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1 Price and Cost Analysis. 2 Outline  Nissan’s Keiretsu Nissan  Carlos Ghosn and Nissan  importance of costing  price and cost in purchasing  related.

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Presentation on theme: "1 Price and Cost Analysis. 2 Outline  Nissan’s Keiretsu Nissan  Carlos Ghosn and Nissan  importance of costing  price and cost in purchasing  related."— Presentation transcript:

1 1 Price and Cost Analysis

2 2 Outline  Nissan’s Keiretsu Nissan  Carlos Ghosn and Nissan  importance of costing  price and cost in purchasing  related issues  cost and pricing of supplier  total cost ownership model and collaborative cost management

3 3 KeiKeiretsu #1tsu  Nissan  special status before the war among automakers  losing the special status after WW II  Nissan’s policy: importing foreign technology (versus 100% self-developed technology of Toyota)  control of foreign exchange in Japan because of shortage in foreign reserve  1952 Bank of Japan rejected Nissan’s application for foreign exchange #1 Evelyn Anderson. Nissan’s Keiretsu, 1956  1970

4 4 KeiKeiretsu #1tsu  term first appeared in 1952  Small and Medium Enterprises Planning Bureau launched the “Keiretsu Shindan” (Keiretsu Diagnosis)  objective: improving the relationship between automakers and their part suppliers  joint site visit of part suppliers by Aichi Industry Guidance Office, Nagoya Industrial Technology Testing Centre, and the Purchasing Department of automakers  advice to and grading for part suppliers  part suppliers of individual automakers formed associations  some open allowing cross-association membership, some more restrictive  social functions and seminars #1 Evelyn Anderson. Nissan’s Keiretsu, 1956  1970

5 5 KeiKeiretsu #1tsu  Provision Act for the Promotion of the Machinery Industry by the Ministry of International Trade and Industry (MITI), 1956-1970  3 times, each of 5 years  for companies of capital less than 50 million yen  component makers (i) to apply for foreign reserve to buy foreign technology, (ii) to borrow at a lower interest rate  incentive for Nissan to spin off or acquire companies #1 Evelyn Anderson. Nissan’s Keiretsu, 1956  1970

6 6 Nissan’s Keiretsu  Table 1, Table 2, Table 3, Figure 1, Table 4, Table 5 Table 1Table 2Table 3Figure 1Table 4 Table 5  close relationship with Nissan for companies in its Keiretsu #1 Evelyn Anderson. Nissan’s Keiretsu, 1956  1970

7 7 Nissan Carlos Ghosn and Nissan

8 8 Bright History of Nissan HistoryNissanHistoryNissan  1933: set up in Japan  late 50’s: sedan, sports car, and truck in the US under the brand name Datsun  late 60’s: popular cars, good performance, nice structure, profitable  Datsun 510 sedan  Datsun 240Z: fastest seller in the world, half a million in 10 years  1975: Datsun being #1 imported brand in US  early 80’s: first assembly factory in Tennessee  first for trucks and later for sedan, all well accepted  1989: launched luxury car Infiniti, selling well in the next 10 years

9 9 Troubles for Nissan  early 90s: emergency of problems  high price, product not as popular as before  market share in Japan dropping for more than 20 years  by late 90s: running into deep financial trouble  debt: US$ 22 billion

10 10 CarlosCarlos GhosnGhosn  1954: born in Brazil from parents of Lebanon origin  mother; born in Nigeria, a French citizen  father: a Brazilian citizen  1960: moved with mother and three siblings to Beirut, Lebanon  excellent student, Intelligent, diligent student with various talents  undergraduate and master in France  bachelor degree in engineering in École Polytechnique  master degree in École des Mines de Paris  1978: employed by Michelin & Cie, the largest tire manufacturer in Europe

11 11 CarlosCarlos GhosnGhosn  1984: heading R&D of the company's industrial tire division  1985: Chief Operating Office of Michelin's South American operations  two factories in Brazil haunted by inflation  turned the factories into profitable in two years  1990: chairman and chief executive officer of Michelin North America  acquisition of the Uniroyal Goodrich tire company  1996: Executive Vice President of Renault, 2nd in company  financial trouble, loss of US$ 1 Billion  cost cutting, leading to profit in 1997  1999: Renault purchased 36.8% of Nissan

