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Price and Cost Analysis 1 Price and Cost Analysis 1

Outline è Nissan’s Keiretsu è Carlos Ghosn and Nissan è importance of costing è Outline è Nissan’s Keiretsu è Carlos Ghosn and Nissan è importance of costing è price and cost in purchasing è related issues è cost and pricing of supplier è total cost ownership model and collaborative cost management 2

Keiretsu#1 è Nissan è special status before the war among automakers è losing the Keiretsu#1 è Nissan è special status before the war among automakers è losing the special status after WW II è Nissan’s policy: importing foreign technology (versus 100% self-developed technology of Toyota) è control of foreign exchange in Japan because of shortage in foreign reserve è 1952 Bank of Japan rejected Nissan’s application foreign exchange #1 Evelyn Anderson. Nissan’s Keiretsu, 1956 1970 3

Keiretsu#1 è term first appeared in 1952 è Small and Medium Enterprises Planning Bureau Keiretsu#1 è term first appeared in 1952 è Small and Medium Enterprises Planning Bureau launched the “Keiretsu Shindan” (Keiretsu Diagnosis) è objective: improving the relationship between automakers and their part suppliers è è è 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 of individual automakers formed associations è è some open allowing cross-association membership, some more restrictive social functions and seminars #1 Evelyn Anderson. Nissan’s Keiretsu, 1956 1970 4

Keiretsu#1 è Provision Act for the Promotion of the Machinery Industry by the Ministry Keiretsu#1 è Provision Act for the Promotion of the Machinery Industry by the Ministry of International Trade and Industry (MITI), 1956 -1970 è 3 times, each of 5 years è for companies of capital less than 50 million yen è component makers (i) to apply foreign reserve to buy foreign technology, (ii) to borrow at a lower interest rate è incentive for Nissan to spin off or acquire companies #1 Evelyn Anderson. Nissan’s Keiretsu, 1956 1970 5

Nissan’s Keiretsu è Table 1, Table 2, Table 3, Figure 1, Table 4, Table Nissan’s Keiretsu è Table 1, Table 2, Table 3, Figure 1, Table 4, Table 5 è close relationship with Nissan for companies in its Keiretsu #1 Evelyn Anderson. Nissan’s Keiretsu, 1956 1970 6

Carlos Ghosn and Nissan 7 Carlos Ghosn and Nissan 7

Bright History of Nissan è è è 1933: set up in Japan late 50’s: Bright History of Nissan è è è 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 è è 1975: Datsun being #1 imported brand in US early 80’s: first assembly factory in Tennessee è è Datsun 510 sedan Datsun 240 Z: fastest seller in the world, half a million in 10 years first for trucks and later for sedan, all well accepted 1989: launched luxury car Infiniti, selling well in the next 10 years 8

Troubles for Nissan è early 90 s: emergency of problems è high price, product Troubles for Nissan è early 90 s: emergency of problems è high price, product not as popular as before è market share in Japan dropping for more than 20 years è by late 90 s: running into deep financial trouble è debt: US$ 22 billion 9

Carlos Ghosn è 1954: born in Brazil from parents of Lebanon origin è è Carlos Ghosn è 1954: born in Brazil from parents of Lebanon origin è è è mother; born in Nigeria, a French citizen father: a Brazilian citizen 1960: moved with mother and three siblings to Beirut, Lebanon è è excellent student, Intelligent, diligent student with various talents undergraduate and master in France è è è 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 10

Carlos Ghosn è 1984: heading R&D of the company's industrial tire division è 1985: Carlos Ghosn è 1984: heading R&D of the company's industrial tire division è 1985: Chief Operating Office of Michelin's South American operations è è è 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 è è acquisition of the Uniroyal Goodrich tire company 1996: Executive Vice President of Renault, 2 nd in company è è è financial trouble, loss of US$ 1 Billion cost cutting, leading to profit in 1997 1999: Renault purchased 36. 8% of Nissan 11

