SCM Manual

STRATEGIC COST MANAGEMENT
Improving Supply Chain

Competitiveness & Profitability
in the 21st Century
Presented by
Anklesaria Group, Inc.

1172 Cuchara Drive
Del Mar, California 92014
Telephone: (858) 755-7119
Fax: (858) 755-2139
E-mail: info@anklesaria.com
Website: www.anklesaria.com
Copyright © 2001, Anklesaria Group, Inc.

Del Mar, California
Part of this program is based on the book
Zero Base Pricing™: Achieving World Class Competitiveness
Through Reduced All-in-Cost
by
David N. Burt, Warren Norquist and Jimmy Anklesaria
Byline Publishing
Zero Base Pricing™ is trademarked

by the Polaroid Corporation.
AIM & DRIVE is a registered servicemark by Jimmy Anklesaria
The material included in this Program Manual is

copyrighted and may not be reproduced in whole or part
without the express written permission of Anklesaria
Group, Inc., 1172 Cuchara Drive, Del Mar, California 92014.
Copyright © 2001, Anklesaria Group, Inc., Del Mar, California
All rights reserved
Code:010117
TABLE OF CONTENTS
Page #
The Anklesaria Group, Inc. Team 1
Firms That Have Participated in Anklesaria Group, Inc. Programs 3
Seminar Agenda and Objectives 4-5
Strategic Cost Management: The Concept 6-11
Cost and Price Management 12-42
Should Cost Models 16

Percentage of Sales Model 26
Price Discipline 30
Total Cost of Ownership Model 37
Implementing SCM 43-46
Exercises: 47-70
Case 1: Coating the Price 48

Case 2: Cable Connection 50
Case 3: Paying the Price 54
Case 4: Ace Incorporated 61
Case 5: The Collins Corporation 65
Optional Exercises: (Service Cases): 71-82
Case 1A: Price Maintenance 72

Case 3A: A Pricing Dilemma 74
Case 4A: A Temporary Solution 78
Appendix : 83-97
Appendix A: Economic Census 84

Appendix B: Pacific Bell Study - Overhead Rates 88
Appendix C: WageWeb Salary Data 89
Appendix D: Industry Financial Information 90
Appendix E: Producer Price Index 94
Appendix F: Bureau of Labor Statistics 96
Appendix G: Other Sources of data 99
Appendix H: International data sources 100
Appendix I: Present Value Interest Factor table 102
THE ANKLESARIA GROUP, INC. TEAM
JIMMY ANKLESARIA
Jimmy Anklesaria, F.C.A., LL.B. is the founder of Anklesaria Group, Inc. He is a Fellow Member of the
Institute of Chartered Accountants, and holds a law degree and an M.B.A. Mr. Anklesaria is co-author of
Zero Base Pricing™: Achieving World-Class Competitiveness Through Reduced All-In-Cost with David
N. Burt and Warren E. Norquist. In January 1998 he founded Cost Management Solutions, LLC, which
brings solutions to his various cost management programs through the use of sophisticated software. Mr.
Anklesaria holds the international servicemark/patent for the AIM & DRIVE process. He has published
several articles and cases in leading purchasing and financial journals and texts in the United States and
abroad.
One of America's most sought-after speakers on cost management, Mr. Anklesaria conducts seminars and
workshops around the world. He has a unique ability to provide practical solutions to complex business
problems. Mr. Anklesaria has been the keynote speaker for a number of organizations and companies.
Mr. Anklesaria teaches a graduate level course in Strategic Cost Management at the University of San
Diego, where he has been named Outstanding Professor of the Year. He is also a faculty member of the
Certificate in International Business program in San Diego and is a guest lecturer at the University of
Chicago, Graduate School of Business.
SANJIT MENEZES
Sanjit Menezes, CMA holds a Master of International Business degree from the University of San Diego.
He is also a Certified Management Accountant. Mr. Menezes is currently the Anklesaria Group, Inc.
Executive-in-Residence at the University of San Diego, where he teaches the undergraduate course in
Strategic Cost Management/Contract Pricing. He was ranked among the top five instructors at the
University of San Diego’s School of Business.
Mr. Menezes has facilitated working sessions on cost management and conducted seminars for numerous
firms around the world. He has developed a number case studies used to teach Strategic Cost
Management and the AIM & DRIVE process.
An enthusiastic and dynamic instructor, Mr. Menezes thinks quickly on his feet and has a natural ability to
relate the material in the courses to real life situations.
Mr. Menezes is currently responsible for the AGI Knowledge Center where he helps client companies
bridge the knowing-doing gap. His expertise in "implementing" the Principles of Strategic Cost
Management has saved clients millions of dollars.
PHIL KELLER
Phil Keller was with DuPont for 29 years and held positions in R&D, Sales, Marketing and for the
past 20 years in many different line and management positions in procurement. His areas of expertise
include Chemical raw materials, Specialty Chemicals, Capital Equipment and MRO supplies. Dr.
Keller played a key role in developing DuPont's Strategic Sourcing Best Practice. He was
instrumental in bringing both Strategic Cost Management and Managing the Cost of the Supply Chain
into DuPont. For the past 5 years he has facilitated Strategic Cost Management and mentored teams
in applying cost management concepts.
Dr. Keller's education includes a Bachelors degree and Ph.D in Chemistry from Temple University.
JOSEPH SANDOR
Joe Sandor, CPM, CPIM is one of America’s most respected Procurement visionaries. Prior to
aligning with AGI, he was Chief Procurement Officer and Director of Corporate Purchasing and
Logistics for the Sara Lee Corporation. Mr. Sandor currently is an adjunct professor of Supply Chain
Management at the University of Chicago, Graduate School of Business. He brings over 24 years of
Supply Management experience with Sara Lee, General Motors, NL Industries and Beatrice. Prior to
joining Sara Lee, Mr. Sandor consulted for 3 years with companies such as, Sara Lee, RCA, Kraft,
TRW, Hallmark Cards and others with emphasis on Materials Management strategy development.
He holds an MBA from the University of Chicago, and is both a C.P.M. (Certified Purchasing
Manager) and a CPIM (Certified in Production and Inventory Management).
M.P. “SID” SIDDHARTH
Sid Siddharth is an industrial marketing consultant specializing in competitive benchmarking, plant cost
analysis, customer and supplier evaluations. He has a wide range of experience in the marketing consulting
arena, including 10 years with Technomic Consultants, International. Providing in-depth analysis of supplier
costs before a negotiation is one of his areas of expertise. He has consulted with several Fortune 500 firms
in the areas of competitive cost analysis, new product introductions and acquisition/due diligence analyses.
Mr. Siddharth has a Bachelor’s degree in Civil Engineering from Indian Institute of Technology, Madras, a
Master’s in Civil Engineering from Vanderbilt University and an M.B.A. from Lehigh University.
JOHN STRIEBICH
John Striebich has extensive knowledge and experience in corporate finance and accounting through his
private and public sector work experience and academic preparation. He is an Adjunct Professor at
Rochester Institute of Technology (R.I.T.) and the State University of New York at Geneseo, where he
teaches courses in Finance and Economics. He has consulted with many small and medium-sized business
in areas such as business plan development, venture capital acquisition and financial projections. Mr.
Striebich holds an M.B.A. in Finance from R.I.T.
A partial list of firms that have participated in Anklesaria Group, Inc. programs
Abbot Laboratories Eaton Corp. Maytag Shell Oil Co.
Agilent Ebara Mayville Engineering Shinetsu
Air Liquide Ecoplast Medical Associates Shinkawa
Airborne Express Electrolux MEMC Shinko
Allen-Bradley Emery Worldwide Menlo Logistics Shipley
Allied Signal Faxon Mercury Aircraft Signamax
Amana Electronics Federal Express Mercury Marine Signet Systems
American Airlines FL Optics Mentor Graphics Soei (Japan)
American Express Flextronics Mercedes-Benz Solar Turbines
Amkor Electronics Florida Power Metalworks Incs. Solectron
Amoco Chemicals Fluor Daniel Metro Automation Sony Corp.
Apple Computers Fluorware Millenium Petrochem. Southeast Freight
Applied Materials FMC Corp. Milliken SEH (America)
Arizona Public Service Ford Motor Co. Mitsubishi Staples
ASM Int’l Gem City Mitsui Metal Star Manufacturing
AVX General Dynamics Monona Tube State of Illinois
Balzers General Electric Motorola Co. Steel Case
Beitzell Globe Machinery 3M Sumicarrier
Bell Atlantic Grede Foundry N.A.P.M. Sumitomo Chemical
Bersdoff Extruders Griffith Labs. Nalco Chemicals Superior Coffee
Bessin Corp. GTI Nationway Transport TDK
Bil Mar Foods Hanover Direct NMC Takaki
Blackhawk Foundry Hamilton Standard Nidec Tanaka
Border States Haraeus Nippon Tandem Computers
Burlington Air Exp. Harley Davidson Nitto Teepak
C-PAK Harris Corporation Novellus Tektronix
Cadmus Hashimoto Nikon Tennant Company
Capital One Financial Hedwin Corp. Norell Services Texas Instruments
Canon Herman Miller NTK Tillotson
Casio Hewlett-Packard NSC Toppan (Japan)
Celestica Hillshire Farm Occidental Chemical Tokyo Ohka
Compact Industries KLA-Tencor Octel Network Tokyo Seimitsu
Computer Task Group Kanto Ogilvy & Mather Tokyu
Conexant Hikari Photo Printing Oildyne Toshiba
Chisso (Japan) Hitachi Cable Panalpina (Mexico) Triangle Plastics
Chevron Hitachi Chemical Parker Hannifin TRW
Ciba-Geigy Hoechst Celanese Partnership Works UPS
Conrail Honeywell, Inc. Philips U.S. Marine
Columbia Gear Reliant Energy Playtex Ushio
Crenlo IBM Pratt & Whitney UTC
Cryovac Iida Co. Ltd. Praxair VDO Car Comm.
Daichiyu Denshi Co. Iomega Probe Technologies VWR
Dana Corporation Italtel PSEG Waste Management
Danzas Japan Energy Puget Plastics Watanabe
Deco Tool Supply Jimmy Dean Foods Qualcomm Watkins Johnson Co.
Deere & Co. Kanto Japan Quantum Weber Seats
Dewar Kelly Services Rolls-Royce Weyerhaeuser
Dewco KSK (Japan) Rockwell Wisconsin Label
Dexter Electronics Kuroda Electric Co. Rohm Co., Ltd. Xilinx
DHL Kuwano (Japan) Samsung Xyratex
Dickey-John Kyocera Sandvik Yamadsa
DISCO (Japan) Lam Research Sauer Sundstrand Yamashita Electric
Dow Chemical Litton Sara Lee Yasuda Warehouse
DNS Lockheed Schenker Eurocargo York International
DuPont Lucent Scott Paper Young & Rubicam
EAC Plexus Maersk Sears Z.F.Industries
Eastman Chemical Manpower Sequent Computer Zytec
Eastman Kodak Matheson/Semi Gas Sharp Corp.
AGENDA
Day 1
u Introductions
u Strategic Cost Management: The Concept
u Anklesaria’s AIM & DRIVE® Process
Ø Case 1: Zero Base Pricing™
u Product Should Cost Models
Ø Case 2: Product Should Cost Model
u Service Should Cost Models
Ø Case 3: Service Should Cost Model
Anklesaria Group, Inc. 