12 12 Achievements of Carlos Ghosn  1999Renault got 36.8% stake of Nissan  Nissan: debt $20 billion; loss $2.7 billion in 99  June 99Ghosn as COO of Nissan  June 00Nissan net profit $2.7 billion  June 01CEO of Nissan  May 05CEO of Renault  by 06EBIT of Nissan 9.25%, double of industrial average, and up from 1.38% from year 2000

13 13 Tasks by Carlos Ghosn  objectives of the 3-3-3 Turnaround plan  cut cost by 1 trillion yen  cut 20% of purchasing in 3 years  cut number of suppliers to half (1,100 to 600)  cut debt from 1.4 trillion yen to 700 billion yen  launched 22 new cars

14 14 Importance of Purchasing and Supply Management  assumption: linear changes of sales and cost w.r.t. the production quantity  how to increase profit? $10Profit $40 Others $50 Material Cost $100Sales  sales?  price?  cost? 10% increase in sales $11Profit $44 Others $55 Material Cost $110Sales 10% increase in profit $20Profit $40 Others $50 Material Cost $110Sales 100% increase in profit 10% increase in price with 30% decrease in demand $14Profit $28 Others $35 Material Cost $77Sales 40% increase in profit 10% increase in price without change in demand $12.5Profit $40 Others $47.5 Material Cost $100Sales 25% increase in profit 5% decrease in material cost

15 15 Tasks by Carlos Ghosn  specific tasks  cut 21,000 jobs (14%)  closed 3 out of 7 assembly factories  reduced production platforms from 24 to 15  sold nearly 1,300 but 4 company stocks  broke the Keiretsu system  benchmarked purchasing cost  purchasing team formed by purchasing, engineering, manufacturing, and finance  cost benchmarks from Renault  centralized financial system  saved design cost  collaboration with Renault  cost-saving design

16 16 KPI at Financial Year 2000  sale: 4%   22 new cars:launched as scheduled  personnel:simplified  purchasing cost:11%   utilization of capacity:74% (up from 51%)  profit margin:5.4%

17 17 Importance of Costing

18 18 Importance of Understanding Cost  Mr. Lin of Tailift ( 台勵福 ) familiar with mechanical parts Mr. Lin Tailift 台勵福  「東勢高工伐木科」 for Mr. Lin, finishing military service in 1969  1969-1971: earning NT$15 mill by producing and selling mechanical machinery at 80% of market price  1972: losing NT$40 mill by producing and selling rotating arm drill press at less than 70% of market price  did not understand the actual cost in production  careful cost analysis for sawing machine, supplying at 2/3 of the cost of the competitor  1973: set up 台勵福 as OEM of sawing machine  1978: production of forklift trucks  later, fork lift trucks, drill presses, CNC punchers

19 19 The Costing Approach of Apple 《 iPhone 全球供應鏈大解析》 曾航

20 20 The Profit Sharing of iPhone

21 21 The Selection of Contractor for iPhone by Apple  Apple: very demanding on contractors  requirements  possessing the very edge of technology, often asked to go beyond  the best or the second best in a discipline  cooperative  preparing multiple options for Apple to select till the very end  possible to entertain demands on price reduction by Apple  having the ability to increase production capacity to have land, machinery, and laborers for new factories  cancellation of order, with immediate effect even for a long-term contractor, if the contractor fails to satisfy Apple’s requirements

22 22 The Selection of Contractor for iPhone by Apple  Why is it good to be a contractor of Apple?  stable order (if the contractor can satisfy Apple’s demand)  less price-cut competition from smaller contractors  less burden on inventory  relatively clear demand and accurate forecast from the hot Apple products  large volume to make overall higher profit margin than industrial average  prestigious to be an Apple supplier  attracting business from other brand holders  usually even higher profit margin from these business

23 23 Apple as a Buyer  improvement of suppliers under the strict requirements of Apple  technical support from Apple to supplier for production problems  professional Apple employees  work first  never accepting any form of entertainment by supplier  putting the benefits of Apple at the first place  strictly executing the target set by Apple