Achievements of Carlos Ghosn è 1999 è Renault got 36. 8% stake of Nissan: Achievements of Carlos Ghosn è 1999 è Renault got 36. 8% stake of Nissan: debt $20 billion; loss $2. 7 billion in 99 è June 99 Ghosn as COO of Nissan è June 00 Nissan net profit $2. 7 billion è June 01 CEO of Nissan è May 05 CEO of Renault è by 06 EBIT of Nissan 9. 25%, double of industrial average, and up from 1. 38% 12 from year 2000

Tasks by Carlos Ghosn è objectives of the 3 -3 -3 Turnaround plan è Tasks by Carlos Ghosn è objectives of the 3 -3 -3 Turnaround plan è cut cost by 1 trillion yen è cut 20% of purchasing in 3 years è cut number of suppliers to half (1, 100 to 600) è cut debt from 1. 4 trillion yen to 700 billion yen è launched 22 new cars 13

Importance of Purchasing and Supply Management assumption: linear changes of sales and cost w. Importance of Purchasing and Supply Management assumption: linear changes of sales and cost w. r. t. the production quantity sales? price? how to increase profit? è è Sales cost? $77 Cost Material $35 Others $28 Profit $14 10% increase in price with 30% decrease in demand 40% increase in profit Sales $100 Cost Material Others Profit $47. 5 $40 $12. 5 25% increase in profit $110 Cost Sales $100 Material $55 Others $44 Others $11 10% increase in profit $50 $40 Profit 10% increase in sales Profit Cost Material 5% decrease in material cost Sales $10 10% Sales increase in price without Cost change in Material demand Others Profit $110 $50 $40 $20 100% increase in profit 14

Tasks by Carlos Ghosn è specific tasks è è è cut 21, 000 jobs Tasks by Carlos Ghosn è specific tasks è è è 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 è è purchasing team formed by purchasing, engineering, manufacturing, and finance cost benchmarks from Renault centralized financial system saved design cost è è collaboration with Renault cost-saving design 15

KPI at Financial Year 2000 è sale: 4% è 22 new cars: launched as KPI at Financial Year 2000 è sale: 4% è 22 new cars: launched as scheduled è personnel: simplified è purchasing cost: 11% è utilization of capacity: 74% (up from 51%) è profit margin: 5. 4% 16

Importance of Costing 17 Importance of Costing 17

Importance of Understanding Cost è Mr. Lin of Tailift (台勵福) familiar with mechanical parts Importance of Understanding Cost è Mr. Lin of Tailift (台勵福) familiar with mechanical parts è è è 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 è è è 「東勢高 伐木科」for Mr. Lin, finishing military service in 1969 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 18

The Costing Approach of Apple 《 i. Phone全球供應鏈大解析》 曾航 19 The Costing Approach of Apple 《 i. Phone全球供應鏈大解析》 曾航 19

The Profit Sharing of i. Phone 20 The Profit Sharing of i. Phone 20

The Selection of Contractor for i. Phone by Apple è Apple: very demanding on The Selection of Contractor for i. Phone by Apple è Apple: very demanding on contractors è requirements è possessing the very edge of technology, often asked to go beyond è the best or the second best in a discipline è cooperative è preparing multiple options for Apple to select till the very end è possible to entertain demands on price reduction by Apple è having the ability to increase production capacity to have land, machinery, and laborers for new factories è cancellation of order, with immediate effect even for a long-term contractor, if the contractor fails to satisfy Apple’s requirements 21

The Selection of Contractor for i. Phone by Apple è Why is it good The Selection of Contractor for i. Phone by Apple è Why is it good to be a contractor of Apple? è è è stable order (if the contractor can satisfy Apple’s demand) less price-cut competition from smaller contractors less burden on inventory è è è relatively clear demand accurate forecast from the hot Apple products large volume to make overall higher profit margin than industrial average prestigious to be an Apple supplier è attracting business from other brand holders è usually even higher profit margin from these business 22

