Pp Ch 04-Markets and Products

8/14/2019 Pp Ch 04-Markets and Products

1/23

Analysis

4. Markets and products


2/23

Program

Markets and market structures Supply side Demand side

Purchase of goods Raw materials and commodities Components

Maintenance, repair and operating supplies Investment goods Services


3/23

Markets and market structure

External structure

a number of links in supply chains (companies, institutions) that areconnected via markets

Industrial branchthe horizontal relationship of organisations that experience eachother as effective competitors

Industry columna series of companies and valuechains in which the consecutivestages of production of an economic product take place fromprimary producer to a specific set f customers or consumers


4/23


RawMaterials

Semi-manufactured goods

Final Consumers

Capital equipment

Components

Diverging Materials flow

Finished product of one link is the main or sole input for

the next production stages of various industry columns.

This applies to industries that process raw materials

Converging Materials flow

Various finished products of links of various industry

columns are the input for the next link. This situation is

found in companies with assembly-oriented production

structures

Linear Materials flow

The finished product of one link is the main or sole input

for the subsequent link.


5/23


Supply side economics: four types of markets......

Pure competition Neither the supplier nor the buyer can influence the product price, price is

a given Complete information is available Homogeneous product

Monopolistic competition High degree of product differentiation Each supplier tries to make his product stand out in the eyes of the

customer in order to create a monopoly situation for himself No direct pressure on prices from competitors offers


6/23



Oligopoly Limited number of suppliers and limited product differentiation

Very difficult to get foothold in the market, entry barriers

Various forms:

At price P1 and

quantity Q1, all

capacity is used:

price stability

There is aprice

leaderand this is

accepted

Price

agreements are

reached

At price P1 and

quantity Q1, one

party operates

below cost price

and starts aprice offensive


7/23



Monopoly

Presence of only one supplier of the product Substitutes are virtually absent Natural monopolies: the entire supply of raw materials or a

particular manufacturing process is owned by just one producer Government monopolies exist when based on special licenses

that are required from the government or when based on statelaw

Advantage:

It enables the supplier to dictate the price and other contractual

decisions to the market


8/23


Demand side economics: three types....

Pure competition

Oligopsony Oligopoly in reverse: a few buyers and a large number of suppliers Co-operatives or buying consortia

Monopsony One buyer versus a large number of suppliers Very rare


9/23


Bilateral

Monopoly, aptivemarket

(spare parts)

Limited supply sidemonopoly

(fuel pumps)

Supply sidemonopoly

(gas, water, light)

Demand-side

monopoly

(weapons systems,

ammunition)

Limited demand

side monopoly

(telephone

exchanges, trains)

Demand-side

oligopoly

(components,

automobile

industry)

Bilateral oligopoly

(chemical semi-

manufacturers)

Supply-side

oligopoly

(copiers,

computers)

Polypolistic

competition

(office supplies)

One

One

Few

Few

Many

Many

Number of buyers

Number of suppliers


10/23

Raw materials and commodity

exchanges

Distinction between natural raw materials (cattle, corn, coffee, cotton

etc.) and minerals (coal, iron ore, copper and bauxite)

Commodity exchanges play a significant role in the purchase of raw

materials. The major commodity exchanges are in the USA. Locations

have their roots in history.


11/23


exchanges

Criteria for the effective functioning of a futures market:

1. A logical geographical location: for transportation of the material

2. Liquidity of the article: material must be available in sufficientquantity and in manageable units

3. Liquidity of the market: there must be sufficient parties willing toparticipate

4. Political stability: there must be a certain degree of politicalstability in the country where the exchange is established, becauseof the huge financial interests connected with the futures trade


12/23


exchanges

Futures trade is forward trade, which means that goods arepurchased to be delivered at a future time, to fulfill the contract bysettling the price difference between the original and a newtransaction

Participants always take an open position:

Long position

Situation in which a partybuys more of the product

than he has sold: positive

balance

Short position

Situation in which a partysells more of the product

than he has bought:

negative balance


13/23


exchanges

Futures market: some definitions..

