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Price and Cost AnalysisPrice and Cost Analysis

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OutlineOutline

Nissan’s Keiretsu Carlos Ghosn and NissanNissan importance of costingimportance of costing price and cost in purchasing price and cost in purchasing

related issues related issues cost and pricing of suppliercost and pricing of supplier total cost ownership model and collaborative cost total cost ownership model and collaborative cost

managementmanagement

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Keiretsu#1

Nissan special status before the war among automakers

losing the special status after WW II

Nissan’s policy: importing foreign technology (versus 100% self-developed technology of Toyota)

control of foreign exchange in Japan because of shortage in foreign reserve

1952 Bank of Japan rejected Nissan’s application for foreign exchange

#1Evelyn Anderson. Nissan’s Keiretsu, 19561970

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Keiretsu#1

term first appeared in 1952

Small and Medium Enterprises Planning Bureau launched the “Keiretsu Shindan” (Keiretsu Diagnosis)

objective: improving the relationship between automakers and their part suppliers joint site visit of part suppliers by Aichi Industry Guidance Office, Nagoya

Industrial Technology Testing Centre, and the Purchasing Department of automakers

advice to and grading for part suppliers part suppliers of individual automakers formed associations

some open allowing cross-association membership, some more restrictive social functions and seminars

#1Evelyn Anderson. Nissan’s Keiretsu, 19561970

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Keiretsu#1

Provision Act for the Promotion of the Machinery Industry by the Ministry of International Trade and Industry (MITI), 1956-1970 3 times, each of 5 years

for companies of capital less than 50 million yen

component makers (i) to apply for foreign reserve to buy foreign technology, (ii) to borrow at a lower interest rate

incentive for Nissan to spin off or acquire companies

#1Evelyn Anderson. Nissan’s Keiretsu, 19561970

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Nissan’s Keiretsu

Table 1, Table 2, Table 3, Figure 1, Table 4, Table 5

close relationship with Nissan for companies in its Keiretsu

#1Evelyn Anderson. Nissan’s Keiretsu, 19561970

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Carlos Ghosn and NissanNissan

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Bright Bright History of of Nissan

1933: set up in Japan late 50’s: sedan, sports car, and truck in the US under the

brand name Datsun late 60’s: popular cars, good performance, nice structure,

profitable Datsun 510 sedan Datsun 240Z: fastest seller in the world, half a million in 10 years

1975: Datsun being #1 imported brand in US early 80’s: first assembly factory in Tennessee

first for trucks and later for sedan, all well accepted

1989: launched luxury car Infiniti, selling well in the next 10 years

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Troubles for NissanTroubles for Nissan

early 90s: emergency of problems high price, product not as popular as before

market share in Japan dropping for more than 20 years

by late 90s: running into deep financial trouble debt: US$ 22 billion

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Carlos Ghosn

1954: born in Brazil from parents of Lebanon origin mother; born in Nigeria, a French citizen

father: a Brazilian citizen

1960: moved with mother and three siblings to Beirut, Lebanon excellent student, Intelligent, diligent student with various talents

undergraduate and master in France bachelor degree in engineering in École Polytechnique

master degree in École des Mines de Paris

1978: employed by Michelin & Cie, the largest tire manufacturer in Europe

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Carlos Ghosn

1984: heading R&D of the company's industrial tire division

1985: Chief Operating Office of Michelin's South American operations two factories in Brazil haunted by inflation

turned the factories into profitable in two years

1990: chairman and chief executive officer of Michelin North America acquisition of the Uniroyal Goodrich tire company

1996: Executive Vice President of Renault, 2nd in company financial trouble, loss of US$ 1 Billion

cost cutting, leading to profit in 1997

1999: Renault purchased 36.8% of Nissan

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Achievements of Carlos GhosnAchievements of Carlos Ghosn

1999 Renault got 36.8% stake of Nissan Nissan: debt $20 billion; loss $2.7 billion in 99

June 99 Ghosn as COO of Nissan

June 00 Nissan net profit $2.7 billion

June 01 CEO of Nissan

May 05 CEO of Renault

by 06 EBIT of Nissan 9.25%, double of industrial average, and up from 1.38% from year 2000

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Tasks by Carlos GhosnTasks by Carlos Ghosn

objectives of the 3-3-3 Turnaround plan cut cost by 1 trillion yen

cut 20% of purchasing in 3 years

cut number of suppliers to half (1,100 to 600)

cut debt from 1.4 trillion yen to 700 billion yen

launched 22 new cars

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Importance of Purchasing and Supply Management

assumption: linear changes of sales and cost w.r.t. the production quantity

how to increase profit?

