Cost Information for Pricing Decisions

Pricing decisions are normally market based and they are based on analysis of demand curves.

But product cost information is required in the pricing decision to arrive at the profit available at a proposed price. If the profit available is insufficient, a firm can't sustain its production and marketing. Only for short periods of time, the firms may be in market even though profits are inadequate in the light of expected long term profits.

Some of the pricing decision moments are:

1. Pricing decisions at the time of preparing a new catalogue.

2. Price increase decision in response to inflation.

3. Pricing for new or improved products.

4. Pricing for selling under private label.

5. Pricing in response to a new price by competitor

6. Pricing bids in both closed and open bidding decisions.

Pricing decision rules and procedures depends on the characteristics of the market in which the firm operates.

In perfect competition markets, a firm is a price taker. In these markets, marginal cost information determines the quantity produced by a firm. Because, as per the description of perfectly competitive market, a firm sell as much as it wants to produce without affecting the market price.

In imperfect competition, the price charged by a firm will influence the quantity of units it sells. Additional sales can be sold only when price is reduced.

Updated on 1 May 2018, 

8 December 2011

Organization Behavior Dilemma - Why There is no Expected Behavior from Organization Associates?

Organization behavior is related to leadership. If leaders in the organization do not show effective leadership, there will not be expected behavior in the organization.

What is going wrong with leadership that is giving  rise to unexpected or inappropriate organization behavior?

Communication  may be the first reason. Leaders are not communicating the required tasks. There is content of communication, context of communication, clarity of communication and style of communication.

Motivation can be the problem. Leaders are not able to assess the personal needs of the group members and make organization provide them the need satisfying environment and means.

Stress and Conflict can be more in the organization.

 Power and Politics may become dominant behavior in the organization. Politics signify personal interests and leaders and other associates dominating in the organization.

Groups  especially informal groups may be in conflict with the line being advocated by the leader.

Effective Leadership Process  that is style of leadership may be the reason. Leader may be using authoritarian style or close directing and controlling style when it is not appropriate especially when the associates are mature and have similar experience profiles. Such a leadership style develops only conflict and difference of opinion.

Leaders are expected to be masters in managing behavior based on the relations that they established with their followers. Whenever in an organization, expected behavior is missing, back to basics and application of behavioral science theories has to be attempted afresh by leaders themselves, or their superiors or external consultants and mentors.


 Attitudes can be formed against individuals also. If the current leaders have  developed negative attitudes in the organization associates, they may themselves try to change them. They may take the help of their superiors or consultants.




Important Organization Behavior Chapters


4. Organizational Context: Design and Culture

5. Organizational Context:: Reward Systems

Cognitive Processes

6. Perception and Attribution

7. Personality and Attitudes

8. Motivational Needs and Processes

9. Positive Psychology Approach to OB

Dynamics of Organizational Behavior

10. Communication

11. Decision Making

12. Stress and Conflict - Negotiation Process (in more detail)

13. Power and Politics

14. Groups and Teams

17. Effective Leadership Process

Managing Economies of Scale in the Supply Chain: Cycle Inventory

Supply Chain Management: Review Notes Based on Chopra and Meindl's Book

Chapter Summary based on Chopra and Meindl's book, Supply Chain Management: Strategy, Planning, and Operation, is a comprehensive introduction on supply chain management.

Economies of Scale in Buying and Production Lots

Producing or purchasing in large lots allows a stage of supply chain to exploit economies of scale and lower cost. These economies of scale result due to fixed costs associated with ordering and transportation, quantity discounts on buying larger lots, and short-term discounts or trade promotions.

*It is important at this stage to point out that Toyota Production System has shown that there are economies of small lot sizes or lot size of one. Hence the discussion in this chapter has to be interpreted along with the content related to economies of small lot sizes.

Cycle Inventory

If purchasing is done in large lots and consumption is done in smaller lots, when the order is received there is a sharp increase in stock or inventory. This inventory or stock gets depleted as consumption takes place gradually and once again a big lot may be ordered and received. Thus the cycle repeats and the average inventory held by a firm during each cycle is termed cycle inventory.

The inventory holding results in costs for a firm and this cost is called inventory holding cost or inventory carrying cost.

Economic Order Quantity or Production Quantity Formulas

(1) Q = SQRT(2RS/hC)

R = demand in a period (usually a year)
S = Ordering cost
h = holding cost per year per dollar of inventory
C = unit price of the item

To reduce lot sizes that arise due to presence of ordering costs, a number of individual items are ordered in a single order. This will distribute the transportation cost over a number of items and lot sizes for individual items can be small.

To take decisions in case of quantity discounts, the total inventory cost when discount is taken is compared with total inventory cost when discount is not taken and appropriate decision is taken.

In case of trade promotions also retailers compare the total inventory cost when the trade promotion is used to accumulate inventory with the total inventory cost when the trade promotion is not utilized.

Estimating Cycle Inventory Related Costs

Inventory holding cost

Cost of capital
Obsolescence cost
Handling cost
Occupancy cost
Miscellaneous cost

Order Cost

Buyer time
Transportation cost
Receiving cost
Other costs

References


Sunil Chopra and Peter Meindl, Supply Chain Management: Strategy, Planning and Operations, Prentice Hall, 2001. Supply Chain Management: Chopra and Meindl - Book Information and Review

Lee, Hau L., and Corey Billington, "Managing Supply Chain Inventories: Pitfalls and Opportunities," Sloan Management Review, Spring 1992, pp. 65-73


First posted in Knol by Narayana Rao  Number  2utb2lsm2k7a/ 1367


Updated on 9 April 2018, 9 December 2011