Graz University of Technology

1 Institute of Business Economics and Industrial Sociology

Industrial Marketing, Purchasing and Supply Management (IMPS)
Assoc. Prof. Priv.-Doz. Dipl.-Ing. Dipl.-Ing. Dr.techn. Bernd M. Zunk

Purchasing and Supply Management

Lecture 14.
Supplier Management: Cost Approaches and
Techniques
Prof. Dr. Bernd M. Zunk

Course no. 373.551, 4.5 ECTS, Lecture

Winter Semester 2020/21 (Online)

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk
www.bwl.tugraz.at
For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 2 Learning objectives

After this lecture you should understand the following:

• How prices are set by suppliers.
• How to use the learning curve technique as a basis for
price negotiations.
• How to apply supplier evaluation and vendor rating
techniques.
• How to evaluate the financial position of suppliers.
• What it takes to develop suppliers.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 3 Introduction

The importance of purchasing as a function increases if rises in material

prices cannot be automatically passed on to the customer.

→ This is may explains to a certain extent why…

… in B2B (e.g. construction industry), the supplier will always attempt
to hide his/her prices and cost structures as much as possible.
… decisions related to the purchasing price determine the cost price
of a company’s product or services-offering product to a high degree.
… pricing and cost price information are insufficient to gain a
comprehensive impression of the situation. It is also essential that …
– … the buyer knows how to use financial-economic analysis techniques.
– … intimate knowledge of the local supply market is available.
– … the buyer has an idea of the expected costs (e.g. for buildings); this is
of crucial importance in preparing for the negotiations with contractors.
– … when selecting a supplier the buyer has to obtain information about
the supplier’s order position (→ Case study “Building a new
headquarters”).
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 4 Introduction: Case Study – Building a new headquarters

*Note:
The full text of this case study you may find in the primary literature for this
course, the textbook “Purchasing and Supply Management“ written by Arjan
van Weele (2018), 7th edition, p. 337.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 5 How is the purchase price determined? Influence of internal and external
factors on purchase price
The price ultimately paid for
materials and services is the
result of environmental
factors (internal & external):
→ Internal factors can bring
about a change in the cost of
materials before the finished
product is placed on the market
(logistical, technical or
organizational factors).
Examples: Changes in quality,
specification, infrastructure.
→ External factors change the
availability of a product in a
given market (economic, socio
political or technological
factors).
Examples: Inflation, legislation,
labour costs, economic climate.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 6 How is purchase price determined? Price influencing factors

The price of a product can be influenced by external factors in two ways:

(i) due to direct changes in the cost structure of a particular product (i.e.
labour, materials, energy costs) or, indirectly, (ii) due to changes in
market structure (and shifts in supply/demand relationships).

∑ [f(c) + f(m)] = 100% of the price

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 7 How is purchase price determined? Cost and market factors

Some products react almost entirely to changes in cost factors, others to

changes in market factors. Still others react to changes in both cost and
market factors (→ see Memo 14.1).

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 340.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 8 How is the purchase price determined? Pricing models

The previously described classification is reflected in the

following three different pricing models:
1. Cost-based pricing. In the case of cost-based pricing the
supplier’s offering price is derived directly from their cost
price; what most systems boil down to is that a particular
profit margin is added to all costs, including the costs of
sales (mark-up pricing).
2. Market-based pricing. The price of the product is
determined by the market and is generated exclusively by
market circumstances such as demand, supply, stock
positions, the economic situation and political factors (e.g.
raw materials and semi-manufactured products).
3. Competitive bidding. The price is influenced by market
factors as well as cost factors. This situation is the most
common.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 9 How is the purchase price determined? Product groups and methods of
price setting – Overview