 2001
AGENDA
Day 2
u Cost Model: Percentage of Sales
u Cost Model: Price Discipline™
Ø Case 4: Applying Price Discipline™
u Cost Model: Total Cost of Ownership (TCO)
Ø Case 5: Applying TCO
u Profit Management
u Implementing SCM

 2001
SEMINAR OBJECTIVES
u To gain a better knowledge of the cost structure of
goods, equipment or services procured
u To differentiate between Zero Base Pricing™ and
AIM & DRIVE®
u To distinguish between price and cost management
u To identify data sources and use market intelligence
in cost models
u To use Price Discipline™ in long term contract
negotiations
u To apply the principles of TCO in sourcing decisions

 2001
This slide is intentionally blank

 2001
STRATEGIC COST MANAGEMENT: THE CONCEPT
Prices
It’s unwise to pay too much.

But it’s worse to pay too little.
When you pay too much you lose a little money,

that is all.
When you pay too little you sometimes lose

everything, because the thing you bought was
incapable of doing what it was bought to do.
The common law of business balance prohibits

paying a little and getting a lot.
It can’t be done.
If you deal with the lowest bidder, it is well to add

something for the risk you run.
And if you do that, you will have enough to pay

for something better.
There is hardly anything in the world that

someone can’t make a little worse and sell a little
cheaper -- and people who consider price alone
are this man’s lawful prey.
John Ruskin
(1819-1900)
Anklesaria Group, Inc.  2001

A HISTORICAL PERSPECTIVE
u The ‘50’s: Rebuilding the infrastructure

u The ‘60’s: Decade of “catching up”
u The ‘70’s: Emergence of global competitiveness
u The ‘80’s: Quality, quality, quality
u The ‘90’s: Cost management & information
u 2000 & Beyond: Leveraging ideas over the
internet

 2001
SUPPLY CHAIN COST FLOW Customer
Supply Base Your Company

A1 A2 A3 A A B C X X
Acquisition Price
Acquisition Price
GS&A & Profit
GS&A & Profit
Acquisition Price
Conversion
Conversion
Revenue
Revenue
+ + = + + =
$
Money enters
Drivers Drivers the chain
only once

 2001
SELECTING YOUR STRATEGY
Comparative Negotiation (SCM) Breakthrough (AIM&DRIVE®)

Costs $
•Leverage Volume •Jointly develop cost management strategies
•Price Analysis with suppliers (Cost Challenges)
•Understand Costs •Execute strategies
•Price Discipline™ •Create knowledge base to leverage ideas
Benchmark Competitor
Initial Cost Your Company

Savings
This is where we generate
real cost savings
Time

 2001
USING COST DATA
Data
Manage Cost Observations

COST
COOPERATION
Understand
the numbers Discussion

 2001
OVERCOMING BARRIERS TO COST SHARING
u Only request “relevant” data

u Do not become an auditor
u Sign a confidentiality agreement if
necessary
u Provide constructive feedback
u Communicate that cost knowledge is the
foundation for building a cost management
strategy

 2001

 2001
ANKLESARIA’S
Agreeing on the need to AIM & DRIVE
manage costs
PROCESS
•Select a Primary Cost
(topic)
•Specify goals from
different perspectives Identifying critical costs
in the supply chain
•Break down Primary Cost

into secondary / tertiary
costs
•Select future / impactable Measuring secondary
cash flows
and tertiary costs
Eternally improving
and modifying the •Develop a list of cost
process drivers for each selected
cost element
•Select next project
•Educate others in the supply chain
•Deploy AIM & DRIVE through the Defining the key cost
supply chain drivers and developing
strategic options
•Evaluate cost drivers and

select the key cost drivers
•Develop strategic options
Verifying the plan with •Monitor performance for each key cost driver
cost monitors
•Document and publicize
results
Reducing, changing or
eliminating activities
that cause costs:
The Strategy
•List constraints from different
perspectives
•Formulate strategy statements
•Develop a detailed action
plan for each selected Implementing an •Perform a risk-benefit analysis for
strategy action plan each strategy statement
•Define a contingency plan •Select strategies for
for each selected strategy implementation
PRICE AND COST MANAGEMENT
PRICE ANALYSIS
u Evaluates and reviews only “bottom line” price
u Price analysis alone is useful when price is the
only variable that differentiates competing firms
u Can be used for standard products and services
u Conducted through:
Ø Quote Comparisons
Ø Internet catalogues
Ø Historical Price Comparisons
Ø Internet auction sites
Ø Independent estimates

 2001
COST ANALYSIS
u Initially evaluates each cost element that makes
up the purchase price, including profit
u Later, extends to all other elements included in
the “Total Cost of Ownership”
u Requires cost information from:
Ø Supplier provided data (RFI/RFP/RFQ/survey)
Ø Absolute Competitiveness Studies (benchmark
comparison)
Ø Cost Models
u Can be used in single source or in competitive
situations

 2001
TYPES OF COST MODELS
To evaluate Purchase Price:

u Should Cost Models
Ø Product Should Cost
Ø Service Should Cost
u Percentage of Sales Model
u Price Discipline™ Model
To determine Life Cycle Costs:

u Total Cost of Ownership Model
*Note: The “Product Should Cost” approach was developed by Mark Cohen of Pacific Bell

 2001
THE POWER OF COST MODELS
u Educate the user in the cost structure of a

product or service procured
u Engage a supplier that has not provided any
cost information
u Ensure that cost discussions are based on facts
and logic
u Build credibility and respect for well informed
buyers

 2001
SOME COST DEFINITIONS
Element Definition
Direct Material Bill of Materials (BOM)
Product: Labor required to convert direct material

into a finished product (production worker wages)
+ Direct Labor
Service: Labor required to execute activities in the
Statement of Work (SOW)
Indirect costs associated with the conversion process
Manufacturing Overhead
+ (Depreciation, other plant costs, supervision,
or Service Overhead research support ...)
Cost of Goods Sold (COGS)
= Sub-total
or Cost of Sales (COS)
Operating (GS&A) Costs incurred to keep the organization in operation
+
& Other Expenses (R&D, finance, procurement, mktg …)
+ Profit Before Tax Profit before deduction of federal and state taxes
= PRICE Total of all cost elements

 2001
AN INCOME STATEMENT APPROACH
Element
NET SALES (PRICE)
- COST OF GOODS SOLD or COST OF SALES
= GROSS PROFIT
- OPERATING & OTHER EXPENSES
= PROFIT BEFORE TAX
- TAXES (a percentage of Profit Before Tax)
= NET PROFIT AFTER TAX

 2001
SHOULD COST MODEL
Application:
u Calculate a fair price for a product or service
purchased
u Compare suppliers’ quotes to industry
averages and to one another
u Extract cost information from suppliers
u Identify key cost element/s for detailed
analysis
u Estimate a target cost of a final product or
service

 2001
SHOULD COST PHASES
u Development of a broad outline (framework)

u Adjustments for:
a. Geographical location
b. Economic conditions
c. More current information
d. Other factors
u Use in negotiation

 2001
PRODUCT
SHOULD COST MODEL
Assumptions:
u Product purchased: Plastic housing

u Supplier’s business: Fabricated Plastic Products
u Type of operation: Semi-automated
u Size of Supplier: $48 million in assets

 2001

 2001
BUILDING A PRODUCT SHOULD COST MODEL
Step 1. Identification of product code and data sources:

1.1 Identify the SIC/NAICS code 3089 / 308920
BOM, material or
1.2 Data sources for Material costs component suppliers,
trade associations…
Data source for Labor costs US Census Bureau,
1.3
(See example on page 85 ) Economic Census.
Data source for Overhead rates Pacific Bell Study
1.4
(See example on page 88 )
Data source for financial ratios RMA, Annual
1.5
(See example on page 91 ) Statement Studies
Step 2. Calculation of Direct Material (DM) costs:

2.1 Break down the Bill of Materials (BOM) 5 lbs of resin
2.2 Obtain quotes on BOM elements $2.00 per lb
= 5 * 2.00
2.3 Calculate Direct Material costs
= $10.00
Step 3. Calculation of Direct Labor (DL) costs:

3.1 Using the Economic Census, Mfg. Series = 8,951,204 /
calculate the Labor/Material (LM) ratio 26,503,716
(production worker wages / cost of materials, = 0.338
parts and containers consumed)
3.2 Calculate Direct Labor costs = 10.00 * 0.338
(Direct Material * LM ratio) = $3.38

PRODUCT SHOULD COST MODEL (CONTD)
Step 4. Calculation of Manufacturing Overhead (MOH):
Determine the applicable Overhead rate, Plastic molding, semi-

4.1 based on type of operation and degree of automated
automation average = 175%
Calculate MOH = 3.38 * 175
4.2
(Direct Labor * OH rate) = $5.92
Step 5. Calculation of Cost of Goods Sold (COGS) and Should Cost:

Calculate Cost of Goods Sold = 10.00 + 3.38 + 5.92
5.1
(DM + DL + MOH) = $19.30
Using RMA, calculate COGS percentage = 100.0 – 24.0
5.2
(Net sales – Gross Profit) = 76.0%
Estimate Should Cost = 19.30 / 0.76
5.3
(COGS$ / COGS%) = $25.39
Step 6. Calculation of Operating & Other Expenses (O&O) and Profit:
= (18.1 + 1.7) / 100

Calculate Operating & Other Expenses
6.1 * 25.39
(O&O% * Should Cost)
= $5.03
Calculate Profit Before Tax = 4.2 / 100 * 25.39
6.2
(PBT% * Should Cost) = $1.06

PRODUCT SHOULD COST MODEL
SIC CODE 3089: MISC. PLASTIC PRODUCTS
Element $ % Source
Direct Material 10.00 39.4 BOM / quote from suppliers
Economic Census-
Direct Labor 3.38 13.3 Manufacturing Series
Manufacturing
5.92 23.3 Pacific Bell Study
Overhead
RMA, Annual Statement
Cost of Goods Sold 19.30 76.0 Studies
Operating & Other Exp. 5.03 19.8 Studies
Profit Before Taxes 1.06 4.2 Studies
SHOULD COST 25.39 100.0

 2001
PRODUCT SHOULD COST MODEL (ACTUAL)

A site visit indicated that the operation was fully automated. A fully automated machine
was 5 time faster than a semi-automated one; actual OH was 300% of Direct Labor
Element Model Actual Source

Direct Material 10.00 10.00 BOM / quote from suppliers
Direct Labor 3.38 0.68 Direct Labor / 5
Manufacturing
5.92 2.04 Direct Labor * 3
Overhead
Cost of Goods Sold 19.30 12.72 Sub-total
Operating & Other Exp. 5.03 3.32 Should Cost * 0.198
Profit Before Taxes 1.06 0.70 Should Cost * 0.042
SHOULD COST 25.39 16.74 COGS $ / 0.76

 2001
SERVICE
SHOULD COST MODEL
Assumptions:
u Service purchased: Design of mechanical tool

u Supplier’s business: Engineering Services
u Supplier location: Decatur, IL
u Length of contract: 2 months

 2001

 2001
BUILDING A SERVICE SHOULD COST MODEL
Step 1. Identification of service code and data sources:
1.1 Identify the SIC/NAICS code 8711/541330
US Census Bureau,
Data sources for Labor costs Economic Census, BLS
1.2
(See examples on pages 86, 57 & 89) Industry Occupation
Matrix, Wageweb.com,
Data sources for financial ratios Dun & Bradstreet, Key

1.3 Financial Norms and
(See example on page 92) Ratios
Operations, HR
Data sources for Statement of Work and
1.4 departments of
bill-out ratio
benchmark companies
IRS tables, Finance
1.5 Data sources for corporate tax rate department

SERVICE SHOULD COST MODEL (CONTD)
Step 2. Calculation of industry averages:
Using BLS IO matrix select Direct Labor
2.1 items and determine Direct Labor $ as a
percentage of Total Payroll = 82%
Using the Economic Census, Prof.,