$10Profit

$40 Others

$50 Material

Cost

$100Sales

sales? price? cost?

10% increase in

sales

$11Profit

$44 Others

$55 Material

Cost

$110Sales

10% increase in profit

$20Profit

$40 Others

$50 Material

Cost

$110Sales

100% increase in profit

10% increase in price with

30% decrease in

demand$14Profit

$28 Others

$35 Material

Cost

$77Sales

40% increase in profit

10% increase in

price without change in demand

$12.5Profit

$40 Others

$47.5 Material

Cost

$100Sales

25% increase in profit

5% decrease in

material cost

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Tasks by Carlos GhosnTasks by Carlos Ghosn

specific tasks cut 21,000 jobs (14%) closed 3 out of 7 assembly factories reduced production platforms from 24 to 15 sold nearly 1,300 but 4 company stocks broke the Keiretsu system benchmarked purchasing cost

purchasing team formed by purchasing, engineering, manufacturing, and finance

cost benchmarks from Renault centralized financial system saved design cost

collaboration with Renault cost-saving design

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KPI at Financial Year 2000 KPI at Financial Year 2000

sale: 4% 22 new cars: launched as

scheduled

personnel: simplified

purchasing cost: 11% utilization of capacity: 74% (up from 51%)

profit margin: 5.4%

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Importance of CostingImportance of Costing

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Importance of Understanding CostImportance of Understanding Cost

Mr. Lin of Tailift ( 台勵福) familiar with mechanical parts 「東勢高工伐木科」 for Mr. Lin, finishing military service in 1969

1969-1971: earning NT$15 mill by producing and selling mechanical machinery at 80% of market price

1972: losing NT$40 mill by producing and selling rotating arm drill press at less than 70% of market price did not understand the actual cost in production

careful cost analysis for sawing machine, supplying at 2/3 of the cost of the competitor

1973: set up 台勵福 as OEM of sawing machine 1978: production of forklift trucks later, fork lift trucks, drill presses, CNC punchers

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The Costing Approach The Costing Approach of Appleof Apple

《 iPhone 全球供應鏈大解析》 曾航

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The Profit Sharing of iPhoneThe Profit Sharing of iPhone

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The Selection of Contractor The Selection of Contractor for iPhone by Applefor iPhone by Apple

Apple: very demanding on contractors requirements

possessing the very edge of technology, often asked to go beyond the best or the second best in a discipline

cooperative preparing multiple options for Apple to select till the very end possible to entertain demands on price reduction by Apple having the ability to increase production capacity to have land,

machinery, and laborers for new factories cancellation of order, with immediate effect even for a long-term

contractor, if the contractor fails to satisfy Apple’s requirements

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The Selection of Contractor The Selection of Contractor for iPhone by Applefor iPhone by Apple

Why is it good to be a contractor of Apple? stable order (if the contractor can satisfy Apple’s demand) less price-cut competition from smaller contractors less burden on inventory

relatively clear demand and accurate forecast from the hot Apple products

large volume to make overall higher profit margin than industrial average

prestigious to be an Apple supplier attracting business from other brand holders usually even higher profit margin from these business

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Apple as a BuyerApple as a Buyer

improvement of suppliers under the strict requirements of Apple

technical support from Apple to supplier for production problems

professional Apple employees work first never accepting any form of entertainment by supplier putting the benefits of Apple at the first place strictly executing the target set by Apple

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Apple as a BuyerApple as a Buyer

in sourcing, a team from Apple to a supplier to

check the cost of machinery, labor, and

material

generally checking two suppliers for each item

often having two suppliers for a component forcing a supplier to share the technology

developed for Apple with another supplier

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Price and Cost in PurchasingPrice and Cost in Purchasing