24 24 Apple as a Buyer  in sourcing, a team from Apple to a supplier to check the cost of machinery, labor, and material  generally checking two suppliers for each item  often having two suppliers for a component  forcing a supplier to share the technology developed for Apple with another supplier

25 25 Price and Cost in Purchasing

26 26 Many Issues Related to Price and Costs  timing of purchase and exchange ratesexchange rates  video clipping: the third, 00:22:00 to the fourth 00:01:04the third, 00:22:00 to the fourth 00:01:04  hedging option paid by Southwest hedging  2007 Jan-Sept: spent US$42 mill at about US$52/barrel when oil price  US$52/barrel

27 27 Cost Terms for International Sourcing  exchange rate  Incoterms (International Commercial terms) on responsibility and duties Incoterms (International Commercial terms)  Ex Works (EXW); Free Carrier (FCA); Free Alongside Ship (FAS); Free on Board (FOB); Cost & Freight = FOB + Freight cost; Cost, Insurance, and Freight (CIF) = FOB + Freight cost + Insurance; Carriage Paid to (CPT) = FCA + freight cost; Carriage & Insurance Paid to (CIP) = FCA+Freight cost+ Insurance; Delivered at Frontier (DAF); Delivered Ex Ship (DES); Delivered Ex Quay (DEQ); Delivery Ex Quay- Duty Paid; Delivery Duty Unpaid (DDU), Delivery Duty Paid (DDP)  import tax  conditions of payment  Letter of Credit, L/C, cash, cash discount, quantity discount  transportation cost  administration cost  trip cost  intermediate storage cost keys: transfer of ownership; kind of cost to share

28 28 Strategic Cost Management in Purchasing  joint effort of the whole company joint effort of the whole company  throughout the life cycle for a product throughout the life cycle for a product

29 29 Cost and Pricing of Supplier

30 30 Basic Cost Structure of an Item Profit Margin Selling and Administrative Cost Production Overhead Direct Labor Cost Direct Materials Cost Price Charged Skimming Skimming Rate of return Rate of return Margin pricing Margin pricing Supplier’s Total Cost Market forces Market forces Market strategy Market strategy Competition Competition Direct Costs Labor force Labor force Raw materials Raw materials Economic conditions Economic conditions

31 31 Analyzing Supplier’s Price  tender/quotation: take average price  comparing to public prices  comparing to historical prices  internal cost accounting

32 32 Market–Driven Pricing Models  strategies adopted by supplier depending on economic and market conditions  price-volume model  market-share model  market skimming model  revenue pricing model  promotional pricing model  competition pricing model  cash discount

33 33 Cost-Based Pricing Models  total cost of the item = $50  markup pricing model for 20% markup  selling price: $50(1+20%) = $60  margin pricing model for 20% margin rate  profit expressed as margin on selling price  selling price = $62.5  rate-of-return pricing model for 20% ROR  $300,000 investment to make 4,000 parts for a total cost of $50 each  selling price = $50 + ((20%)(300000)/4000) = 65.

34 34 Reverse Price Analysis  to prepare price negotiation with supplier  estimation of supplier cost structure from experience and public informationsupplier cost structure  opportunities for cost reduction in discussing with suppliers  plant utilization  process capability  learning-curve effect  supplier’s workforce  management capability  purchasing efficiency

35 35 Total Cost Ownership Model and Collaborative Cost Management

36 36 Total Cost Ownership Model  costs throughout the life cycle of an item  payment method, inflation, life, salvage value, auxiliary charge, packaging, transportation, installation, service support, training, maintenance, service parts  example: cost structure and calculationcost structure calculation

37 37 Collaborative Approaches to Cost Management  target pricing: price acceptable by market, or price for competition  searching for design methods, material, and production process to match the target price  reducing the gap between the target price and the actual price provided by suppliers  cost-saving sharing: incentive offered to a vendor for cost saving  pre-requisites  information sharing  vendor to buyer: details of production process, cost structure  buyer to vendor: quantity, quality requirements, plan from near to intermediate term  agreement on cost saving sharing  example: data setting and calculationdata settingcalculation

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