for $10.00 each, 5-9 units for $9.50 each). Quantity Discount Analysis (QDA) calculates the incremental price difference for each quantity and price. This process shows the real price that is being charged for the next quantity rather than average price for the entire quantity. This analysis either confirms that you are in fact getting an increasing lower price as the unit volume increases or that the incremental unit price is increasing and decreasing as volume increases (irrational behavior). What you would like to see are two lines starting from the same point with a gap between increasing as volume increases.

The "Range" worksheet also calculates the maximum quantity to purchase in each quantity range. All range quantity pricing has the potential for concealing that maximum units to purchase in a given price range is less than the maximum in that range. Therefore, it may be cheaper to purchasing the minimum quantity in the next range rather than buying above a certain quantity (see the Range worksheet for an example of this effect).

Perform a QDA analysis on all pricing to determine if the if price schedule you are analyzing is rational (the discount is consistent with larger volumes) or irrational (the discount is not consistent with larger volumes) before performing other SDS analyses.
 

SourcingApps Specific Quantity Discount Analysis Show Example

...Are discounts for larger quantities real or illusionary? What is the maximum quantity you should buy in each price break?

In specific quantities pricing there is a price for each quantity on the price list or quotation (1 unit for $10.00, 2 units for $9.50 each, etc). Quantity Discount Analysis (QDA) calculates the incremental price difference for each quantity and price. This process shows the real price that is being charged for the next quantity rather than average price for the entire quantity. This analysis either confirms that you are in fact getting an increasing lower price as the unit volume increases or that the incremental unit price is increasing and decreasing as volume increases (irrational behavior). What you would like to see are two lines starting from the same point with a gap between increasing as volume increases. Perform a QDA analysis on all pricing to determine if the if price schedule you are analyzing is rational (the discount is consistent with larger volumes) or irrational (the discount is not consistent with larger volumes) before performing other SourcingApps analyses.
 

SourcingApps Experience Curve Analysis Show Example

..What should the price be if you continue to buy additional quantities of the same item to your specifications?

The Boston Consulting Group performed studies that found non-labor as well as labor related costs followed a composite learning curve and label it the "experience effect." Experience curves can be very useful in forecasting future prices for items that are purchased on a repetitive basis. All you need is an initial price and the "experience effect" for the industry or process to forecast the price of additional quantities.

Experience curves for select industries and processes are as follows: aerospace 85%; complex machine tools 75-80%; construction operations 70-90%; contract manufacturing 85-90%; raw materials 93-96%; repetitive clerical tasks 75-85%; custom integrated circuits 70%; and repetitive electronics manufacturing 90-95%.

For additional information on this subject see: Notes on the Use of Experience Curves in Competitive Decision Making, Gerald B. Allan and John S. Hammond, III Harvard Business School, No. 175-174 and The Boston Consulting Group, Perspectives on Experience, Boston, MA, 1970.
 

SourcingApps Economic Order Quantity Analysis Show Example

...Is this supplier able to provide you with a quantity discount schedule that meets your EOQ?

Economic order quantity (EOQ) balances the cost acquisition and the cost of carrying material to minimize total costs. Use EOQ after any pricing anomalies found have been explained. The worksheet has been designed to permit you to perform sensitivity analyses (comparing the total cost based for different price/volume relationships).

For additional information on this subject see Purchasing Principles and Applications, Stuart Heinritz, Paul V. Farrell, Larry Giunipero Michael Kolchin, Prentice Hall, Englewood Cliffs, NJ, 1991,pages 290-294.