The following table reflects the relationship between the “price setting
methods” and the various purchasing product groups.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 10 Pricing methods: Fixing a selling price – Influencing factors (1/2)
Factors suppliers have to take into account to set the selling
price:
 Expected demand for its product: If demand is high, the supplier
will normally set the price a little higher than when demand is low.
In such cases he or she will not be willing to make price
concessions easily.
 Number of competitors: The monopolist’s situation is, of course,
ideal. Buyers have to go to it for a specific product. The
monopolist therefore has a high degree of freedom in determining
the selling price. This situation is rare in practice. As a rule,
suppliers will look to their competitors’ prices when setting their
own prices.
 Expected development of the cost price per product unit: Large-
scale production makes low prices possible. If the supplier
expects his or her production volume to increase in the future, he
or she will take this into account. He or she will anticipate his or
her cost development based on potential learning curve effects.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 11 Pricing methods: Fixing a selling price – Influencing factors (2/2)
 Customer’s order volume: Suppliers are often willing to make price
concessions in exchange for the promise of “more business” in the
future. This principle is often recognized in pricing methods, usually
by awarding extra discounts for larger purchased quantities. Many
suppliers employ a sliding scale to indicate which price or discount
applies to which quantities.
 Importance of the customer to the supplier: From a commercial
point of view the supplier’s position may be strengthened by good
references. For this reason, they will be eager to do business with
certain large, well-reputed companies. In order to gain access to
this type of customer, suppliers often charge “special prices”.
However, after some time has passed they will try to re-establish
the price at “normal” levels.
 Value of the product to the customer: Some products (e.g. spare
parts for manufacturing equipment) have a value to the customer
that bears no relationship to their manufacturing cost. In some
circumstances supply of spare parts is critical for continuity of
production. It is not uncommon for suppliers to charge prices for
critical spare parts which are a multiple of the original cost price.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 12 Pricing methods (1/3)

Taking account of all of the price influencing factors mentioned

before, the following pricing methods (purchasing or selling price)
can be distinguished:
 Mark-up pricing. A fixed percentage (mark-up) is put on top of the cost
price. This method of pricing does not take competitors’ prices into
account, neither does it acknowledge developments in the demand
for the product. Nevertheless, this method is frequently used in
practice because of its simplicity.
 Target-return pricing. In target-return pricing the price is determined
based on the amount of profit that should be realized. Based on the
fixed and variable costs and the expected selling price, the required
sales volume is calculated. This is done in two steps. First, the break-
even volume is determined through a break-even analysis. Then,
based on the profit that is to be made, the required extra volume is
determined. Finally, a check is made as to whether this required sales
volume can be realized at the estimated price.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 13 Pricing methods (2/3)

 Perceived value pricing. A general rule in marketing is that you do not

base your selling price on the cost price of the product, but rather on
what the market can bear. In this reasoning, the price that the buyer
is willing to pay is related primarily to the value they attach to the
product. The perceived value pricing method is often used for
consumer products (well-known branded articles) and also for
industrial products.
 Value pricing. Here, the company tries to win customers by charging
them fairly low prices for high-quality offerings.
An example is IKEA, a company known for the value for money that it
offers to consumers. Value pricing is not a matter of simply setting
lower prices. It is a matter of re-engineering the company’s operations
to become a low-cost producer without sacrificing quality, and
lowering prices significantly to attract a large number of value-
conscious customers. Wal-Mart is another example of a company
which attracts large masses of consumers through its everyday low
pricing strategy.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 14 Pricing methods (3/3)

 Going rate pricing. In going rate pricing, the firm bases its price largely
on competitor prices. The firm might charge the same amount, more or
less than major competitors. In such cases companies may follow the
market leader in setting their prices. Some oligopolistic markets are
characterized by price leadership. Smaller companies follow the market
leader's pricing behaviour often at some distance. Fuel prices in many
European countries are examples of this pricing method.
 Auction type pricing. Due to web technology, reverse auctions have
become more popular among buyers. Professional buyers today may
use a large number of marketplaces which allow for organizing buying
processes through electronic auctions. Suppliers may use auctions to
dispose of excess inventories or used goods. Auctions are used when
buyers decide to go for a straight tender process. Such a tender may be
selective or public. In the last case, all suppliers that qualify may
participate in the tender. Tendering is quite common in public
procurement and some industries (such as the petrochemical,
construction and defense industries; → see also Lecture2/Chapter 2).