Scientific and Tech. series, calculate Total = 1,330,332 / 3,380,960
2.2
Payroll as a percentage of sales = 39.3%
(Annual Payroll / Total receipts)
Calculate Direct Labor as a percentage of = 0.82 * 39.3

2.3
sales (DL% * Payroll%) = 32.2%
Using D&B ratios, calculate Cost of Sales% = 100- 46.4
2.4
(Net Sales% – Gross Profit%) = 53.6%
Calculate Overhead % = 53.6 – 32.2
2.5
(COS% – DL%) = 21.4%
2.6 Using IRS tables, determine tax rate = 30%
Calculate Profit Before Tax % = 5.1 / (1 – 0.3)
2.7
{PBT% = Net profit after tax% / (1 – tax rate)} = 7.3%
Calculate O & O Expenses % = 100 – (53.6 + 7.3)
2.8
{100 – (COS% + PBT%)} = 39.1%
Summary of industry averages (figures in %):

A Direct Labor 32.2
B Overhead 21.4
C Cost of Sales (A+B) 53.6
D Operating & Other Expenses 39.1
E Profit Before Tax 7.3
F SHOULD COST (C+D+E) 100.0

SERVICE SHOULD COST MODEL (CONTD)
Step 3. Calculation of Direct Labor Cost:
Break down the Statement of Work and 1 Supervisor
3.1 determine the labor requirements for the 5 Mechanical Engineers
contract 2 Technicians
Using data from Wageweb.com, calculate 1 Supervisor @ $81,275
Direct Labor cost for contract term 5 engineers @ $64,105
(salaries include Mean Avg. Max. Salary 2 Technician @ $31,543
3.2 plus bonus) Total = $464,886 / year
Cost for 2 months:
= 464,886 / 6
= $77,481
3.3
Estimate percent of time billed out and 80%, interview with
document the source of this information ABC Co., T-Tech Inc.
Adjust Direct Labor cost for down-time = 77,481 / 0.8
3.4
(Direct Labor Cost / Billed time) = $96,851
Step 4. Calculation of Contract Price:

Calculate contract price (CP) = 96,851 / 0.322
4.1 (Labor $ / Labor%) = $300,779
Step 5. Calculation of OH, COS, O&O and PBT Dollars:

Calculate COS dollars = 300,779 * 0.536
5.1
(Contract price * COS%) = $161,218
Calculate Overhead dollars = 300,779 * 21.4
5.2
(Contract price * OH%) = $64,367
Calculate Operating & Other Exp. dollars = 300,779 * 0.391
5.3
(Contract Price * O&O%) = $117,604
Calculate Profit Before Tax dollars = 300,779 * 0.073
5.4
(Contract price * PBT%) = $21,957

SERVICE SHOULD COST MODEL
SIC CODE 8711: Engineering Services
Element $ % Source
Economic Census- Prof. Scientific,
Labor 96,851 32.2 Tech Svcs – Geographic area series
Overhead 64,367 21.4 Cost of Sales - Labor
Dun & Bradstreet – Key Financial

Cost of Sales 161,218 53.6 Ratios

Operating & Oth. Exp. 117,604 39.1 Ratios

Profit Before Taxes 21,957 7.3 Ratios
SHOULD COST 300,779 100.0 Labor $ / Labor %

 2001
SERVICE SHOULD COST MODEL (ACTUAL)

Supplier indicated that engineers were billed out approximately 70% of the time
SIC CODE 8711: Engineering Services

Element Model Actual Details
Labor 96,851 110,687 96,851 * 0.8 / 0.7
Overhead 64,367 73,562 Should cost * 0.214
Cost of Sales 161,218 184,249 Should Cost * 0.536
Oper. & Other Exp. 117,604 134,405 Should cost * 0.391
Profit Before Taxes 21,957 25,094 Should cost * 0.073
SHOULD COST 300,779 343,748 Labor cost / 0.322

 2001
PERCENTAGE OF SALES MODEL
Application:
u To understand the break-down of a supplier’s
price, even when the price appears fair and

reasonable
u To develop Price Discipline™ models in
order to evaluate price-change requests over a

period of time
u To engage a supplier that has not provided
any cost information in a discussion on cost

 2001
Assumptions:
u Product Purchased: Printed Material

u Supplier’s business: Commercial Printing,
Lithographic
u Size of supplier: $30 million in sales
u Supplier’s quote: $250 per 100 copies

 2001
BUILDING A PERCENTAGE OF SALES MODEL
Step 1. Identification of product code and data sources:

1.1 Identify the SIC/NAICS code 2752 / 323110
Data source for Material costs US Census Bureau,

1.2 Economic Census,
(See example on page 87) Manufacturing Series
Economic Census,
1.3 Data source for Labor costs
Manufacturing Series
Data source for financial ratios RMA, Annual
1.4
(See example on page 93) Statement Studies
Step 2. Calculation of Direct Material (DM) Cost:

Using the Economic Census, Mfg. Series, = 16,660,337 /
calculate Material as a % of Sales (45,392,837
2.1 (Cost of material parts, containers etc. / {Primary + 2,704,062)
products value of shipments + Secondary products
value of shipments}) = 34.6%
Calculate Material costs = 250.00 * 0.346
2.2
(Material% * 250) = $86.50
Step 3. Calculation of Direct Labor (DL) Cost:

Using the Economic Census, Mfg. Series = 8,631,629 /
calculate the Labor as a % of Sales (45,392,837
3.1 (Production worker wages / {Primary products + 2,704,062)
value of shipments + Secondary products value of
shipments})
= 18.0%
Calculate Direct Labor costs =250.00 * 0.18

3.2
(Labor% * 250) = $45.00

PERCENTAGE OF SALES MODEL (CONTD)
Step 4. Calculation of COGS, O&O Expenses and Profit dollars:

Using RMA, calculate COGS% = 100.0 – 25.7
4.1
(COGS% = Net Sales% – Gross Profit%) = 74.3%
Using RMA, determine Operating & Other = 19.4 + 2.0
4.2
Exp.% (Operating Exp. + Other Exp.) = 21.4%
Calculate Operating & Other Exp. $ = 250 * 0.214
4.3
(250 * O&O%) = $53.50
Using RMA, determine Profit Before
4.4 = 4.3%
Tax%
Calculate Profit Before Tax $ = 250 * 0.043
4.5
(250 * PBT%) = $10.75
Step 5. Calculation of Manufacturing Overhead (MOH) dollars:

Determine MOH as a % of Sales = 74.3 – {34.6 + 18.0}
5.1
(MOH% = COGS% – {DM% + DL%}) = 21.7%
Calculate Manufacturing Overhead $ = 250 * 0.217
5.2
(250 * MOH%) = $54.25

SIC Code 2752: Commercial Printing, Lithographic
Element $ % Source
Economic Census –
Direct Material 86.50 34.6 Manufacturing series
Economic Census-
Direct Labor 45.00 18.0 Manufacturing Series
Manufacturing
54.25 21.7 COGS – (DM = DL)
Overhead
Cost of Goods Sold 185.75 74.3 Studies
Operating & Oth. Exp. 53.50 21.4 Studies
Profit Before Taxes 10.75 4.3 Studies

 2001

 2001
PRICE DISCIPLINE MODEL
Price Discipline™ involves an understanding that the
various elements of cost are NOT directly correlated
u Determines the reasonableness of a

suppliers request for a change in price
u Uses a previous year’s price as a base
u Sets the structure for all future
discussions on price
u Useful in setting up LTA’s

 2001
APPLYING PRICE DISCIPLINE™

Make a list of the factors that impact each cost element, quantify the
impact of each factor and adjust respective cost elements
COST SAMPLE FACTORS

ØMarketprice ØStability
of orders
ØTakeDown Rate ØMaterial
yields
Material
ØVolume ØExchange rates
ØWage rates ØSkill levels

Labor ØProductivity ØSkill Mix
Overhead ØFixed OH – Volume, inflation

ØVariable OH – Inflation
ØRisk
Profit ØValue added

 2001
PRICE DISCIPLINE MODEL
Step 1. Comparison of quotes
1.1 Select a base year 2000
Yr Price Vol..
1.2 Compare current quote with base year quote 00 250 10,000
01 245 15,000
Build a Percentage of Sales model for the See Percentage of Sales
1.3
base year price model
Step 2. Adjustment of Material Costs:

Break down the BOM into major elements, identify industry codes and
2.1
assign weights for each. (For services, break down the SOW into
activities, identify skill level requirements and assign weights based on
time for each activity)
# Element SIC Code Weight
1. Book paper, uncoated free sheet 2621-4 0.70
2. Plates 2796-231 0.15
3. Lithographic and offset ink (sheet) 2893-23234 0.06
4. Miscellaneous supplies 0.09
Total 1.00
2.2 Document all sources of information Interviews with D Co., A Inc.
Factor Track Mech.
List the factors that have impacted
material costs over the given period Price PPI
and identify tracking Productivity Quality audits
2.3
mechanisms/indices to evaluate
changes in each factor Supplier Take-down
Competitive rates, Bench-
(see page 95)
-ness marking studies

PRICE DISCIPLINE MODEL (CONTD)
Step 2. Adjustment of Material Costs (Continued):
2.4
Adjust for changes in material price using the Producer Price Index
and a take-down rate (TDR) of 3%
# Element Wt. %r Wt * % r
1. Book paper, uncoated free sheet 0.70 4.45 3.12
2. Plates 0.15 0.00 0.00
3. Lithographic and offset ink 0.06 0.74 0.04
4. Miscellaneous supplies 0.09 3.00 0.27
Net % Price Change 1.00 3.43
Calculate Price Adjustment Factor = 1 + 0.0343 - 0.03
2.5
(1 + Net % Price Change – TDR) = 1.0043
Estimate avg. productivity factor = 3%
2.6 improvement over the given period Factor = 1 – 0.03
(Prod. factor = 1 – prod. improvement) = 0.97
Calculate Adjusted Material Cost = 86.50 * 1.0043 * 0.97
2.7
(Base yr Mat’1* Price/TDR adj*Prod. adj) = $84.27
Step 3. Adjustment of Labor Costs:

List the factors that have impacted Labor Factor Source
3.1
costs over the given period. Identify and Wage rate BLS
document the sources to calculate
changes in the factors (see page 98) Productivity BLS
Determine changes in wage rates and = 1.8%
3.2
calculate the Labor Rate Factor (LRF) LRF = 1+ 0.018 = 1.018
Determine changes is productivity and = 7%
3.3
calculate Labor Productivity Factor (LPF) LPF = 1 – 0.07 = 0.93
Calculate adjusted Labor cost = 45.00 * 1.018 * 0.93
3.4
(Base yr Direct Labor * LRF * LPF) = $42.60

PRICE DISCIPLINE MODEL (CONTD)
Step 4. Adjustment of Manufacturing OH and Operating & Other Exp:
Determine the mix between Fixed and MOH = 80% F; 20% V
Variable OH for both Manufacturing O&O = 90 F; 10% V
4.1
Overhead and Operating & Other This is a rule of thumb for
Expenses Product Overhead
4.2 Determine inflation rate for OH = 3%
4.3 Adjust MOH and O&O Expenses as shown below
Manufacturing OH Adjustment
Fixed 80% Inflation adj. Volume (BV/CV)*
43.40 * (1.03)1 * 10/15 = 29.80

Base Yr OH
54.25 +
Variable 20% Inflation adj No volume adj
10.85 * (1.03)1 * 1 = 11.18
* BV = Base Volume
CV = Current Volume Adjusted Factory OH = 40.98
Operating & Other Exp. Adjustment

