Pricing is the first phase of Materials Management. Pricing means procurement of goods and services from some external agencies. The object of purchase department is to arrange the supply of materials, spare parts and services or semi-finished goods, required by the organisation to produce the desired product, from some agency or source outside the organisation.
The purchased items should be of specified quality in desired quantity available at the prescribed time at a competitive price. In the words of Alford and Beatty, ”Pricing is the procuring of materials, supplies, machines, tools and services required for equipment, maintenance, and operation of a manufacturing plant”.
According to Walters, pricing function means ‘the procurement by purchase of the proper materials, machinery, equipment and supplies for stores used in the manufacture of a product adopted to marketing in the proper quality and quantity at the proper time and at the lowest price, consistent with quality desired.”
Thus, pricing is an operation of market exploration to procure goods and services of desired quality, quantity at lowest price and at the desired time. Supplier who can provide standard items at the competitive price are selected.
Pricing in an enterprise has now become a specialised function. It was experienced that by giving the purchase responsibility to a specialist, the firm can obtain greater economies in pricing. Moreover pricing involves more than 50% of capital expenditure budgeted by the firm.
According to Westing, Fine and Zenz “Pricing is a managerial activity that goes beyond the simple act of buying. It includes research and development for the proper selection of materials and sources, follow-up to ensure timely delivery; inspection to ensure both quantity and quality; to control traffic, receiving, storekeeping and accounting operations related to purchases.” The modern thinking is that Pricing is a strategic managerial function and any negligence will ultimately result into decrease in profits.
Importance of Pricing:
- Pricing function provides materials to the factory without which wheels of machines cannot move.
- A one percent saving in materials cost is equivalent to a 10 percent increase in turnover. Efficient buying can achieve this.
- Pricing manager is the custodian of his firm’s is purse as he spends more than 50 per cent of his company’s earnings on purchases.
- Increasing proportion of one’s requirements are now bought instead of being made as was the practice in the earlier days. Buying, therefore, assumes significance.
- Pricing can contribute to import substitution and save foreign exchange.
- Pricing is the main factor in timely execution of industrial projects.
- Materials management organisations that exist now have evolved out or pricing departments.
- Other factors like:
(i) Post-war shortages,
(ii) Cyclical swings of surpluses and shortages and the fast rising materials costs,
(iii) Heavy competition, and
(iv) Growing worldwide markets have contributed to the importance of pricing.
Objectives of Pricing:
The pricing objective is sometimes understood as buying materials of the right quality, in the right quantity, at the right time, at the right price, and from the right source. This is a broad generalization, indicating the scope of pricing function, which involves policy decisions and analysis of various alternative possibilities prior to their act of purchase.
- To pay reasonably low prices for the best values obtainable, negotiating and executing all company commitments.
- To keep inventories as low as is consistent with maintaining production.
- To develop satisfactory sources of supply and maintain good relations with them.
- To secure good vendor performance including prompt deliveries and acceptable quality.
- To locate new materials or products as required.
- To develop good procedures, together with adequate controls and pricing policy.
- To implement such programmes as value analysis, cost analysis, and make-or-buy to reduce cost of purchases.
- To secure high caliber personnel and allow each to develop to his maximum ability.
- To maintain as economical a department as is possible, commensurate with good performance.
- To keep top management informed of material development which could affect company profit or performance.
- To achieve a high degree of co-operation and co-ordination with other departments in the organisation.