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 15 Pricing methods: Discount policy

• A special characteristic of pricing policies for industrial products

is the discount policy which is applied.
• Some authors differentiate between following discount practices:
 Payment discount: e.g. 2% discount for payments within 10 days.
 Quantity discounts: To stimulate larger quantity orders.
 End of year bonus: Bonus is linked to the amounts purchased from
a specific supplier for a full year. Reinforces customer loyalty.
 Geographical discount: Given to customers located near the
supplier.
 Seasonal discount: Applied to improve capacity utilization in periods
when sales decline.
 Promotional discount: Provided to temporarily stimulate the sale of a
product.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 16 Pricing methods: Distinction between cost price analysis & pricing method

• To get a grip on the supplier prices, a distinction should be made

between the (i) cost price analysis and the (ii) pricing method.
• When conducting an analysis of the supplier’s cost structure buyers
should create detailed knowledge about the …
(1) … supplier’s materials costs (to be itemized according to the major
components);
(2) … direct labour costs (information can often be obtained by consulting
the collective labour agreements for that particular industry);
(3) … energy consumption and C02 emission rights;
(4) … transportation and distribution costs; and
(5) … indirect costs, to be divided into general management overhead and
sales costs.
→ As a general rule, the higher the share of the fixed costs in the cost price of
the end product, the greater the supplier’s price elasticity. By expanding the
order volume to the supplier, the buyer will be able to create a decrease in the
fixed costs per unit, and this should result in a lower price per unit.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 17 The learning curve: Introduction

• The learning curve is an important instrument in the development of

purchasing strategies.
• It was discovered in the US aircraft industry that the cost price per
unit decreased at a fixed percentage as experience (the cumulative
production volume of a particular type of aircraft) increased.

• The learning effects results from:

– Reduced supervision as experience with production grows
– Increased profits, from improved efficiency through streamlining the
process
– Reduced defects and line reject rates during production
– Increased batch sizes (less time spent on resetting machines)
– Improved production equipment (after a while)
– Improved process control
– Reduced engineering changes

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 18 The learning curve: Basic principle

• The basic principle of the learning curve is that “each time the
cumulative production volume of a particular item doubles, the
average time required to produce that item is approximately x per
cent of the initially required time”.
• An 80 per cent learning curve means that if the cumulative number
of produced goods is doubled, only 80 per cent of the original
number of hours are needed to produce one unit (see Table 14.2).

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 19 The learning curve: Graphical representation and relevance for buyers

→ These data can also be reproduced graphically; regular graph paper yields a
curve (Figure 14.3), while log-log paper produces a straight line (Figure 14.4).

This knowledge is clearly of vital importance to the buyer:

→ Anticipating the supplier’s learning experience,
buyers can negotiate price reductions in the future.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 20 The learning curve: Usage (exemplarily)

The learning curve is preferably used in the following situations:

– When it concerns customized components manufactured by
a supplier to the customer’s specification.
– When large amounts of money are involved (so that the
costs which must be incurred to apply the technology in
question can be recovered).
– When the buyer cannot request competitive quotations
because, for example, a considerable investment has to be
made in moulds and specific production tooling, which leads
the buyer to single sourcing.
– When direct labour costs make up an important part of the
cost price of the product to be produced.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 21 Supplier assessment: Levels of assessment

• The need for objective assessment of suppliers increases as the role

of the supplier in the value chain grows. It is necessary to know
whether the supplier can guarantee sustained continuity of supply.
→ The systematic gathering of supplier performance data enables the buyer
to negotiate strict agreements about improving reject rates, reducing total
lead time and contributing to cost reduction.
• Supplier assessment may take place at four different levels*:
1. Product level. Focuses on establishing and improving the supplier’s
product quality.
2. Process level. Not the product, but the supplier’s production process is
closely investigated.
3. Quality assurance system level. The entire supplier quality organization
is subject of investigation by the customer.
4. Company level. Besides quality aspects also financial aspects are taken
into consideration. Also auditors want to get an idea of the quality of
management (how competitive is the supplier in the future?)
* Note: Most supplier evaluation is limited to the first two levels.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 22 Supplier assessment: Methods (1/4)

