Purchasing Skills | Analysis of all costs that buyers must consider during the purchasing process

By justchinait
October 26, 2020

There are many issues that we consider when placing an order. But in the final analysis, it is the cost that determines our purchasing behavior. All scattered angles, such as price, payment method, delivery period, and warranty are all factors that affect our cost. So when selecting suppliers, we must also consider from the perspective of cost control.

This is the question we want to discuss today.
The costs that affect our purchase decision can be roughly divided into three categories: procurement costs, operating costs, and opportunity costs.

1. Purchase cost

This is easy to understand, is the cost of the purchase itself. This is the most direct cost and the cost concept we have come across most.
What aspects does the purchase cost include?

  • Price is undoubtedly the most important;
  • The payment method is related to the cost of using funds and interest;
  • The delivery period is related to inventory and production continuation. If it is sold, it is related to market price changes;

Transportation costs, customs clearance costs, tariff costs. And other related expenses that may be incurred.

We can easily calculate these costs. A high-quality supplier will help us calculate these costs and help us control these costs when quoting, for example, the price is lower, or the invoice amount is written less to reduce import tariffs, and the certificate of origin can be provided to help us reduce tariffs;
So this part is the easiest to measure, and it is the point that buyers are most concerned about.

2. Operating costs

This is a hidden cost. No matter what type of product it is, it is purchased for use. Even if we are a middleman and we sell to end customers, this is also the use of the product, and the related costs incurred during use are operating costs. For example, labor costs, storage costs, corresponding resource costs, advertising costs, etc. Cost determines how profitable our final selling price is.

Strictly speaking, suppliers only need to complete product production, supply. But in fact, suppliers can also be helpful to sellers in terms of operations, such as providing product advertisements and providing the resources required for products in the Chinese market.

3. Opportunity cost

Opportunity cost is also called choice cost.
That is, when faced with multiple choices, such as ABCD, when we make a decision to choose A, the maximum value in BCD will be correspondingly lost. Then this maximum value is the opportunity cost.

When it comes to purchasing, it means that after some screening, there may be three or five suppliers for us to choice. So when we make a choice, we must consider not only purchasing costs and operating costs, but also opportunity costs.

That is, when we choose A as the supplier, we must give up other suppliers and give up the prices, benefits, and after-sales services of other suppliers.

The choice is risky. In case we choose a supplier with poor quality, unstable operation, and no after-sales guarantee, it means that we may give up the choice of good quality, stable operation, and timely and effective quality assurance.

Regarding this, what we have to do is to choose a trustworthy supplier. The most basic point is that his warranty clauses and subsequent services must be guaranteed for us. In addition, some suppliers can also provide additional technical services, production process recommendations, and even management methods. All in all, let us maximize our value!

All in all, the three types of costs are deepen and interpenetrate each other. After the analysis of the three costs, we can draw several conclusions:

1. The supplier must have a good understanding of the product, not only the structure, composition, and cost of the product, but also the performance, requirements, consumption, controllable, and uncontrollable of the product in the process of being used, etc.;
2. To understand the problems surrounding our use of this product, such as the need to build a workshop to hold the equipment, the size of the workshop, the voltage requirements of the equipment, the supply of parts in the domestic market, the labor situation, etc.;
3. The basic skills of foreign trade must be solid, how to avoid taxes, and how to deal with the situation of potential losses that we do not understand.

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