Clearing house: body that guarantees the contracts and takes care of

the financial settlement

Four groups participate. Producer: uses market to secure his crop revenues Trader: is both buyer and seller and is satisfied with small profits

over large positions

Buyer: main goal is to limit the market or price risk Speculator: only goal is profit. Speculators provide the market withdynamics


14/23


exchanges

Futures market, when?

Raw material is an essential constituent of the cost price of

the finished product

It is almost impossible to translate a price increase on the

purchasing side in the sales price

The raw material that is used in the finished product

cannot be substituted by other products


15/23

Buying components

Purchasing related characteristics.

Components are parts that are to be built in the final product, to

be sold by the manufacturer: standard or specific

Often for serial production

Quality aspects and punctual delivery play an important role


16/23

Maintenance, Repair & Operating supplies

Purchasing related characteristics.

Very extensive article assortment

High degree of specificity Low, but irregular consumption rate User has substantial influence on the choice of the product MRO articles represent 80% of product codes, and 20% of the

purchasing turnover


17/23

Maintenance, Repair & Operating supplies

Typical purchasing agreements for MRO-supplies:

Call-off agreements: agreements that specify price, delivery termsand conditions and the contract period. Orders are placed againstannual contact.

Systems contract: contract that covers a plant or departmentsrequirements for MRO supplies. Supplier carries inventory andmakes regular and timely deliveries. Often supported by electroniccatalogues and/or e-Procurement systems.

Corporate credit cards: not only for travel and entertainmentpurposes, but also for non-production buying and incidentalpurchases. Often in form of Procurement Cards.


18/23

Investment goods

The purchase of investment goods entails.. The purchase of machinery, installations and services Monitoring the progress Ensuring the required quality and specifications

Project related purchasing organized through project team: project leader project engineer

planning engineer project administrator process engineer project buyer


19/23

Investment goods

Criteria for selecting suppliers: Production: Project experience that the supplier has Organisation: State of quality of the staff and the ability to

provide in all the required disciplines Financial status: Financial reliability, state of liquidity and

profitability Design and manufacturing capacity: The assembly

instructions, the material experience and the monitoring of costs Quality assurance: Guarantees that the supplier provides and

the quality standards he adheres to Experience and references: The references the supplier can

provide and the experiences of other clients it has worked for


20/23

Investment goods

Some specific aspects.

Bank guarantees: to ensure that the suppliers obligations are

fulfilled Transfer of title: agreements about ownership of the material

Performance guarantees:Guarantee that the supplier will meet

specifications

Payment terms: Supplier usually wants pre-payment in severalterms


21/23

Buying services

Several types of services Civil engineering and architecture

Machine construction, production equipment,

transportation and energy

Electrical engineering, instrumentation etc.

Offices, laboratories, computers, catering.


22/23

Buying services

Capacity buying:

Buying services because of insufficient internal capacity

Specialist buying:Buying services because of a lack of expertise

Open tender.

With pre-selection: principal indicates which companies arequalified and can submit proposals

Without pre-selection: every supplier can submit a proposal


23/23

Buying services

Investments can be focused oncore activities

Optimal use of knowledge,equipment and experience of third

parties Flexibility is increased; fluctuations

in workload can be absorbed moreeasily

Contracting out leads to a moresimple primary process in theorganization

Input of an independent visionprevents organizationalshortsightedness

Part of the company risk isoutsourced to third parties

Increased dependency onsuppliers

Constant monitoring of costsrelated to contracting out is

necessary Risk of communication and

organizational problems duringoutsourcing of activities to thirdparties

Risk of information leaks(confidential information)

Risk of social and legal problemsin case of activities by third parties

Disadvantages of outsourcing servicesAdvantages of outsourcing services

Pp Ch 04-Markets and Products

Documents

Transcript of Pp Ch 04-Markets and Products