Buying at Right Price

S.C. SEHGAL
MATERIALS MANAGEMENT CONSULTANT

Buying at Right Price

PRICE
Can be defined as
Value of commodity or service measured in
terms of Standard Monetary Unit. In
comparing two quotations price enables us
to appraise relative value offered by each
supplier

Buying at Right Price

Price Information
-

Price Catalogue
Trade Journals
Tendering

TENDERING
Tendering is to present anything for
approval and acceptance
-

In Purchasing tendering may be defined as

Procedures by which potential suppliers
are invited to make a firm and
unequivocal offer of price & terms &
conditions which, on acceptance, shall be
the basis of subsequent contract

TENDERING
-

Tendering mostly used by Govt.

organizations to ensure
- observance of principle of public
accountability,
- although it is sometime used by private
organization also

Competitive Biddings
Two important policies are
1.

Buyer be willing to do business with

every supplier from whom they solicit a
bid. The resultant policy states that
supplier requested to bid must be
determined in advance as qualified

2.
Whenever lowest bidder does no
receive the contract, buyer is obliged to
explain reasons

Competitive Biddings
Prerequisites
-

Rupee value of specific purchase must be

sufficient to justify expenses both to buyer
and seller that accompanies this method of
source selection and pricing.

Specification of items or services to be

purchased must be explicitly clear to both
buyer and seller.

Market must consist of adequate No of

sellers.

Competitive Biddings
Prerequisites
-

Sellers that make market must be

technically qualified and

actively want contract and therefore be

willing to quote competitively

Time available must be sufficient

Competitive Biddings
Conditions must be fulfilled
-

Atleast two qualified suppliers (Preferably

three in Govt. deptts) have responded to
solicitation

Proposal are responsive to buying firms

needs

Suppliers competed independently for the

award

Competitive Biddings
Conditions must be fulfilled

Supplier submitting lowest offer does not

have an unfair advantage over its
competitors.
Lowest evaluated price is reasonable.

Tendering- Broad Procedures

Standard procedure provides a monetary

limit above which tender must be invited
Tender may take two forms, i.e. OT (NIT or
Formal Tender) & LT (Selected/ Informal
Tender)
Since cost of OT and length of LT is high,
suitable limits are fixed, above which NIT are
resorted

Tendering- Broad Procedures

Full and identical specifications are issued

to all prospective suppliers
Prospective suppliers are required to
submit their offer/tender in a sealed and
identifiable envelope by a prescribed
date and time

Tendering- Broad Procedures

On due date and time, tenders are
opened by a committee normally
comprising of officers from Accounts and
Materials departments.

Some organization allow suppliers

representative witness opening of tender if
they so wish

Tendering- Broad Procedures

Late tender are not usually considered and

returned to suppliers unopened
Tenders are listed, initialed and entered into
tender opening register and
- bid analysis sheet, showing details of
price, price basis, taxes/ duties- extra or
inclusive, transportation charges,
delivery, payments & other relevant
information for tender evaluation

Tendering- Broad Procedures

Comparison of prices is done on basis of

landed prices &
-

quoted prices are suitably loaded for

deviations to buyer standard terms &
conditions so as to bring them at a
common platform

Tech. evaluation of offers is done by user

deptts

Tendering- Broad Procedures

Orders are normally placed on lowest

among the technically qualified bidder.
Standard procedure normally delegate
power to Purchase Manager or officer of
purchase functions to place orders unto
specified limits on lowest bidder

Tendering- Broad Procedures

Where acceptance of lowest technically

qualified bidder is not recommended or
value of purchase is more than specified
limits,
-

approval of higher authority is obtained

as per delegation.

Tendering- Disadvantages

Suppliers may quote too low prices to obtain

business-problems of unsatisfactory quality,
delayed supplies etc
Cost of buying especially in case of OT is
very high
System is too slow for emergencies and even
otherwise lead-time is long especially in case
of OT

Tendering- Disadvantages

Tenders are normally accepted on lowest

price, if everything otherwise equal
-

long lasting relationship with

suppliers are difficult,

no credit for past performance

Negotiations

Negotiation is
- any form of verbal communication
in which participant seeks to exploit
the relative strengths of their
respective bargaining
positions to
achieve explicit or
implicit objectives
- within overall purpose of seeking
to resolve identified areas of
disagreement.

Negotiations

Negotiation as such can be defined as

- The process by which we search for
terms to obtain what we want from
somebody who wants something from us
-

The definition points up a key factor that

negotiation implies some mutuality of wants,
resolved by exchange.

Negotiations

For high value contracts for plant &

Equipments and other materials where
orders cannot be finalized on basis of
tender/offers, price and other terms may
be determined through negotiations
Initial quoted price, however forms basis
for further negotiation between buyer and
seller so as to reach an agreement on
price, quality, delivery etc

Negotiations as means of source selection

and price determination

When all re-requisites for competitive

tendering are not satisfied, negotiation
process shall be employed to select sources
& to arrive at price:
Several progressive professionals favour
use of negotiations over competitive
tendering due to

Process far more likely to lead to complete

understanding of all issues of procurement.

