Right price, which brings the best ultimate value is usually determined with other factors, such as quality, quantity, delivery, shelf life, availability, demand, supply, standard/non-standard, repetitive/non-repetitive, seasonal/ non-seasonal, etc.
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Prices may be ascertained by previous purchase, catalogues, list price, market price, by telephone, by inquiry, by tender through negotiations, estimates of cost plus, for the costing price trends etc. The process of obtaining quotations involves a certain amount of work and this should be justified by the order.
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These are three basic methods a buyer can use to determine the right price. These are:
1. Competitive Bidding
2. Published Price Lists
3. Two Step Bidding.
1. Competitive Bidding:
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Competitive bidding is a widely discussed form of purchasing. Competitive bidding is one of the three methods by which price can be determined. It is nothing more. It is not a panacea or an infallible technique that always assures the honest purchase of quality products or rock bottom prices.
When competitive bidding is used by private industry, requests for bids are traditionally sent to three to eight vendors, depending on the money value size of the purchase. Requests for bids asks vendors to quote the price at which they will perform in accordance with the terms and conditions of the order of contract should they be the successful bidder.
Government buyers generally are not able to restrict the number of bidders to only eight. Rather, all vendors desiring to bid are permitted to do so (for large purchases, the number are literally in the hundreds).
Under competitive bidding, industrial buyers generally, but not always, give the order to the lowest bidder. By law, government buyers are routinely required to give the order to the lowest bidder, provided the lowest bidder is deemed qualified to perform the contract.
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The proper use of competitive bidding, as the best method of pricing available to a buyer, is dictated by five criteria. When all five criteria prevail, competitive bidding normally assures the buyers of obtaining the lowest possible price. The criteria are:
1. The Rupee value of the specific purchase is large enough to justify the expense; to both buyer and seller that accompanies this method of pricing.
2. The specifications of the item or services to be purchased are to be explicitly clear to both buyer and seller. In addition, the seller knows from actual previous experience, or can estimate accurately from similar past experience, the cost of producing the item or rendering the service.
3. The market consists of an adequate number of sellers.
4. The sellers comprising the market are technically qualified and actively want the contract and, therefore, are willing to price competitively to get it.
Under such circumstances, additional orders would entail overtime operation and its attendant problem of scheduling difficulties and premium wage payment. Under such circumstances, if bids are made at all, they are at prices that include all manner of contingencies.
5. The time available is sufficient for using this method of pricing. Vendors competing for large contracts must be allowed to obtain and evaluate bids from their subcontractors before they can calculate their best price. Bidders must also have time to perform the necessary price analysis required within their own organization and to assure themselves of reliable sources of materials.
The time required for preparing, mailing, opening, and evaluating bids is usually considerably longer than those unfamiliar with this system of pricing would expect. Thirty days is not an uncommon time.
2. Published Price Lists:
Published price lists in the form of daily quotations exist for standard commodities traded on the various commodity exchanges throughout the world.
Price lists also exist for most standard items of hardware and office supplies carried by typical firms in their inventories.
Usually price lists show different prices for varying quantities. Quite often a seller who has a particular commodity in inventory will sell at a price lower than the price quoted for the commodity on the exchange.
3. Two Step Bidding:
A large, technically oriented firm and the government use a modified type of competitive bidding called “two-step bidding”. This method of pricing is used in situation where inadequate specifications preclude the initial use of regular competition bidding. In the first step, bids are requested only for technical proposals, without any prices.
Bidders are requested to set forth in their proposals the technical details describing how they would produce the required materials, products or services. After these bids are evaluated, and it is determined which proposals are technically satisfactory, the second step follows.
In the second step, requests for bid are sent only to those sellers who submitted acceptable technical proposals in the first step. These sellers now compete for the business on a price basis, as they would in any routine, competitive bidding situation.