Linear performance pricing: A

collaborative tool for focused supply cost

reduction
BITS Pilani Vidhat Bhat
Pilani | Dubai | Goa | Hyderabad Costing Department Intern , Spicer-India.
 What is LPP ?

● Linear Performance Pricing is a regression based method for price analysis. It

helps to answer the question: “What is a good price for what I’m looking for?”
● The basic idea behind “LPP” is to find a formula that enables us to calculate a
Shouldcost based on a single-cost-driver
● The resulting regression function should minimize the difference between the
price we already know and the calculated shouldcost using the formula.
● The major cost driver in our components is their net weight.

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BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956
 The Maths behind LPP
Simple linear regression is a statistical method that allows us to summarize and study
relationships between two continuous (quantitative) variables:
■ One variable, denoted x, is regarded as the predictor, explanatory, or
independent variable.
■ The other variable, denoted y, is regarded as the response, outcome, or
dependent variable.

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BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956
 Modus Operandi
● For LPP to work, we need to plot the
Getting started
component cost and it’s net weight
after data cleansing on a scatter plot.

● Using scatter plot option in Excel, we

can plot our data points and obtain
Using Excel the BEST FIT LINE using the show
trendline option.

● The equation of this line is the

Trendline Analysis equation that explains the
relationship between the costs of the
component and their weight.
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BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956
 Application, limitations and way forward in Linear Performance
Pricing
The ‘y’ in the best fit line (y =
mx + c) serves as an
indicator of average market
price of a particular part
weighing ‘x’ grams. Those
parts which are above this
price are considered as
savings opportunity.
01
NLPP uses the magic of
mathematics in order to find
out how selected product
properties influence the price
and comes up with a target
price formula using those
selected properties and
properties can be more than 1.
The first and most critical
aspect to understand is that
one regression method (one
mathematical approach)
02 can’t handle all cases you
have. There is just no single
“one size fits all” approach
for statistical price analysis.
03 Due to the availability of
data for Landed cost and
Gross weight only, the
analysis is limited to one
variable only. As we keep
on adding data for other
variables that affect the
04 landed cost like diameter,
thickness, etc. the equation
becomes more diligent and
more reliable.
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BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956
 Key learnings from the Project

• The linear performance pricing strategy is one way to identify a technical cost
driver that is crucial for the product price of a sourcing category, which can then
serve as the basis of objective target prices.
• The challenge is to pick the crucial cost driver out of all the possible ones. An
appropriate method for this is simple correlation analysis. The result indicates the
strength of the correlation between the cost driver and the price. The cost driver
with the highest correlation to the price is the relevant one.
• Only models that capture the structure of the input data and extract as much
information as possible give reliable and usable results.

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BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956
The Battle of getting better is never
ending.

Do you have any questions ?

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BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956