Fixed 90% Inflation adj. Volume (BV/CV)*
48.15 * (1.03)1 * 10/15 = 33.06

Base Yr OH
53.50 +
Variable 10% Inflation adj No volume adj
5.35 * (1.03)1 * 1 = 5.51
* BV = Base Volume
CV = Current Volume Adjusted O & O Exp. = 38.57

PRICE DISCIPLINE™
Summary
SIC Code 2752: Commercial Printing, Lithographic
Element 2000 2001 Source
Adjusted for price and
Direct Material 86.50 84.27 productivity changes, and TDR
Adjusted for changes in wage
Direct Labor 45.00 42.60 rates and productivity
Adjusted for inflation, Fixed
Manufacturing OH 54.25 40.98 OH for volume
Cost of Goods Sold 185.75 167.85

Adjusted for inflation, Fixed
Operating & Oth. Exp. 53.50 38.57 OH for volume
Profit Before Taxes 10.75 10.75 Profit $ kept constant

 2001
BUILDING COST MODELS QUICKLY WITH
u Makes life easier for the procurement professional

u Provides a cost breakdown for any product or service in
minutes
u Designed in Excel with user-friendly interface (buttons, pop-
up windows, menus, etc.)
u Preloaded with:
Ø SIC and NAICS codes
Ø Economic Census Data
Ø Industry Financial Ratios
u Direct hyperlinks to free web sites where buyers can retrieve
relevant company-specific and industry data

 2001
UNDERSTANDING OVERHEAD
TYPES OF COST
Based on Allocation
u Direct Costs (Costs that can be traced to a product)
u Indirect Costs (Costs that cannot be traced to a product )
Based on Behavior (reaction to volume changes)

u Fixed
Ø Constant in total, vary per unit; as volume changes
Ø Committed
ã Costs committed for a period of time (building lease)
Ø Discretionary
ã Amounts left to management discretion (advertising)
u Variable
Ø Constant per unit, vary in total; as volume changes

 2001
DETERMINING OVERHEAD RATES

OVERHEAD POOL (E.g. $1,000,000)
Capacity = 1MM hrs

Utilization = 80%
Overhead rate - $1.25/hr OVERHEAD BASE (E.g. LABOR HOURS – 800,000)
($1MM / 800,000)
Product A Product B Product C Product D

Labor hrs = 3 Labor hrs = 8 Labor hrs = 5 Labor hrs = 4
OH = $3.75 OH = $10.00 OH = $6.25 OH = $5.00

 2001
ALLOCATING OVERHEAD
u Allocation of indirect costs using one or more
allocation bases
Ø Job/Process Costing
Ø Standard Costing
Ø Activity Based Costing
Ø Process Based Costing
u Based on estimates made at the beginning of the
year
u Markups on non-value-added activities is a cancer
that is killing previously profitable companies

 2001
MAGNIFICATION OF COST
No change in material cost
MOH = 200% of Direct Labor
Assumptions: O&O Exp. = 25% of COGS
Profit = 10% of Total Cost
Wage Rate = $15 per hour
Supplier#1 Supplier#2 Supplier#3
Material N/C $61.88 $85.09

Labor $15.00 N/C N/C
Manufacturing OH 30.00 N/C N/C
Cost of Goods Sold 45.00 61.88 85.09
Operating & Other Exp. 11.25 15.47 21.27
Total Cost 56.25 77.35 106.36
Profit 5.63 7.74 10.64
Loaded Cost $61.88 $85.09 $117.00
A $15 increase/decrease in labor of Supplier #1 magnifies to $117.00 for end customer

 2001
TOTAL COST OF OWNERSHIP MODEL
TCO: The Present value of all costs associated with
a product/service, incurred over its expected life
Application:
u Evaluate purchase options
u Make effective sourcing decisions
u Make vs. Buy decisions
u Determine the overall financial impact of

changes in activity
u Understand and measure all costs incurred over
the life of a purchased product/service

 2001
TOTAL COST OF OWNERSHIP

Note: This breakdown is Purchase Cost elements that make up
only a guideline. TCO
categories vary depending Price the purchase price
on the nature of the
product/service
Acquisition Costs incurred in getting the

I product to customer site, incl.
N Costs freight, admin costs
H
Total Cost of O
Ownership U Costs incurred in converting
S purchased part/material into
E Usage finished product and
Costs supporting it through its
C usable life
O
S
T Costs incurred in the
Price is only a End of Life termination of products’ life,
S
part of cost Costs incl. disposal costs, winding
down of project costs, etc.

 2001
TOTAL COST OF OWNERSHIP MODEL
Assumptions:
u Product Purchased: Desktop PC’s
u Product Life Cycle: 3 years
u Volume: 1,000 PC’s
u Cost of Capital: 12%

 2001
BUILDING A TCO MODEL

Step 1 :
Construct a broad process map PURCHASE PRICE:
of the activities associated with
Ø Equipment
“owning” the product/service
and determine categories for Ø Software A
the TCO
Ø Software B
PURCHASE PRICE Ø Software C
ACQUISITION COST ACQUISITION COST:
USAGE COSTS Step 2:
Ø Sourcing
List the cost elements
END OF LIFE COSTS under each category Ø Administration
USAGE COSTS:
Ø Opportunity Cost
Ø Lost Productivity
Ø Lost Sales
Ø Installation
Ø Equip. support
Ø Network support
Ø Warranty
END OF LIFE COSTS:

Ø Salvage value
 2001
ELEMENT R/O MEASURE
PURCHASE PRICE:
ØEquipment O Supplier quote ($1,200 per PC)
ØSoftware License A O Supplier quote ($300 per PC)
ØSoftware License B O Supplier quote ($100 per PC)
Step 3: ØSoftware License C O Supplier quote ($150 per PC)

Determine if each
ACQUISITION COST:
cost element is
recurring (R) or one- ØSourcing R 2 FTE @ $70K and $120K for 3 months
time (O) and identify ØAdministration R 1 PO @ $150 and 12 invoices @ $40 each
how each element is
to be measured USAGE COSTS:
ØOpportunity Cost R Downtime 15 hrs/PC per yr @ $30/hr

ØInstallation O $700/PC includes PC move, install and network
ØEquipment support R $120/month/PC – supplier quote
ØNetwork support R $100/month – supplier quote
ØWarranty O $120/PC for 3 year warranty
END OF LIFE COSTS:
ØSalvage value O $36 per PC

Step 4: ELEMENT Present Year 1 Year 2 Year 3
Develop cost time
PURCHASE PRICE:
line over the
expected life of Equipment 1,200,000
the product/
service, and place Software License A 300,000
each cost in the Software License B 100,000
appropriate time
period Software License C 50,000
ACQUISITION COST:
Sourcing 42,500
Administration 630 480 480 480
USAGE COSTS:
Opportunity Cost 450,000 450,000 450,000

Installation 700,000
Equip. support 1,440,000 1,440,000 1,440,000
Network support 1,200,000 1,200,000 1,200,000
Warranty 120,000
END OF LIFE COSTS:
Salvage value (36,000)

TOTAL $2,513,130 $3,090,480 $3,090,480 $3,054,480

Time Present Year 1 Year 2 Year 3

TOTAL $2,513,130 $3,090,480 $3,090,480 $3,054,480
Step 5:
Calculate Present Value Interest Factors
(PVIF) for each year, using your firm’s 1 0.893 0.797 0.712
Cost of Capital (12%)
(See table on page 102)
Step 6:
Calculate Present Values $2,513,130 $2,759,799 $2,463,113 $2,174,790
(Total * PVIF)
Step 7:
Calculate Total Cost of Ownership
(Sum of Present Values in Step 6) $9,910,832

TOTAL COST OF OWNERSHIP EXAMPLE
TCO for Desktop PC’s Source: Anklesaria Group, Inc.
Usage 8,242K
Present
values
Purchase
Price 1,650K
Acquisition
44K EOL (26K)
Product life cycle

 2001
PROFITABILITY:
THE KEY TO COMPETITIVENESS
u Acknowledge the need for suppliers to make a
reasonable profit early in the process
u Profit should be discussed when it becomes a
“critical” cost
u Profit should be based on risk and value added
u Select appropriate profit option:
Ø Current supplier profit margin
Ø Industry margin
Ø Industry margin plus premium
Ø Current absolute per unit dollars
Ø Current total dollars (ROIC)

 2001
IMPLEMENTING
IMPLEMENTATION
u Review material presented in this manual

u Create an Intelligence Cell
u Identify as many sources of data to build a cost
models
u Communicate new strategy through the supply
chain
u Reward suppliers that cooperate
u Document & Publicize savings

 2001
THE NEXT STEP
u Identify key suppliers/commodities

u Engage in SCM techniques
u Determine readiness for strategy building
u Establish initial team members
u Develop and deploy AIM&DRIVE®
strategies

 2001
VALUE OF STRATEGIC COST MANAGEMENT
To Customers: To Suppliers:
u Develop a sustained u Improve cost
competitive advantage competitiveness
u Understand cost structures u Increase market share
better u A different insight into
u Continuously improve costs
u Break down customer- u Reduce business risk
supplier barriers through stability
u Set the stage for a “real” u A methodology for cost
alliance management
u Leverage supplier’s u Leverage customer’s
knowledge to reduce costs resources to reduce costs

 2001
AND FINALLY…
Every morning in Africa,

a gazelle wakes up.
It knows it must run faster
than the fastest lion,
or it will be killed.
Every morning a lion wakes up.

It knows it must outrun the
slowest gazelle,
or it will starve to death
It doesn’t matter whether

you are a lion or gazelle:
Source: The Economist

 2001
WHEN THE SUN
COMES UP
YOU HAD BETTER

BE RUNNING
 2001
EXERCISES
CASE #1
Coating the Price
A year ago, you entered into an indefinite quantity contract for coated plastic made to your specification.
With experience you are now able to estimate, fairly accurately, that your requirement per month will be 4
million feet. The product that uses the plastic you are buying is doing very well in the market and is
expected to have a life of at least three more years. However, customers are applying a lot of pressure on
your salespeople to reduce the market price of the finished product to less than $275. This plastic is the
main raw material used in the product and constitutes about 27 percent of the total selling price of $325.
Hence the pressure is on the purchasing department to find ways to reduce the cost of raw material.
You requested the current supplier to quote, together with supporting cost data, for a 12 month extension.
The initial cost breakdown and data for the extension is shown below. The sales rep has pointed out that
while costs have gone up in most cases, only $0.21, or 0.24%, has been passed on to you.
Cost Breakdown for coated plastic $ per thousand feet

Current Proposed
Raw Materials
Plastic: $2.00/lb., 90% yield $ 57.00 $ 57.00

Coating: 90% yield 5.55 5.55
Total material cost $ 62.55 $ 62.55
Conversion Costs
Labor (@10,500 feet/hr.)

2 operators x $20 (proposed labor: $21) 3.78 3.97
Machine Cost: $33.33/hour/10.5 3.17 3.17
Packaging .81 .81
Total conversion cost 7.76 7.95
Overhead
Engineering 3.85 3.85
Manufacturing 1.15 1.15
General & Administrative 2.50 2.50
Selling 2.05 2.05
Total overhead 9.55 9.55
Profit 7.98 8.00
Selling Price (Total material + Conversion + Overhead + Profit) $ 87.84 $ 88.05

====== ======

Case #1: Coating the Price
Page 2
Team Activity: Step - 1: Develop a list of the key issues you would bring up in your next meeting with this
supplier (e.g., Do you need to have 2 operators to run this job?)
ISSUES RAISED
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Team Activity: Step - 2: Nominate 2 members in your group to prepare for a short negotiation with the
“supplier” (represented by 2 members from another group). Observe the simulated negotiations and note
your comments regarding the performance of the “customer” players. List what they did well and what
you would do differently.
Positive observations Suggestions for improvement

1.
2.
3.
4.
5.

