The Optimal Price

2. 10 The Optimal Price

3. You Should Be Able To: • Explain how purchase prices influence buyers. • Describe how suppliers determine their purchase prices. • Identify methods buyers employ to reduce purchase prices.

4. You Should Be Able To (cont.): • Calculate cost information, including edible portion cost, servable portion cost, and standard cost. • Evaluate qualitative aspects of a potential opportunity buy.

5. What Is the Optimal Price? • The optimal price is the price that, when combined with optimal quality and supplier services, produces the optimal value. • It represents the lowest possible EP cost consistent with the optimal value of the product.

6. EP Cost Calculation EP cost = AP price ÷ edible yield percentage

7. How Do Attitudes Affect the Purchasing Process? • Novice buyers overrate AP prices • Price normally follows quality • Derived demand • Sometimes price is secondary • Requesting itemized bills • A particular product represents a huge expense • Tight materials budget

8. How Are AP Prices Determined? • A function of the suppliers cost • A function of supply and demand • A function of competitive pressure • Buyer pricing

9. Ways to Reduce AP Price • Make or buy analysis • Provide your own supplier services • Provide your own economic values • Shop around • Lower your quality standard • Blanket orders on miscellaneous items • Improved negotiations • Substitutions

10. Ways to Reduce AP Price (cont) • Cash Discounts • Hedging • Economical packaging • Odd-hours deliveries • Co-op purchasing • Cost-plus purchasing

11. Ways to Reduce AP Price (cont.) • Promotional discount • Exchange bartering • Introductory offers • Reevaluate EP cost • Calculate PF, PD, and EP costs • Opportunity buys • Evaluate their benefits

12. Opportunity Buys • Rules for taking the opportunity • Purchase in large quantity • Pay in advance or on delivery • Buyers must analyze true costs • Quantitative analysis • Qualitative analysis