Two types of assessment may be differentiated:

o Subjective methods are used when companies evaluate suppliers
through personal judgments.
o Objective methods attempt to quantify the supplier’s performance.
In general, the following techniques and tools can be used:
(1) Spreadsheets are used to systematically compare and asses
quotations obtained from suppliers. Important criteria are listed on one
axis and the supplier quotations on the other.
(2) Qualitative assessment is used for suppliers with whom exist close
business relationships. Specialists who have experience with the
suppliers rate them according to a agreed checklist.
(3) Vendor rating: Limited to quantitative data only. Entails measuring the
aspects of price, quality and delivery reliability per supplier.
(4) Supplier audit: Entails that the supplier is periodically visited by
specialist(s) from the customer. They investigate the production
process and quality organization.
(5) Cost modeling: Specialists from the buying company estimate, based
on the production technology, the costs of the product. This may lead
to ‘should cost’ discussions with the supplier (→ see Memo 14.2).
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 23 Supplier assessment: Methods (2/4) – Cost modeling for purchasing

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 348.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 24 Supplier assessment: Methods (3/4) – Identifying cost drivers (examples)

→ A cost driver is the unit of an activity that causes the change in activity’s cost; it is
any factor which causes a change in the cost of an activity.*
*Source: Chartered Institute of Management Accountants.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 25 Supplier assessment: Methods (4/4) – Major differences between
supplier auditing and vendor rating
• Vendor rating will be used to judge existing suppliers. It has a more
quantitative focus than auditing techniques.
• During a supplier auditing faults and weaknesses are reported and
discussed with the supplier. Measures for improvement are negotiated and
established.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 26 Supplier assessment: Financial assessment

• The financial assessment of suppliers is carried out on the basis of

annual financial reports.
– In most European countries legislation requires companies to file a
summary of their fin annual reports at the local chamber of commerce.
– Additionally, an increasing number of companies publish (a part) of their
annual financial results in online.
– Next, information brokers, provide information via detailed electronic
databases online (e.g. “dun&bradstreet”, www.dnb.com).

• Financial performance analysis (note: based on historical data!) …

… enables buyers to judge the potential future opportunities and threats.
… gives a first impression of the quality of the supplier’s management.
… enables buyers to visit suppliers well-prepared & to ask pointed questions.
… provides insight into the quality development of the supplier’s results.
… makes knowledge available that can be used in discussions with the
supplier to achieve improvements in their organization.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 27 Supplier assessment: Financial assessment – Overview of financial
indicators for assessing a supplier’s financial position

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 28 Supplier assessment: Financial assessment – Cost breakdown of
Apple iPhone 6 (example)

Taken from: van Weele, A. (2018), Purchasing and Supply Management, 7th edition, p. 349.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 29 Supplier development
• Due to outsourcing, buying companies are becoming increasingly
dependent on their suppliers.
• For this reason, many large companies have developed programmes,
which are aimed at improving supplier (relationships), e.g.
 BASF segmented the suppliers into distinct segments: (1) strategic
partnerships, (2) performance partnerships, (3) preferred suppliers and
(4) competitive suppliers.
 Based on this segmentation, BASF has developed different relationships
with different suppliers.
• That is what is called for now: Because, the best customers and the
customers with the best development potential get most of the
attention and most of the supplier’s resources.
→ However, supplier performance measurement is still not widespread
in some industrial and service sectors; even rarer are companies that
measure supplier satisfaction (“supplier satisfaction surveys”). Here, the
theory is clearly ahead of practice.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 30 Supplier development: Actions for development of suppliers (exemplarily)

What does a purchasing professional need to do in order to develop its

suppliers, i.e. to take supplier performance to a higher level?
In general, they can initiate three types of actions:
• Supplier suggestion program: actively ask for suggestions for
improvements of suppliers
• Supplier development, ask questions like:
 What is going well in the cooperation?
 What could or must get better?
 What is needed for improvement?
 How to measure the improvements?
• Supplier satisfaction survey, collaborative relationship between
business partners requires that expectations between all
stakeholders involved are made explicit (incl. the assessment of the
actual experiences from both partners).
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 31 Supplier development: The supplier-partnering hierarchy

