price and cost analysis
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Price and Cost Analysis. Outline. Nissan’s Keiretsu Carlos Ghosn and Nissan importance of costing price and cost in purchasing related issues cost and pricing of supplier total cost ownership model and collaborative cost management. 2. Kei re tsu #1. Nissan - PowerPoint PPT PresentationTRANSCRIPT
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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