CASE #2
The Cable Connection: Should Cost Models
Tom Mazzone is a senior contract manager of Advanced Telecommunications. He had recently sent out a
request for quotation for special connectorized cable. The cables are to be used in a very expensive and
sophisticated switching system for a major telephone company. Success on this program could well mean
many more such jobs for the company internationally. The selected supplier would need to be capable of
meeting the increase in demand overseas as well as the inherent nuances of international business. Key
points of the requirements are summarized below.
Materials Cable A: 24.75 million feet, averaging 150 feet per length
Male connector: one per length of cable
Total number of connectors: 165,000
Specifications 25 pair cable; 24 g.a., ICC or equivalent

Cable insulation: must have an oxygen index of 28% or better
A week later, Tom received the following quotes, which are summarized below.
Item Supplier Supplier Supplier Supplier Supplier

Description A B C D E
Cable Cost per length $ 19.50 $ 31.00 $ 34.50 $ 29.70 *
Connectors (each) 3.23 2.67 1.76 1.55 *
Base Labor Cost 2.85 0.28 0.85 0.31 *
Manuf. Overhead 5.84 0.91 2.40 0.93 *
Operating & other exp. 2.70 0.25 0.19 0.33 *
Profit 1.06 0.20 0.60 0.33 *
Total Cost per length 35.18 35.31 40.30 33.15 22.81
* Supplier E quoted only a total cost per length. No breakdown was provided.
In order to process the proposals, Tom decided to do a little homework. He first called one of the major
suppliers of male connectors in Chicago and asked for a price based on 200,000 standard male
connectors. The price quoted to him was $2.61 each on quantities below 100,000 pieces; $2.10 on
quantities between 100,000 and 200,000; and $1.71 each on quantities of 200,000 or more. Tom
realized that these prices could be further negotiated if he were a serious buyer. Besides, Tom feels that
suppliers would purchase similar connectors for projects with other customers.

CASE #2: The Cable Connection
Page 2
Next, Tom called ICC, the country's leading manufacturer of this kind of cable. The prices provided were
$0.1832 per foot. These prices were available to Advanced Telecommunication only because of the special
relationship between the two companies. ICC usually charges a premium of 10 to 20 percent more to other
companies, who in turn further add a markup of 2-15%, depending on the value added. Tom tried to get ICC to
quote on the entire job, but was told that the company did not wish to take on that type of contract. ICC was
willing to sell the cable to a selected supplier of Advanced at the preferred rate of $0.1832 per foot. However, the
suppliers are not aware of this.
In order to understand the labor contribution to cost, Tom called the engineer at Advanced, Margaret
Teacher, who was familiar with the connectorization process. After reviewing the specifications, Margaret
indicated that she knew of some studies that had been performed to evaluate the time standards for similar
requirements. Her feeling was that the maximum time to connectorize 25 pair cable would be 15 minutes
per cable (4 cables per hour). She pointed out that by using an automated system, the output could be
improved to 1.5 minutes per cable (40 cables per hour). Referring to the Department of Labor Area
Wage Surveys for the skill level required, Tom determined the labor to be $10.00 per hour.
Next, Tom pulled out the files of the respective suppliers. In the past, all of them had dealt with Advanced
Telecommunications without any major problem. Companies B, C and D were all large companies
(between $40-50 million in asset size with around 750 to 1,000 production workers), while A and E, both
between $15 and $20 million companies, had only recently diversified into cable assembly. These
companies employed less than 250 production workers.
Tom called Supplier E to verify if it really understood the requirement, and also to provide a cost
breakdown. The sales representative said that she believed the quote was correct and that it was against
company policy to share cost data. No samples were available to the customer for inspection. However,
if Tom wished, he could purchase a minimum of 5,000 cable lengths at a price of $40 per length. If the full
order of 165,000 cables were placed within 15 days, the $200,000 paid for the 5,000 cables would be
adjusted against the full contract price of $22.81 per length.
The hardware and software for the switching system is nearly complete and the cabling will have to be
done within the next five weeks. An order would have to be placed fairly soon and the selected supplier
would be given no more than three weeks to deliver the entire quantity.
* This case is an adaptation of a case by Mark L. Cohen of Pacific Bell.

Page 3
Worksheet - 1
Based on the information above, develop a Should Cost model for special connectorized cable. The
information provided below the worksheet will help you in your calculations. Please note that this is a
service should cost, so material costs have been calculated separately.
$ per length
# Cost Element
Manual Automated
1 Direct Labor (Hourly wage rate ÷ # of cables per hr)
2 Overhead {see information (a) below}
3 Sub-total: Loaded labor Cost
4 GS&A {see information (b) below}
5 Sub-total: Total Cost (Loaded labor + GS&A)
6 Profit {see information (c) below}
7 Cost excluding mat’l (Total Cost + Profit)
8 Material Cost (ICC quote)

9 Connector (enquiry from Chicago)
10 Material Markup (Procurement OH) (use your discretion)
TOTAL SHOULD COST
(Lines 7+8+9+10)
The following information has been obtained for SIC Code 3496 (misc. fabricated wire products):
a) Overhead as a percentage of direct labor (Pacific Bell study) for assembly

Manual = 100% Semi-automated = 100-200% Automated = 225-400%
b) GS&A as a percentage of Loaded Labor Cost (RMA, 2000)

$500K-2 mil. in assets = 35.3% $2-10 mil. in assets = 28.5% $10-50 mil. = 28%
c)Profit as a percentage of Total Cost (RMA, 2000)

$500K-2 mil. in assets = 3.3% $2-10 mil. in assets = 5.4% $10-50 mil. = 8.7%

Page 4
Using the data from your Should Cost Worksheet-1, complete Worksheet-2 and discuss the questions that follow.
Allocate the material markup, if any, between the Cable Cost per length and Connector:
Worksheet - 2
Item Description A B C D E Manual Automated

Cable Cost per length $19.50 $31.00 $34.50 $29.70 *
Connectors (each) 3.23 2.67 1.76 1.55 *
Base Labor Cost 2.85 0.28 0.85 0.31 *
Manuf. Overhead 5.84 0.91 2.40 0.93 *
Operating & other exp. 2.70 0.25 0.19 0.33 *
Profit 1.06 0.20 0.60 0.33 *
Total Cost per length 35.18 35.31 40.30 33.15 22.81
1. Can Tom eliminate any of the suppliers? If so, which suppliers and why?
2. Which supplier/s should Tom select and why?
3. What strategy should Tom use when negotiating with the selected supplier/s?

Paying the Price
CASE # 3
Dave Matthews had recently joined Power Machine Corp., New York, as Senior Procurement Manager
and was faced with a daunting task. He had been requested by Sandra Palmer, the Director of Marketing
Operations, to help her obtain the services of a consultant to evaluate and re-engineer the company’s
logistics department. There had been a significant reshuffle at the top and the incoming management team
had established a 20% company-wide cost reduction target.
Over the years Power had utilized the services of several consultants for various projects ranging from
benchmarking studies to process re-engineering . Consulting contracts were traditionally put out to bid.
On several occasions, Apollo Consulting, a large established management consulting firm headquartered in
Chicago, IL had won the bid.
Jan Thompson, Dave's predecessor had sent out several RFQ for the project prior to leaving. The
responses Dave received were as follows:
Supplier Days Contract Amount

Apollo Consulting 30 600,000
Henderson Consulting 30 620,000
Carney & Co. 32 630,000
Aquarius Consulting 35 650,000
This was the first time Henderson, Carney and Aquarius had bid on a Power contract. Dave called Henry
Dawson, the account manager at Henderson. Henry informed him that it would be impossible for him to
lower the contract amount any further. He said that the project would involve a significant initial scope
study. This would take about 6 days. It would involve a detailed evaluation of the company's existing
organizational structure and operations, and would entail a round of in-depth interviews with several key
business managers. Since this was the first time Henderson was involved with Power this would have to be
done in great detail. Dave verified this with the account managers at Carney and Aquarius. Apollo had
recently completed a large project for Power's manufacturing operation, which included a scope study and
may not have to conduct another one.
Dave then contacted Steve Lindsey, the Account Executive at Apollo. Steve provided him with the
following breakdown team profiles:
Project time – 30 days
Resource requirements – 2 Senior Consultants, 5 Junior Consultants.
Fee Structure:
2 Senior Consultants @ $4,000/day each = $240,000
5 Junior Consultants @ 2,400/day each = $360,000
TOTAL FEE: = $600,000

Case #3: Paying the Price
Page 2
Dave obtained the profiles of the consultants from Apollo and categorized them into 2 levels:
Team Profiles:
Senior Consultants:
• Bil Luther, MS Industrial Engineering, MBA: Had over 10 years consulting experience and had
managed several re-engineering projects with various Apollo clients.
• Lisa Holmes, BS Mechanical Engineering, MBA: Had held several marketing roles in 2 large computer
equipment manufacturers prior to joining Apollo 6 years ago. Also managed several re-engineering
projects with the company.
Junior Consultants:
• Sheri Gilmore, Tyrone Jackson and Jeff Chang: Each had a BS, Planning & Logistics, and an MBA.
They had joined Apollo 2 years ago with no prior experience.
• Julie Watters, BS Computer Science: Joined Apollo 1 year ago and was currently enrolled in an MBA
program with an emphasis in finance.
• Corey Smith, BS Accounting, CPA: Had joined Apollo 1 year ago.
Dave believed that if he were to begin any discussion on cost he would first have to develop a model on his
own. He began by logging onto the Anklesaria Group, Inc. web site at www.anklesaria.com to search for
some data sources. To find out consulting labor rates he browsed through several on-line job banks where
employers advertised job opportunities. He discovered that on average, Senior Consultants were being
offered between $120K-150K per year plus bonuses. Salaries of Junior Consultants ranged between
50K-70K per year plus bonuses. He also found that bonuses averaged about 20%.
He contacted Enrique Bernal, the Director of Business Strategy at Power. Enrique had recently joined the
company from Delphi Consulting Group, a large consulting company. Enrique informed him that normally,
Junior Consultants were billed out about 75% of the time. Senior Consultants were billed out about 60%
of the time.
Equipped with this information and some data that he gathered from other sources (Exhibits 1 and 2) Dave
felt that he had enough to build a cost model.