Negotiations as means of source selection

and price determination

This improved understanding greatly re

subsequent quality and schedule problems
Competitive bidding tend to put greater
pressure on suppliers to quote low (but
profitable) prices

Negotiations as means of source selection

and price determination

This pressure of low price may result in

sacrifices in product quality, development
efforts and other vital services
This method may, however, be good for
private sector & not feasible for Govt. and
PSU purchase due to limitation of public
accountability and strict adherence to
system and procedures, competitive
bidding oriented

Negotiations

AVOIDANCE OF NEGOTIATIONS
In order to ensure bidder quote lowest
prices, order shall be finalized on lowest
qualified bidder after opening of bids
If organization gains reputation of
negotiating lowest bidder after opening
and evaluation of bids, bidder shall tend
not quoting lowest price initially believing
that prices shall be reduced during
subsequent negotiations.

Negotiations

They may adopt a strategy of submitting a

bid low enough to allow them to be invited
in ant negotiations
A prudent buyer never goes for
negotiation after opening bids, until there
are compelling and valid reasons

Negotiation with bidder by PSU Buyers

In view of reasons high-lighted earlier and

directive issued by CVC from time to time
negotiations after competitive bidding shall
be avoided.
No price negations where three technocommercially accepted offers are available
Order shall be placed on lowest (L1)
acceptable after establishing price
reasonability

Exceptional cases of negotiations with L1

bidder
In exceptional cases of high value
contracts, negotiations with evaluated L1
bidder may be done when (with prior
approval of award approving authority)

Only two acceptable offers received and

rates of evaluated L1 bidder are quite high
compared to cost estimate or LPP if
available

Exceptional cases of negotiations with L1

bidder

If bidders have formed a cartel and rates

of L1 bidder are substantially high
compared to cost estimate or LPP if
available
When the materials being purchased is
one of critical inputs of plant/production, it
may be felt necessary to enter into parallel
contract with two or more parties

Negotiations with bidder other than L1

In these cases NIT and bidding documents

shall specifically stipulate this requirement
so that bidders are aware before hand of
awarding parallel contract
In such situations, negotiation with prior
approval competent authority shall be
conducted with L2 bidder to match prices
and conditions with evaluated L1 bidder.

Negotiations with bidder other than L1

If negotiation succeed, parallel contract (s)

is/are awarded.
What needed is that quantity ordered may
be distributed in such a manner that
purchase is done in a fair, transparent and
equitable manner
However, if Negotiation fail with L2 bidder,
further negotiation can be held with all
bidders to match their prices with evaluated
L1 bidder.

Pricing Agreements
FIXED PRICE
Once determined. Price remains fixed until
completion of order apart from changes in
scope of order/contract.
This is applicable mostly to standard items
from stock or for short term production

Pricing Agreements
Advantages to buyer of fixed price
agreements

Provide greater certainty to buyer who

knows from start, what he is likely to pay
In case of tendering, especially in Govt.
buying comparison of offer is convenient
It provides an incentive to the supplier to
complete the work within prescribed time

Pricing Agreements

Re-determinable Fixed Price

Firm price is determined at an agreed point
of contract (say 30% completion) in light of
actual experience of production cost
Price may be retrospective to
commencement of contract/ prospective to
completion
Such price are applicable where
development and production proceed
concurrently, such as Import Substitution

Pricing Agreements
Fixed Price subject to adjustment i.e.
Price ruling at time of executing order

Fixed price as per offer/order is adjusted on

agreed basis to cover escalation in cost of
labour and materials.
Applicable to contracts extending over
period of time during which supplier/
contractor may require to allow for increase
in cost due to inflation or other factor
affecting labour /material

Pricing Agreements

Such prices are more common in countries

where inflation rate is very high i. e. prices
are not stable
Even for short term contract, a monopoly
supplier insists on such prices
These are difficult and expensive to
administer since supplier cost schedule will
be required to be checked by cost deptt of
buyer or services of outside specialist may
be required

Pricing Agreements

Operation of such prices further become

difficult as supplier do not provide
quantifiable data in support of price
increase
This aspect, however can be taken care if
a price variation formula with quantifiable
attributes is agreed upon, before award of
contract.

Pricing Agreements

In variable price contract all financial risk

accrue to buyer
Cost Plus Prices
Final price is determined on the basis of
actual cost and agreed formula for
determination of profit

Pricing Agreements

The basis may be

a) cost plus a fixed fee
b) cost plus agreed percentage
c) cost sharing
Such type of price is applicable to
construction and service contracts, repair
work
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