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8/14/2019 Pp Ch 04-Markets and Products
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Analysis
4. Markets and products
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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
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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
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Markets and market structure
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.
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Markets and market structure
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
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Markets and market structure
Supply side economics: four types of markets......
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
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Markets and market structure
Supply side economics: four types of markets......
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
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Markets and market structure
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
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Markets and market structure
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
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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.
8/14/2019 Pp Ch 04-Markets and Products
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Raw materials and commodity
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
8/14/2019 Pp Ch 04-Markets and Products
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Raw materials and commodity
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
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Raw materials and commodity
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
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Raw materials and commodity
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
8/14/2019 Pp Ch 04-Markets and Products
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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
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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
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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.
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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
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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
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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
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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.
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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
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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