Page 3
Exhibit 1:
Source: Dun & Bradstreet Key Norms and Financial Ratios (1999-00):
SIC 8742, Management Consulting Services
Item $ %
Net Sales 1,500,000 100
Gross Profit 636,000 45.4
Net Profit After Tax 105,000 7.3
Exhibit 2:
Source: U.S. Bureau of Census, 1997 Economic Census – Professional, Scientific & Tech. Services
Geographical Area Series – Chicago, Illinois
NAICS 541614 Process, physical distribution and logistics consulting services

Page 4
Exhibit 3:
SIC Code - 874(Management & Public Relations) Industry-Occupation-Wage Matrix
No. of Emp. Mean Total Salary Direct

Occupation Title
Employees Dist Salary Salary Dist Labor
Industry Total 1061240 100.00 20.45 21702358 100
Managerial & Administrative 223080 20.91 31.87 7109560 33% X

Financial Managers 21030 1.97 33.83 711445 3.28%
Personnel, Training & Labor Relations Managers 7910 0.74 26.19 207163 0.95%
Purchasing Managers 2480 0.23 21.45 53196 0.25%
Marketing/Advertising/Public Relations Managers 23190 2.17 29.04 673438 3.10%
Administrative Managers 22690 2.13 23.47 532534 2.45%
Engineering, Mathematical & Natural Sciences Managers 10640 1.00 34.37 365697 1.69%
Health Services Managers 660 0.06 27.88 18401 0.08%
Industrial Production Managers 110 0.01 28.50 3135 0.01%
Construction Managers 9210 0.86 28.72 264511 1.22%
Communications/Transportation & Utilities Managers 480 0.05 30.47 14626 0.07%
Food Service/Lodging Managers 780 0.07 22.74 17737 0.08%
Other Services Managers 960 0.09 19.22 18451 0.09%
General Managers & Top Executives 85280 8.00 38.06 3245757 14.96%
All Other Managers & Administrators 37660 3.53 26.13 984056 4.53%
Professional/Paraprofessional & Technical Occupations 373180 34.96 23.38 8724948 40% X
Sales & Related Occupations 63580 5.96 17.35 1103113 5.08%
Clerical & Administrative Support 246440 23.13 12.05 2969602 13.68%
Service Occupations 65650 6.16 8.70 571155 2.63%
Agricultural, Forestry, Fishing & Related 5770 0.54 9.98 57585 0.27%
Product/Construct/Operate Maintenance/Material Handling 83540 7.70 13.90 1161206 5.35%

Page 5
Using the industry statistics in Exhibits 1, 2 and 3, complete the following worksheets:
Worksheet 1: Industry Percentages

1. Using BLS IO matrix select Direct Labor
items and determine Direct Labor $ as a
percentage of Total Payroll
2. Using the Economic Census, Prof.,
Scientific and Tech. series, calculate Total
Payroll as a percentage of sales
3. Calculate Direct Labor as a percentage of

sales (DL% * Payroll%)
4. Using D&B ratios, calculate Cost of Sales%
(Net Sales% – Gross Profit%)
5. Calculate Overhead %
(COS% – DL%)
6. Using IRS tables, determine tax rate = 30%

7. Calculate Profit Before Tax %
{PBT% = Net profit after tax% / (1 – tax rate)}
8. Calculate O & O Expenses %

{100 – (COS% + PBT%)}
Summary of industry averages (figures in %):

A Direct Labor
B Overhead
C Cost of Sales (A+B)
D Operating & Other Expenses
E Profit Before Tax
F SHOULD COST (C+D+E) 100.0

Page 6
Worksheet 2: Daily Direct Labor costs

Element Sr. Consultant Jr. Consultant
Base Annual Salary (use average)

Bonus
Total Annual Compensation
Percentage of time billed-out
Adjusted Annual Compensation
Number of billable hours in a year (default) 2080 2080
Hourly direct labor cost
Daily direct labor cost (use 8-hour workday)
Worksheet 3: Daily billing rate, using summary of industry averages

Sr. Consultant Jr. Consultant
Element %
$/day $/day
Daily direct labor cost
Overhead
COS (Daily rate + Overhead)
Operating & Other Expenses
Total Cost (COS + O&O Exp.)
Profit Before Taxes (PBT)
SHOULD COST (Total Cost + PBT) 100.0
Worksheet 4: Contract Amount

# of Daily billing # days (less days
Resource for Co. Total $
Consultants Rate Evaluation)
Senior Consultant
Junior Consultant
Contract Amount

Page 7
Questions:
1. What strategy should Dave use to negotiate the contract with Apollo?
2. Nominate two members from your team to participate in a negotiation with Apollo (two members from
another team). Note your observations on the negotiations below.

CASE #4
Ace Incorporated: Developing Cost Breakdowns Using Financial Data
You are a procurement specialist for Ace Incorporated, a manufacturer and marketer of consumer
products. You are concerned that one of your major suppliers of C-Flute Kraft boxes, Asia-Pacific
Container Company, has been unreasonably increasing its price by about 10 percent each year. Asia-
Pacific is a subsidiary of Transglobal Paper Products, a paper conglomerate based in Terra Haute, Indiana.
You do not believe the salesperson's explanation that "our costs have been increasing each year." Asia-
Pacific has been unwilling to give you any cost breakdowns, despite repeated efforts on your part. Since
this supplier is essential to your firm, you realize that you need to build some sort of cost model to get an
idea of its costs and prepare for your meeting with the salesperson next week. You decided to start with
the base year and work your way to the current proposal using the Price Discipline approach.
Basic research has turned up the following information:
Asia-Pacific Container Co.’s basic operation: Manufacturer of Paperboard containers and boxes
SIC / NAICS Code: 2653 / 322211

Part number: XY-789 (200lbs C-Flute RSC Kraft Box)
Prices for: 1998 $480.00 each (total 2.1 million units)

(per 1000 boxes) 1999 $530.00 each (total 2.4 million units)
2000 $580.00 each (total 2.6 million units)
2001 proposed $600.00 each (total 3.0 million units)
The increase in volume has utilized the unused capacity of Asia-Pacific. No extra investment in machinery
or personnel was necessary to fulfill your orders.
Asia-Pacific Container Company, Income Statements
(Dollars in 000’s) 2000 1999 1998

Net Sales $ 31,760 $ 31,250 $ 30,780
Cost of Goods Sold 24,770 24,680 23,423
Gross Profit 6,990 6,570 7357
Operating & Other Exp.:
Selling, general & admin 5,270 5,000 4,980
Other Expenses 450 500 253
Total Operating & other exp. 5,720 5,500 5,233
Profit before taxes 1,270 1,070 2,124
Provision for taxes 483 407 807
Net Income 787 663 1,317

CASE #4: Ace Incorporated
Page 2
DATA FOR SIC /NAICS CODE 2653 / 322211 (Corrugated and Solid Fiber Boxes)
Robert Morris Associates, 1998

Data sorted by $ sales (all numbers are in percent) Note: 1 MM = 1 Million
Income data 1-3MM 3-5MM 5-10MM 10-25MM > 25MM All Sizes
Net Sales 100.0 100.0 100.0 100.0 100.0 100.0
Gross Profit 27.9 28.1 28.1 27.5 25.0 27.5
Operating Exp 24.5 23.2 22.7 21.2 17.6 21.8
Other Expenses 1.7 1.3 0.9 1.0 1.4 1.1
Profit Before Tax 1.8 3.6 4.6 5.3 6.0 4.6
U.S. Bureau of Census, 1997 Economic Census – Manufacturing – Industry Series

Page 3
Worksheet
Step 1: Percentage of Sales (POS)
Using the POS approach, compute each cost element for 2001. To determine the industry averages,
use the RMA and ASM data given at the end of the case. For Asia Pacific’s percentages, use the
income statement provided in the case. In calculating the material, labor and factory overhead ratios for
Asia Pacific, you may assume that the mix between these three costs is in line with the mix in the
industry.
1998 1998 1998

Cost Element
Industry Avg (%) Asia Pacific (%) Asia Pacific ($)
Material
Labor
Manufacturing Overhead
Sub-total (COGS)
Operating & other exp.
Profit
TOTAL 100% 100% $480.00
Step 2: Price Discipline

Using 1998 as the base, calculate a "fair price" for part #XY-789 for 2001. Reviewing the PPI for
corrugated paperboard, you observed that Asia-Pacific’s raw material prices have increased by an
average of 10.51% per year over the past 2 years. Labor rates have shown a 2% increase per year over
the same period. You expect a 3% productivity improvement each year in material. The BLS Industry
Productivity Index reveals that labor productivity improved by 6.84% per year over the same period.
These trends in Material and Labor are expected to continue for the new contract period. It is estimated
that manufacturing overhead is 80% fixed and 20% variable. Operating and other expenses are 90%
fixed and 10% variable. The overhead pool (fixed and variable) has grown by 3 percent per year to
cover inflation of some of the items in the pool.
Cost Element 1998 ($) 2001 ($) Notes

1 Material adjusted for inflation and productivity
2 Labor adjusted for inflation and productivity
3 Manufacturing OH adjusted for inflation and volume
4 Sub-total (COGS) 1+2 +3

5 Operating & other adjusted for inflation and volume
6 Profit
7 TOTAL $480.00 4+5 +6

Page 4
Based on the results of the above worksheet, please answer the following questions:
1. How will you negotiate the 2001 contract with Asia-Pacific?
2. Assume Asia-Pacific has spare capacity over the short run and you have bought and paid for the 3
million units. You need 250,000 extra units, what price would you be willing to offer per extra unit?
Explain. (Since prices are quoted to you per thousand units, do all calculations per thousand units.)
3. What price would you negotiate in case Asia-Pacific had to run the extra 250,000 units using
overtime? Assume that the firm operates only one shift and there is no spare capacity on that shift.
Also, running overtime to fill your order will not affect the production schedule on regular runs in the
near future.

CASE #5
Techno, Inc.: Total Cost of Ownership
Liz Cooper sat at her desk gazing at the mounds of paper that had accumulated around her. She was the
Capital Equipment buyer for Techno Inc.’s (TI) semiconductor division. The papers on her desk were all
related to the responses she received to an RFP that was sent out to three of Techno’s capital equipment
suppliers SeeMos, Inc., Applied Technologies and Trax Inc.
A decision had been made to upgrade the Beam Tools that were used in the production of Techno’s highly
successful Quasar product line. Sales had greatly exceeded initial expectations and were projected to
grow rapidly over the next 5 years. The equipment that was currently being used was almost 5 years old
and would not be able to sustain the expected market growth. Also this step of the production process
was the one with the longest cycle time. The new machines had much faster throughput rates, which in turn
would translate into increased production and sales.
The RFP that was sent out to the three suppliers contained a detailed spec. Engineering had already
examined the responses for functionality and were satisfied that all three suppliers met the stated
requirements. It was now up to Liz to work the numbers out and determine the best option for Techno.
This is where her problems began. She did not know how to proceed. She began by putting together a
summary of the information she had. Her summary is below:
General Information: Present Value Interest Factors @11%:
• Purchase volume - 10 Machines Year 1 - 0.901

• Expected life – 5 years Year 2 - 0.812
• Techno’s cost of capital – 11% Year 3 - 0.731
Year 4 - 0.659
Year 5 - 0.593
Existing Equipment:
No. of machines 10
Machine Throughput 67 units per hour
Uptime 85%
Current Total Annual Production 5,000,000 units
Production time (maximum capacity) 24/7 (8760 hours a year)
Disposal Costs $50,000 per machine
Product Info (based on next year sales estimate of 9,900,000 units:
Sales Price $23.50

Fixed Costs $7.25
Variable Costs $11.50
Profit $4.75

Case Study # 5, page 2 New Equipment Product Summary (all information is per machine)
Details SeeMos, Inc Applied Technologies Trax, Inc.

