Finding the "Right" Price

[From iSource Business, August 2001] Last month's Net Best column examined sell-side software that allows suppliers to optimize their selling processes, including finding the right price and managing customer response processes more strategically. This month, we look at the buy side of the equation and examine tools that help companies look beyond the sticker price to calculate the total cost of a purchase.

What is the Right Price?

For suppliers, it's that level that maintains the supplier's margins while also meeting strategic business goals. For buyers, the price issue encompasses more than just the figure that winds up on the sales contract. Total cost of purchase (TCP) clearly includes factors that have traditionally been calculated in total cost of ownership, such as quality, supplier reliability, lead times and warranty. However, TCP also encompasses more abstract factors, such as the risks of buying too much or too little of a component; the tradeoffs of buying one product over another, similar good; and the costs associated with doing business with a particular supplier under a given set of terms as opposed to slightly different terms.

The emergence of e-procurement has arguably made figuring the total cost of any given purchase considerably more difficult, because e-procurement systems have the potential to expose purchasers to a greater number of potential suppliers and therefore an exponentially broader range of options. Using manual processes to calculate total cost of purchase has never been easy because of the fuzziness of TCP's constituent components. But manual processes are a greater liability today because they impede the ability of a company and its supply chain to react to changes in demand or unexpected bottlenecks. Companies striving to operate in proverbial Internet time need TCP-discovery tools that enable them to rapidly respond in a dynamic way to fluctuations in the market.

No single solution provider, to date, has stepped forward with an application that can address every aspect of TCP. But several software and consulting companies have recently touted solutions that address some component of the total-cost-of-purchase equation.

The Cost of Too Few and Too Many

Sun Microsystems, for example, is using software from Rapt to examine the costs associated with buying too much or too little of key components for the company's servers. The ordinary challenges associated with planning supply to meet future demand are exacerbated in the computer industry by demand lead times that are shorter than supply lead times for key components.