What you should know about quote pricing, purchase orders, and ERP systems

By Mark Zetter

Below is a summary of how purchasing, materials, and program management departments within many contract manufacturers manage quote pricing and purchase orders as these relate to the contract manufacturer’s enterprise resource planning (ERP) system.

Price

Pricing can be broken-down into four categories.

Contract manufacturer quote price
The quote price is the price which the contract manufacturer has negotiated with their suppliers

OEM customer quote price
The customer quote price is the price which the contract manufacturer charges the customer for the component. This price is the landed cost price for the contract manufacturer. The customer quote price includes duty and component packaging but it usually does not include freight or contract manufacturing overhead for handling the component.

Purchase order price
The purchase order price is the price (or cost) the contract manufacturer pays to the supplier. This price typically must include duty and component packaging and this price could also include freight.

OEM customer contract price
The customer contract price is the component price negotiated by the customer with the supplier(s) and given to the contract manufacturer to use as the purchase order price. The OEM customer contract price could be based on cost reductions or shared profit savings and is based on using direct channels unless stated differently by the manufacturer. This price usually must include duty and component packaging and could also include freight. The OEM customer contract price does not include overhead for handling the component.

OEM customer quote price

Program management and materials management will usually have the responsibility of determining the customer product or services quote price. The basis for this type of decision-making is usually distilled from customer contract pricing and pricing negotiated by the contract manufacturer. Meanwhile, the customer quote price is then communicated to the OEM customer and other relevant organizations. It’s important this is determined three, maybe four, weeks before the quarter begins.

OEM customer contract pricing is provided to the contract manufacturer at least four weeks before the quarter begins. The customer contract pricing will / should be exactly similar to the customer quote price for the same quarter.

The contract manufacturer’s negotiated pricing is determined between program management and materials management. When doing so, many contract manufacturers follow a general framework whereby the current quarter’s pricing is added to the subsequent quarter’s pricing and the total is divided by two. Additionally, any price breaks are usually based on volume related to forecast numbers.

Enterprise resource planning (ERP)

OEM customer quote pricing should usually updated at least once each quarter. This is typically performed by the contract manufacturer’s purchasing department.

Meanwhile, buyers for the contract manufacturer should always check this pricing before placing any purchase order through the system. In instances where the price is higher in the purchase order than price in the ERP system, the buyer usually fills out a cost variance authorization form. The purchase order is then placed only once the buyer and program management both sign-off on the cost variance authorization form.

In some instances, the enterprise resource planning system may not have complete pricing information or, the information is outdated. In such cases, it is usually the buyer’s responsibility to alert contract manufacturing program management via a cost variance authorization form. It is then the purchasing department’s responsibility to update the information in the ERP system once the cost variance authorization form has been signed-off by program management.

Purchasing

OEM customer quote price
The purchasing department will always try and purchase at, or better, than the OEM customer quote price. This should be expected. In cases where purchasing has bought at a higher price than the OEM customer quote price, a cost variance authorization form is completed. The purchase order is then not placed until the authorization form is signed by program management and purchasing.

OEM customer contract pricing
With regards to OEM customer contract pricing, the contract manufacturing purchasing department should always go directly to the manufacturer unless advised differently by the OEM customer or manufacturer. If purchasing channels distribution, the OEM customer contract pricing is usually exploited and the contract manufacturer’s ‘mark-ups’ are also typically exploited. Again, in such instances, a cost variance authorization form is filled out since the price will be higher than the OEM customer quote price due to the ‘mark-up’.

Contract manufacturer negotiated pricing
With regards to pricing negotiated by the contract manufacturer the contract manufacturer’s purchasing department will source from any source listed on the OEM customer’s approved manufacturer’s list (AML) that is provided by the OEM customer. In such cases, the purchasing department will try and use the ‘last buy’ price or OEM customer quote price, whichever one is lower, as the starting point for negotiations.

Whenever appropriate, it is expected for purchasing to attempt to lower the price. In such cases where the price is higher than the OEM customer quote price, a cost variance authorization form is filled out.

Quarterly changes: OEM customer quote price / OEM customer contract price
It is the contract manufacturer’s purchasing department that typically has the responsibility to place all purchase orders in line with the relative pricing for any respective calendar quarter.

It is also purchasing responsibility to update the purchase orders in line with the quarterly customer contract pricing – which should be made available approximately four weeks before the start of the quarter. In addition, it is usually the purchasing department’s responsibility to ensure all outstanding purchase orders are reviewed before the start of the quarter so that the respective quarter’s pricing is applied.

What would be deemed ‘new quarter’ pricing would be based on agreed upon delivery dates determined between the contract manufacturer and the suppliers.

As for purchase order pricing, it is the responsibility of the purchasing department in the contract manufacturer to make sure all purchase orders reflect correct pricing whereas it is the responsibility of the finance department to check to see that invoices are in line with the proper purchase order information. Purchasing then takes the responsibility to address pricing issues with the suppliers.


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