Model Name AC1 XRT-7 Trax 1000
Base Equipment $1,800,000 $1,300,000 $1,700,000
Discount 10% of Base Equipment cost, based on 12.5% of Base Equipment cost, 8% of base price
order of 10 or more based on order of 10 machines
Add-ons to meet TI spec:
1 Chamber $275,000 $220,000 Included
Software $60,000 Included Included
Drying system $25,000 $10,000 Included
Installation $25,000 $35,000 $25,000
Operating Costs Each machine would require 1.5 FTE Each machine would require 2 FTE Each machine would require 2 FTE
(Full time equivalent). The loaded cost The loaded cost is $140,000 per year The loaded cost is $120,000 per year
is $100,000 per year
Training $7,500 for year 1 and $5,000 per year $8,000 for year 1 and $4,000 per $9,000 for year 1 and $6,000 per
thereafter, for the life of the product. year thereafter, for the life of the year thereafter, for the life of the
product. product.
Service/Maintenance $4,250 per month $5,750 per month $5,250 per month
Freight to TI Included in equipment price $5,000 $7,500
Warranty 12 months parts and labor. Extended 24 months parts and labor. Extended 24 months parts and labor.
Warranty of $200,000 for 5 years. This Warranty of $300,000 for 5 years. Extended Warranty of $250,000 for
amount is due on delivery of the This amount is due on delivery of the 5 years. This amount is due on
machines. machines. delivery of the machines.
Delivery lead time 98 days 42 days 28 days
Machine Uptime 93% 90% 90%
Machine Throughput 122 units per hour 122 units per hour 120 units per hour
Salvage value after 5 yrs $50,000 $50,000 $50,000

Case Study # 5, page 3
Using the information Liz gathered, complete the following worksheets
Worksheet 1: SeeMos, Inc. - Total Cost of Ownership
Cost Element Year 0 (Now) Year 1 Year 2 Year 3 Year 4 Year 5

Acquisition Costs:
Base Equip (less disc.)
Additional chamber
Software
Drying system
Freight
Costs of Use:
Disposal of current equip.
Installation
Training
Operating costs
Service/maintenance
Extended warranty
Opportunity costs (if any)
End of Life Costs:

Salvage value
TOTAL
(sub-total of Acq costs, Cost of use, and EOL)
Present Value
(enter the Present Value of each year’s total
in the appropriate box)
TCO:
(Sum of all Present Values)
Worksheet 2: Applied Technologies - Total Cost of Ownership

Acquisition Costs:
Additional chamber
Software
Drying system
Freight
Costs of Use:
Installation
Training
Operating costs
Service/maintenance
Extended warranty
End of Life Costs:

Salvage value
TOTAL
Present Value
TCO:

Worksheet 3: Trax, Inc. - Total Cost of Ownership

Acquisition Costs:
Additional chamber
Software
Drying system
Freight
Costs of Use:
Installation
Training
Operating costs
Service/maintenance
Extended warranty
End of Life Costs:

Salvage value
TOTAL
Present Value
TCO:

Case Study #5
Page 6
Questions:
1. Based on your TCO models, which supplier/s would you suggest Liz select? Explain your reasons
2. What points would you raise in your negotiations with the selected supplier?

OPTIONAL EXERCISES
CASE #1A
Price Maintenance
Three years ago you entered into a contract with Fluid Air, Inc. for the construction of a custom
designed plant to manufacture Fluro dioxide. Fluro dioxide is used as a cleaning agent in the
manufacture of integrated circuits (IC’s). The market for IC’s is currently exploding and is expected to
continue to grow rapidly.
The Fluro dioxide plant was constructed at a cost of $3.5 million and became operational a year after
construction began. At that time, a 2-year maintenance contract was drawn up, whereby for a monthly
fee of $60,000, Fluid Air would make sure that the plant remained fully operational.
Fluid’s performance so far has met your expectations. The maintenance contract is now coming up for
review. Fluid proposes to raise the maintenance fee to $65,800. You are aware that over the past
two years, material prices have increased by 6% and labor rates have gone up by 10%. When
reviewing Fluid’s cost breakdown for the current contract you notice that it had budgeted the labor
hours for the 8 maintenance workers and 3 engineers based on routine maintenance, plus a 20%
contingency factor for emergence repairs. There were no emergencies last year.
Below is a comparison of the breakdowns for the current and proposed contracts.
Cost Breakdown for plant maintenance $ per month

Current Proposed
Raw Materials
Oils, cleaners, tubing etc. 10,000.00 11,000.00

10,000.00 11,000.00
Labor: (Rates shown are current rates)
3 engineers @ $40/hr for 40 hrs. each 4,800.00 5,300.00

1 on site maintenance person @ $3,750/mth 3,750.00 4,000.00
8 maintenance workers @ $15/hr for 80 hrs. each 9,600.00 10,500.00
1 Project Coordinator 5,000.00 5,500.00
23,150.00 25,300.00
Overhead
Engineering @ 300% of eng. labor 14,400.00 15,900.00
GS&A @ 25% of Materials and Labor 8,300.00 9,100.00
22,700.00 25,000.00
Profit 4,150.00 4,500.00
Monthly maintenance fee 60,000.00 65,800.00

Case #1A: Price Maintenance
Page 2
Team Activity: Step - 1: Develop a list of the key issues you would bring up in your next meeting with
this supplier (e.g., Do you need to have 3 engineers on this contract?)
ISSUES RAISED
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Team Activity: Step - 2: Nominate 2 members in your group to prepare for a short negotiation with
the “supplier” (represented by 2 members from another group). Observe the simulated negotiations
and note your comments regarding the performance of the “customer” players. List what they did well
and what you would do differently.
Positive observations Suggestions for improvement

1.
2.
3.
4.
5.

CASE #3A
A Pricing Dilemma
Robin Murphy had recently joined Standard Financial, a multi-billion dollar investment-banking firm, as
Senior Procurement Manager, with responsibility for Marketing and Communications (Marcom)
purchases. Her commodities included, among others, a variety of printed materials including brochures,
prospectuses, and annual and quarterly reports. This was a new post created to bring some supply
management expertise into the department. Most Marcom purchases had traditionally been handled
within the department through an informal competitive bid process.
Robin was currently evaluating the contract for one Standard's prospectuses. This was a high quality
48-page document that was distributed annually to current and prospective customers. The contract
had been put out to bid every year for the past three years. On every occasion, Creative Creations
(CCI) had been the lowest bidder and won the contract. CCI's was headquartered in Chicago, and last
year had sales of $37 million. This year the requirement was for 300,000 sets. The bids over the last 3
years were as follows:
3 years ago 2 years ago 1 year ago This year

Volume 200,000 220,000 250,000 300,000
Suppliers:
Creative Creations 720,000 840,000 940,000 1,250,000
Kings Printing 790,000 860,000 965,000 1,285,000
Delphi Publishing 800,000 875,000 980,000 1,320,000
Seven Hills Publishing 805,000 890,000 965,000 1,295,000
Robin first called in a favor from a former colleague, Rufus Abrams at Clone Printing. She sent Rufus a
sample of the previous years prospectus. While there were several alterations in the content this year,
no changes were being made to the prospectus design. After taking a look at it, Rufus indicated that it
was high quality for a prospectus. The cover stock was Kromekote which, according to the catalog,
cost $0.10 per sheet (the prospectus had a front and back cover). The paper stock was a high quality
uncoated paper that was listed at $0.02 per sheet (the prospectus has 24 sheets). A normal yield loss
of 1% was anticipated on both the cover and paper stock.
Rufus also informed Robin that a job of this nature would involve an initial set-up cost. She called Susan
Roby at Kings Printing to verify this. Susan confirmed that there was, indeed, a set-up cost, and
mentioned that three years ago when Kings first bid on the contract, the set-up had been budgeted at
$200,000. Today however that cost had increased by about 20%. This cost would have to be
amortized over one year.
Before approaching CCI, Robin decided to develop a cost model. The price she arrived at was
significantly lower than CCI's quote. She suddenly felt that Standard had been overcharged.

CASE #3A: A Pricing Dilemma
Page 2
Use the information provided at the end of the case to complete the worksheets below and answer the
questions that follows:
WORKSHEET 1
Details Volume (this year) Total $ (this year)

Current Quote (CCI) 300,000
Less: Set-up cost (info from Kings) 1
CCI's quote w/o setup (Prod’n Cost) 300,000
WORKSHEET 2: SHOULD COST MODEL FOR THIS YEAR’S PROSPECTUS
Cost element % Per unit ($) Total ($)

Paper (incl. yield loss)
Other Materials
Outside Services
Total Materials
Direct Labor
Factory Overhead
Cost of Goods Sold
Administrative Expenses
Selling Expenses
Other Expenses
Total Oper. & Other Exp.
Profit Before Taxes
SHOULD COST 100

Page 3
Questions:
1. Was Standard overcharged (gouged) in the past? If so, should Robin continue to do business with
CCI ?
2. What strategy should Robin use in negotiating the contract with CCI?

Page 4
Source: Printing Industries of America Financial Ratio Survey, 1998:

Sheetfed Printers: Data categorized by sales volume.
Report on Operations - Sales = 100%
To 1.5MM 1.5-3MM 3-6MM 6-10MM >10MM All

Profit Profit Profit Profit Profit Profit
All All All All All All
Leaders Leaders Leaders Leaders Leaders Leaders
Sales Value 100 100 100 100 100 100 100 100 100 100 100 100
Materials:
Paper 18.38 17.54 18.83 18.33 19.85 19.81 21.41 21.93 21.90 22.34 20.01 19.92
Other mat'ls 4.04 3.87 4.80 3.98 5.15 4.82 5.86 5.55 6.11 6.18 5.17 4.85
Outside services 10.44 11.90 9.14 10.05 8.41 8.45 7.17 6.69 9.32 8.12 8.92 9.07
Total Materials 32.86 33.31 32.77 32.36 33.41 33.08 34.44 34.17 37.33 36.64 34.10 33.84
Factory Payroll 25.05 22.22 25.92 23.63 25.97 24.33 26.02 23.06 26.12 24.53 25.82 23.62
Factory Expenses 17.15 15.34 15.67 14.54 14.63 13.72 15.29 14.11 13.6 12.64 15.23 14.05
Total Factory Cost 75.06 70.87 74.36 70.53 74.01 71.13 75.75 71.34 77.05 73.81 75.15 71.51
Gross Profit 24.94 29.13 25.64 29.47 25.99 28.87 24.24 28.66 22.95 26.19 24.85 28.49
Admin & Selling Exp
Admin. Exp. 13.56 10.27 12.70 12.67 10.56 9.11 8.58 7.50 7.73 6.81 10.69 9.33
Selling Exp. 6.69 5.08 9.54 8.18 10.47 8.85 10.46 9.83 10.12 9.46 9.49 8.27
Total GS&A 20.25 15.35 22.24 20.85 21.03 17.96 19.04 17.33 17.85 16.27 20.18 17.60
Interest Expense 1.16 0.68 1.45 1.11 1.65 0.99 1.44 0.43 1.26 0.61 1.41 1.75
Profit Before Tax 3.53 13.10 1.95 7.51 3.31 9.92 3.77 10.90 3.84 9.31 3.26 10.10

CASE #4A
A Temporary Solution: Developing a Price Discipline Model
You are a procurement specialist for Star Corp., a large multi-national manufacturer of Telecommunications
equipment based in Torrance, CA. You have recently been given responsibility for the procurement of
Administrative services for the company’s headquarters. You are currently reviewing the contract with Rossi
Employment Services for supplying Star with temporary administrative personnel (excluding Executive
Secretaries).
Rossi has been a supplier for the past 3 years. While the company has been performing extremely well, you
are concerned that it has been unreasonably increasing its prices each year. Whenever you approach Rossi’s
salesperson you get the same reply; “costs have been increasing”.
Rossi has been unwilling to give you any cost breakdowns despite repeated efforts on your part. You realize
that you need to develop some sort of cost model to get an idea of Rossi’s costs and prepare for your meeting
with the salesperson next week.
Basic research has turned up the following information:
a) Rossi Employment’s basic operation: Temporary Employment Services
b) SIC / NAICS code: 7363 / 561320
c) Rossi’s Quote: 1998 100,000 hours @ $19/hr = $1,900,000

1999 120,000 hours @ $21/hr = $2,520,000
2000 150,000 hours @ $22/hr = $3,300,000
2001 (proposed) 160,000 hours @ $24/hr = $3,840,000
d) All individuals provided are employees of Rossi. However, these individuals do not remain on Rossi’s
payroll if there is no vacancy to fill.
e) No additional investments in systems or recruiting/administrative personnel were made by Rossi during

the above period
f) The latest BLS Industry Occupation Matrix indicated that Direct Labor was 94.9% of Annual Payroll.

