Nationwide Telephone is a quality low-cost cordless telephones manufacturer that has been in the market since 2001. The company currently employs 200 workers, 140 of whom work in assembly. Nationwide is among the pioneers of low-cost telephones in the United States that is still in the market to date. Automation, fast deliveries, and reliable service strategies employed by the company have helped it acquire and retain its market share. However, the company has been facing stiff competition from its rivals in the Far East, which has made maintaining its market share a challenging endeavor. Over the past months, the company has been performing poorly financially which is attributed to high production costs and low sales. The company’s president, Rodger, has been analyzing the company’s performance with the help of the supply team, Steve, the supply manager and his two supply analysts, Jan and Bill.
Over the last six months, the company has been experiencing adecline in sales and an increase in expenses. After a careful assessment, the increase in expenses has been found to be as a result of an increase in the price of raw materials, the plastic component. Plastic components costs make up about 40% of the end product’s cost, and thus a change in its price affects the company’s overall expenses significantly, which is reflected in the profits made.Furthermore, since the company uses competitive bids comparison as the only tool for analyzing prices and thus has used ABC suppliers as their sole-supplier.
The company has a problem of plastic component price fluctuation. Since this is one of the main raw materials used in manufacturing telephones, its price fluctuation is affecting the company’s financial performance and if this trend goes on, the company’s on going concern could also be affected. Nationwide would need to have a strategy in place so as to ensure that it can effectively deal with similar price fluctuations in the future.
Another problem faced by the company is the difficulty of plastic component price analysis. Plastic component prices are highly dependent on the competitive nature of the market, which makes price analysis a challenging endeavor. Lastly, the company does not understand the costs and benefits of staying with the current supplier to facilitate the decision making process.
Possible Solutions and Alternatives
Price analysis tools that Nationwide can use to determine the right price for its plastic component
Nationwide supply team should use more than one analytical tool to determine the right price. The company could use some of the price comparison techniques recommended by the Federal Acquisition Regulation, which includescomparison of prior quotations, comparison of published price lists, prices et by law or regulation and comparison of competitive bids(Skitmore & Marsden, 1988).
Ways that Nationwide’s supply department can prevent the price escalations
Nationwide can prevent price escalation through employment of various methods such as inserting aprice escalation clause in its supplier contract, introducing ways to produce its telephones more efficiently, buying its raw materials locally, selling its products locally, and reclassifying its product on the global market (Crump, 1985).
How the competitive condition of the plastic component industry might impact the use of price analysis
Marketers set their prices in line with the trends set by their competitors.Although researching competitive prices is easy, analyzing those prices can be challenging especially if it is affected by external factors such as competitors who might allow room for price negotiations. Such competition may affect price analysis in three different ways including direct competitor pricing, related product pricing, and primary product pricing(Skitmore & Marsden, 1988).
Costs and benefits for Nationwide if it continues sourcing from the same local suppliers
Nationwide should consider continuing to use the same local suppliers due to added advantages that come with purchasing locally. Buying products locally would be seen as promoting the local community, which could lead to good public relations. Local suppliers also tend to place substantial value on serving customers from their community; hence Nationwide could continue enjoying benefits associated with such superior services (Porter, 2000). The supplier is located near the company, which promotes convenience and predictability of delivery times and reduces delivery cost. Nevertheless, the company might get the plastic components at a higher price and lower quality than it would have if it switched suppliers. Using a sole-supplier for too long might make Nationwide over dependent on the supplier, which could result in financial and technical problems in case the supplier was unable to deliver(Porter, 2000).
Choice and Rational
Nationwide should use comparison of prior quotations and comparison of competitive bids.
The supply team should also analyze ABC’s most recent quotation in order to determine the viability of the current price. This would save the team time spent in getting competitive quotes for price analysis (Skitmore & Marsden, 1988). This tool should be used for the initial price analysis, as it would help eliminate procurement delays that might affect the company’s operations.
Another tool that the team could use to analyze plastic component prices is comparison of competitive bids. Nationwide supply team send out requests for quotations to potential suppliers and compare the ABC’s prices against the quotes received. This will assist them to validate the price, as quotes received from other suppliers will help them determine whether the ABC’s price is reasonable (Skitmore & Marsden, 1988). However, the team should bear in mind that the lowest bid placed does not necessarily represent the lowest product cost. They should therefore analyze the product’s overall cost of acquisition. Costs associated with purchasing the plastic component such as the quality, and additional processing costs should be taken into consideration when comparing different supplier’s bids as it is the real product’s cost (Skitmore & Marsden, 1988).
Nationwide should insert a clause in its supplier contract to protect it from price escalations and introducing ways to produce its telephones more efficiently.
Inserting a price escalation clause should be agreed upon before getting into a contract with the vendor, before cost escalation. A price escalation clause states a percentage price rise at which the terms of contract have to be reviewed. Although this might not protect the company from small price increments, it will ensure that the company has options when prices start escalating (Crump, 1985).
Another way that Nationwide can price escalations would be through introducing ways to produce its telephones more efficiently. If the company reduces other production overheads such as labor, an increment in raw material prices would not have a significant impact on the company’s profits (Skitmore & Marsden, 1988). Introduction and implementation of more efficient production process might require intensive capital investment but it would result in more savings in the long run.
The main way competitive condition of the plastic component industry impacts the use of price analysis is direct competitor pricing.
All marketing decisions, product prices included, are made after a careful evaluation of what the competitors are offering. As a result, the price of plastic component would heavily depend on the market’s competitive nature. Since plastic component is not a market leader, it would be heavily subjective to competitor pricing. Once a company sets a competitive price, other companies might be forced to adjust their prices too in order to remain competitive.
Nationwide should consider continuing to use the same local suppliers due to added advantages that come with purchasing locally.
Although the plastic material might cost more when purchased locally, the indirect benefits justify having retaining the local supplier.
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