Apple as a Buyer è è è improvement of suppliers under the strict requirements Apple as a Buyer è è è improvement of suppliers under the strict requirements of Apple technical support from Apple to supplier for production problems professional Apple employees work first è never accepting any form of entertainment by supplier è putting the benefits of Apple at the first place è strictly executing the target set by Apple è 23

Apple as a Buyer è in sourcing, a team from Apple to a supplier Apple as a Buyer è in sourcing, a team from Apple to a supplier to check the cost of machinery, labor, and material è generally è often checking two suppliers for each item having two suppliers for a component è forcing a supplier to share the technology developed for Apple with another supplier 24

Price and Cost in Purchasing 25 Price and Cost in Purchasing 25

Many Issues Related to Price and Costs è timing of purchase and exchange rates Many Issues Related to Price and Costs è timing of purchase and exchange rates è video clipping: the third, 00: 22: 00 to the fourth 00: 01: 04 è hedging option paid by Southwest è 2007 Jan-Sept: spent US$42 mill at about US$52/barrel when oil price US$52/barrel 26

Cost Terms for International Sourcing è exchange rate è Incoterms (International Commercial terms) on Cost Terms for International Sourcing è exchange rate è Incoterms (International Commercial terms) on responsibility and duties è 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) è import tax è keys: transfer of ownership; kind of cost to share conditions of payment è Letter of Credit, L/C, cash discount, quantity discount è transportation cost è administration cost è trip cost è intermediate storage cost 27

Strategic Cost Management in Purchasing è joint effort of the whole company è throughout Strategic Cost Management in Purchasing è joint effort of the whole company è throughout the life cycle for a product 28

Cost and Pricing of Supplier 29 Cost and Pricing of Supplier 29

Basic Cost Structure of an Item Profit Margin Price Charged • Skimming • Rate Basic Cost Structure of an Item Profit Margin Price Charged • Skimming • Rate of return • Margin pricing Selling and Administrative Cost Production Overhead Supplier’s Total Cost • Market forces • Market strategy • Competition Direct Labor Cost Direct Materials Cost Direct Costs • Labor force • Raw materials • Economic conditions 30

Analyzing Supplier’s Price è tender/quotation: take average price è comparing to public prices è Analyzing Supplier’s Price è tender/quotation: take average price è comparing to public prices è comparing to historical prices è internal cost accounting 31

Market–Driven Pricing Models è strategies adopted by supplier depending on economic and market conditions Market–Driven Pricing Models è strategies adopted by supplier depending on economic and market conditions è price-volume model è market-share model è market skimming model è revenue pricing model è promotional pricing model è competition pricing model è cash discount 32

Cost-Based Pricing Models è total cost of the item = $50 è markup pricing Cost-Based Pricing Models è total cost of the item = $50 è markup pricing model for 20% markup è è selling price: $50(1+20%) = $60 margin pricing model for 20% margin rate è è è profit expressed as margin on selling price = $62. 5 rate-of-return pricing model for 20% ROR è $300, 000 investment to make 4, 000 parts for a total cost of $50 each è selling price = $50 + ((20%)(300000)/4000) = 65. 33

Reverse Price Analysis è è è to prepare price negotiation with supplier estimation of Reverse Price Analysis è è è to prepare price negotiation with supplier estimation of supplier cost structure from experience and public information opportunities for cost reduction in discussing with suppliers è è è plant utilization process capability learning-curve effect supplier’s workforce management capability purchasing efficiency 34

Total Cost Ownership Model and Collaborative Cost Management 35 Total Cost Ownership Model and Collaborative Cost Management 35

Total Cost Ownership Model è costs throughout the life cycle of an item è Total Cost Ownership Model è costs throughout the life cycle of an item è payment method, inflation, life, salvage value, auxiliary charge, packaging, transportation, installation, service support, training, maintenance, service parts è example: cost structure and calculation 36

Collaborative Approaches to Cost Management è target pricing: price acceptable by market, or price Collaborative Approaches to Cost Management è target pricing: price acceptable by market, or price for competition è è 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 è information sharing è è 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 è è 37