Remarks:
→ Building up collaborative
relationships takes many
years and a lot of effort.
→ Starting from the
beginning, business
partners will go through
several consecutive stages
to develop from a
traditional, arm’s length
relationship to a more
collaborative relationship.
→ The figure illustrates
what it takes from both
partners to go down this
Source: From Building Deep route.
Supplier Relationships by Liker
and Choi (2004), © 2004 Harvard
Business School Publishing
Corporation. All rights reserved.
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 32 Brief summary

• Pricing and cost structures of suppliers are interrelated, but

the effect they have on one another is not always clear.
• The prices of goods and services can be based on market
factors, on cost factors or on a combination of both.
• Suppliers can be differentiated in to strategic suppliers,
preferred suppliers and competitive suppliers.
• When doing business with a supplier, it is important that the buyer
is aware of the supplier’s financial performance.
• Methods to control supplier’s pricing policy:
– Closely monitoring of the supply market
– Monitoring of the individual supplier financial performance
– Analysis of the supplier’s cost price
– Monitoring of developments in the supplier’s performance on price,
quality, delivery, etc.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 33 Lecture 14: Self-assessment (Individual work)

Preliminary remark:
The aim of this exercise is to reflect on the content presented in this
lecture and to prepare for the final exam at an early stage.

Work order:
1. Answer the self-assessment questions given on the following slide(s).
2. Take approx. 15 minutes per question.

Final note: To answer/discuss/reflect on the questions on the following slide(s), please

consult the primary as well as the relevant literature of this course we have listed for you on
the TUGrazTeachCenter learning platform (see: course-detailed view -> further information ->
recommended reading). Of course, you are also welcome to use further sources.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 34 Lecture 14: Self-assessment (1/2)

14.1 To be able to build long-term collaborative relationships with the

supplier, the supplier needs to have a sound financial position.
Apart from financial reports, what weak signals would indicate that
things are going wrong with the supplier and that its continuity may
be at stake?
Give a few examples.

14.2 A supplier of components announces that it has to raise his

prices by 10 per cent because it has lost a major customer.
It states it is now forced to spread its fixed cost across a smaller
production volume.
What costing method does this supplier use?
Assuming that this supplier is important to you, how would you deal
with the supplier’s request? What steps would you take?

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 35 Lecture 14: Self-assessment (2/2)

14.3 In this lecture/chapter vendor rating was named as one of the

methods that can be used to measure supplier performance.
Delivery reliability and quality performance of the supplier are two
aspects of vendor rating. How can a supplier’s delivery reliability and
quality performance be measured in a practical way? What KPIs
would you suggest?

14.4 Last year you purchased 100 units of product X from a supplier
at € 50.00 each. You estimate that you will purchase 300 units of this
product from the same supplier this year. You are now preparing for
the price discussion with the supplier. What price are you willing to
pay, assuming that an 80 per cent learning curve applies to this
product?

14.5 Name examples of products for which the price is set by means
of cost-based pricing, market-based pricing and competitive bidding.
Which arguments will the buyer use in each of these cases to obtain
the lowest possible purchase price?
TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 36 Supplementary literature (Lecture 14)

Laseter, T.M. (1998), Balanced Sourcing: Cooperation and Competition in

Supplier Relationships, San Francisco, CA: Jossey-Bass.
Liker, J.K. and Choi, T.Y. (2004), Building deep supplier relationships, Harvard
Business Review, 82(12), 104-113+149.

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018
 Graz University of Technology
37 Institute of Business Economics and Industrial Sociology
Industrial Marketing, Purchasing and Supply Management (IMPS)
Assoc. Prof. Priv.-Doz. Dipl.-Ing. Dipl.-Ing. Dr.techn. Bernd M. Zunk

Purchasing and Supply Management

Lecture 14.
Supplier Management: Cost Approaches and
Techniques
Prof. Dr. Bernd M. Zunk

Course no. 373.551, 4.5 ECTS, Lecture

Winter Semester 2020/21 (Online)

TU Graz I Institute of Business Economics and Industrial Sociology I Industrial Marketing, Purchasing and Supply Management I Prof. Dr. Bernd M. Zunk
www.bwl.tugraz.at
For use with Purchasing and Supply Chain Management 7 th Edition
373.551 Purchasing and Supply Management by Arjan J. van Weele (9781473749443) © 2018