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Many Issues Related to Many Issues Related to Price and CostsPrice and Costs

timing of purchase and exchange rates video clipping: the third, 00:22:00 to the fourth

00:01:04

hedging option paid by Southwest 2007 Jan-Sept: spent US$42 mill at about

US$52/barrel when oil price US$52/barrel

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Cost Terms for Cost Terms for International SourcingInternational Sourcing

exchange rate

Incoterms (International Commercial terms) on responsibility and duties Ex Works (EXW); Free Carrier (FCA); Free Alongside Ship (FAS); Free on Board

(FOB); Cost & Freight = FOB + Freight cost; Cost, Insurance, and Freight (CIF) = FOB + Freight cost + Insurance; Carriage Paid to (CPT) = FCA + freight cost; Carriage & Insurance Paid to (CIP) = FCA+Freight cost+ Insurance; Delivered at Frontier (DAF); Delivered Ex Ship (DES); Delivered Ex Quay (DEQ); Delivery Ex Quay- Duty Paid; Delivery Duty Unpaid (DDU), Delivery Duty Paid (DDP)

import tax

conditions of payment

Letter of Credit, L/C, cash, cash discount, quantity discount

transportation cost

administration cost

trip cost

intermediate storage cost

keys: transfer of ownership; kind of cost to share

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Strategic Cost Management Strategic Cost Management in Purchasingin Purchasing

joint effort of the whole company

throughout the life cycle for a product

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Cost and Pricing of SupplierCost and Pricing of Supplier

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Basic Cost Structure of an ItemBasic Cost Structure of an Item

Profit MarginProfit Margin

Selling and Administrative CostSelling and Administrative Cost

Production OverheadProduction Overhead

Direct Labor CostDirect Labor Cost

Direct Materials CostDirect Materials Cost

Price ChargedPrice Charged•SkimmingSkimming•Rate of returnRate of return•Margin pricingMargin pricing

Supplier’s Total CostSupplier’s Total Cost•Market forcesMarket forces•Market strategyMarket strategy•CompetitionCompetition

Direct CostsDirect Costs•Labor forceLabor force•Raw materialsRaw materials•Economic conditionsEconomic conditions

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Analyzing Supplier’s PriceAnalyzing Supplier’s Price

tender/quotation: take average price

comparing to public prices

comparing to historical prices

internal cost accounting

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Market–Driven Pricing ModelsMarket–Driven Pricing Models

strategies adopted by supplier depending on economic and market conditions price-volume model market-share model market skimming model revenue pricing model promotional pricing model competition pricing model cash discount

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Cost-Based Pricing ModelsCost-Based Pricing Models

total cost of the item = $50 markup pricing model for 20% markup

selling price: $50(1+20%) = $60

margin pricing model for 20% margin rate profit expressed as margin on selling price selling price = $62.5

rate-of-return pricing model for 20% ROR $300,000 investment to make 4,000 parts for a total cost of $50

each selling price = $50 + ((20%)(300000)/4000) = 65.

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Reverse Price AnalysisReverse Price Analysis

to prepare price negotiation with supplier estimation of supplier cost structure from experience and

public information opportunities for cost reduction in discussing with

suppliers plant utilization process capability learning-curve effect supplier’s workforce management capability purchasing efficiency

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Total Cost Ownership Model and Total Cost Ownership Model and Collaborative Cost ManagementCollaborative Cost Management

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Total Cost Ownership ModelTotal Cost Ownership Model

costs throughout the life cycle of an item payment method, inflation, life, salvage value,

auxiliary charge, packaging, transportation, installation, service support, training, maintenance, service parts

example: cost structure and calculation

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Collaborative Approaches Collaborative Approaches to Cost Managementto Cost Management

target pricing: price acceptable by market, or price for competition searching for design methods, material, and production process to match

the target price reducing the gap between the target price and the actual price provided by

suppliers cost-saving sharing: incentive offered to a vendor for cost saving pre-requisites

information sharing vendor to buyer: details of production process, cost structure buyer to vendor: quantity, quality requirements, plan from near to

intermediate term agreement on cost saving sharing

example: data setting and calculation