Case #4A: A Temporary Solution,
Page 2
Source: Dun & Bradstreet Key Norms and Financial Ratios (1998):
SIC Code – 7363 Help Supply Services
Item $ %
Net Sales 5,552,155 100
Gross Profit 1,410,247 25.4
Net Profit After Tax 364,204 3.5
1997 Economic Census: Admin. & support & Waste Mgt. & Remed Svcs
Employment Cost Index
Not Seasonally Adjusted

Compensation: Total compensation
Group: Administrative support, including clerical occupations
Ownership: Private Industry
Data:
Year Qtr1 Qtr2 Qtr3 Qtr4 Ann Avg
1997 133.7 134.7 135.9 137.0
1998 138.2 139.6 140.6 141.4
1999 142.6 143.7 145.0 146.2
2000 149.0 150.6 152.3

Case #4A: A Temporary Solution
Page 3
Step 1: Percentage of Sale:

Using the industry statistics provided, complete the worksheets below:
Worksheet 1: Industry Percentages
1. Using BLS IO matrix select Direct Labor
items and determine Direct Labor $ as a
percentage of Total Payroll
2. Using the Economic Census, Prof.,
Scientific and Tech. series, calculate Total
Payroll as a percentage of sales
3. Calculate Direct Labor as a percentage of

sales (DL% * Payroll%)
4. Using D&B ratios, calculate Cost of Sales%
(Net Sales% – Gross Profit%)
5. Calculate Overhead %
(COS% – DL%)
6. Using IRS tables, determine tax rate = 30%

7. Calculate Profit Before Tax %
{PBT% = Net profit after tax% / (1 – tax rate)}
8. Calculate O & O Expenses %

{100 – (COS% + PBT%)}
Summary of industry averages

Cost Elements Industry % Rossi 1998 $
A Direct Labor
B Overhead
C Cost of Sales (A+B)
D Operating & Other Expenses
E Profit Before Tax
F PRICE (C+D+E) 100.0 $19.00

Page 4
Step 2: Price Discipline
Calculate a "fair price" for the 2001 Rossi contract. Use the data given at the end of the case to
calculate changes in Labor cost. It is estimated that overhead is 70% fixed and 30% variable.
Operating and other expenses are 90% fixed and 10% variable. The overhead pool (fixed and
variable) has grown by 3 percent per year to cover inflation.
Cost Element 1998 ($) 2001 ($) Notes

A Labor adjusted for inflation
B Overhead adjusted for inflation and volume
C Cost of Sales A+B
D Operating & other adjusted for inflation and volume
E Profit
F PRICE $19.00 C+D+E

Page 5
Step 3: Using the information you now have, how will you negotiate the 2001
contract with Rossi?
Step 4: Assume you have contracted for the 160,000 hours for the year 2001. There is
suddenly a need for 15,000 extra hours of help, what rate would you be willing
to offer per extra hour? Explain.
Step 5: What rate would you negotiate in case Rossi had to perform the extra hours
using overtime?

APPENDIX
APPENDIX - A
U.S BUREAU OF CENSUS, ECONOMIC CENSUS
“The Economic Census is indispensable to understanding America's economy. It insures the accuracy of the
statistics we rely on for sound economic policy and for successful business planning." --Alan Greenspan,
Chairman of the Federal Reserve Board of Governors
Source: Bureau of the Census, U.S. Department of Commerce, Washington DC.

Phone: (301) 457-4100 (customer service) website: www.census.gov
Also available through the Anklesaria Group, Inc. website at: www.anklesaria.com
Economic Census 1997: The Economic Census profiles the US economy every 5 years, from the
national to the local level. Data is published primarily on the basis of the new North American
Industry Classification System (NAICS). Limited data is published according to the old Standard
Industrial Classification (SIC) system.
Census results are available on the Internet and on CD-ROM. Only highlights are published in
paper reports. However, software on both CD-ROM and the Internet include the ability to print out
any of the detailed data.
Data is available in a variety of series:

• Geographic Area Series (published for all sectors) provides detail for establishments with
employees, for the Nation, states, and substate areas.
• Industry Series (manufacturing, mining, and construction) provides national totals for
individual industries and their products, with limited data for states.
• Subject Series (all sectors) provides national and, in some cases, state data on special
topics including Merchandise Line Sales, Concentration Ratios, and Establishment and Firm
Size.
• ZIP Code Statistics (published for most sectors) includes counts of establishments by
employment size by NAICS code for 5-digit ZIP Code.
The following are the specific series available:
Industry Series Geographic Area Series

21 Mining 42 Wholesale Trade
23 Construction 44 Retail Trade
31-33 Manufacturing 51 Information
53 Real Estate and Rental and Leasing
54 Professional, Scientific, and Technical Services
56 Administrative and Support and Waste Management and Remediation Services
61 Educational Services
62 Health Care and Social Assistance
71 Arts, Entertainment and Recreation
72 Accommodation and Foodservices
81 Other Services (exc ept Public Administration)
Available in html: Table 1 (1997 by NAICS) Table 2 (1997 and 1992 by SIC) Entire report in pdf
APPENDIX - A (continued)
EXTRACTS FROM CENSUS DATA FOR MISC. PLASTIC PRODUCTS (SIC CODE: 3089)
MANUFACTURING SERIES
EXTRACTS FROM CENSUS DATA FOR ENGINEERING SERVICES (SIC CODE: 8711)
PROFESSIONAL, SCIENTIFIC & TECH. SERVICES – GEOGRAPHIC AREA SERIES
EXTRACTS FROM CENSUS DATA FOR COMMERCIAL PRINTING (SIC CODE: 2752)
MANUFACTURING SERIES
APPENDIX - B
PACIFIC BELL STUDY OF OVERHEAD RATES
FACTORY OVERHEAD AS A PERCENT OF DIRECT LABOR*
Manual Semi-Automated Automated

Hand Type Process Facilities
Operations Operations Processes
One Stage & Techniques N.C.M.
Machine Multi-Stage Computer
Operations Machine Systems
Operations
Piece Parts 100% 175 to 200% 250 to 300%
Sheet Metal 125% 150 to 200% 250 to 350%

Stamping
Forming
Blanking
Drilling
Other
Casting 125% 150 to 250% 275 to 400%
Assembly 100% 100 to 200% 225 to 400%

(Apparatus)
Components - 175 to 200% 250 to 300%
Equipment 125% 175 to 225% 250 to 500%
Plastic Molding - 150 to 200% 225 to 300%
*This information is based on a study by Pacific Bell.

APPENDIX - C
WAGEWEB SALARY DATA FOR ENGINEERING – NATIONAL AVERAGES
Salary data as of July 1, 2000.
All information is annualized (based on 2080 hours in a year) and in U.S. dollars.
# of # of Mean Mean Avg. Mean Average

Title Companies Employees Average Min Salary as of Average Bonus Paid,
Responding in Position Salary 06/01/00 Max Salary if any
Eng. Lab
134 806 $16,199 $20,780 $25,544 $539
Assistant
Electronics
112 2,125 $19,805 $25,300 $30,920 $623
Tech
Hardware
107 790 $30,453 $39,794 $49,188 $1,261
Engineer
Civil
211 3,927 $39,805 $51,154 $62,645 $1,299
Engineer
Civil
Engineering 103 715 $56,594 $68,718 $80,958 $2,381
Supervisor
Mechanical
193 2,076 $39,1015 $50,685 $62,532 $1,573
Engineer
Mech Eng
173 772 $54,787 $66,699 $79,201 $2,074
Supervisor
Chemical
159 1,725 $46,732 $61,261 $75,843 $1,789
Engineer
Chem Eng
136 297 $72,607 $82,277 $91,154 $2,897
Supvr
Electrical
96 857 $39,989 $51,597 $63,524 $1,792
Engineer
Electrical
84 165 $54,388 $71,027 $87,363 $3,758
Eng Sup
VP,
207 259 $88,366 $148,799 $210,610 $14,115
Engineering
http://www.wageweb.com/eng1.htm
APPENDIX - D
INDUSTRY FINANCIAL INFORMATION
PUBLICATION: ROBERT MORRIS ASSOCIATES, ANNUAL STATEMENT STUDIES
Source
Robert Morris Associates
1 Liberty Place, 1650 Market Street, 23rd Floor
Philadelphia, PA 19103.
Telephone: (800) 677-7621 Website: www.rmahq.org
Description
The volume is published annually. It consists of composite balance sheet and income statement information,
sorted by industry 4 digit SIC codes. The data is categorized by company size (assets and sales).
Information Breakdown: By asset size (0-500M, 500M-2MM, 2-10MM, 10-50MM, 100-250MM, and
ALL), or by sales size (0-1MM, 1-3MM, 3-5MM, 5-10MM, 10-25MM, 25+MM and ALL). Ratio
information is further broken down into three quartiles (upper or good, median or average, lower or bad).
It also contains 16 financial ratios as well as 5 years of comparative historical data. Data incorporates
financial information for fiscal year ends through March.
PUBLICATION: DUN & BRADSTREET, KEY NORMS AND FINANCIAL RATIOS
Source
Dun & Bradstreet One Diamond Hill Road
Murray Hill, NJ 07974
Phone: 908-665-5000 Main Switchboard Customer Service - U.S. 800-234-3867
Website: www.dnb.com
Description
The volume is published annually. It contains information very similar to the RMA, Annual
Statement Studies. It is a better sources of data for developing Service Cost Models. Information
is sorted by 4 digit SIC Code. It also provides 14-key business ratios covering the critical areas of
solvency, efficiency and profitability.
APPENDIX - D (continued)
SAMPLE RMA PAGE: SIC 3089 -MISC. PLASTIC PRODUCTS (SORTED BY ASSETS)
$500,000 $2,000,000 $10,000,000 $50,000,000 $100,000,000 $250000000

Assets Size -> All
$2,000,000 $10,000,00 $50,000,000 $100,000,00 $250,000,000 and Over
Type of Statement:
Unqualified 4 62 105 38 16 19 244
Reviewed 61 173 34 4 2 279
Compiled 85 74 12 1 2 194
Tax Returns 10 7 29
Other 68 107 71 16 15 12 298
Number of Statements 228 423 222 59 31 35 1044

Assets % % % % % % %
Cash & Equivalents 6.4 5.8 4.9 4.8 5 3.2 5.7
Trade Receivables - (net) 28.8 26.5 23.9 19.7 19.7 20.3 25.8
Inventory 20.8 19.9 18.1 16.2 13.1 15.5 19.1
All Other Current 1.2 1.3 1.8 1.8 3.1 2 1.6
Total Current 57.2 53.5 48.7 42.5 40.9 41 52.2
Fixed Assets (net) 35.6 38.4 40.1 40.2 38.9 38.5 37.9
Intangibles (net) 1.8 3 5.2 9.5 12.5 13.7 4.2
All Other Non-Current 5.4 5.1 6 7.7 7.8 6.8 5.6
Total 100 100 100 100 100 100 100
Liabilities
Notes Payable-Short Term 10.4 11.5 9.7 6.6 3.8 7.2 10
Curr.Mat.-L/T/D 5.5 5.5 5.4 4.4 2.8 4.3 5.4
Trade Payables 16.9 14.9 14.1 12.2 10.8 12.3 15.1
Income Taxes Payable 0.4 0.3 0.3 0.2 0.3 0.2 0.3
All Other Current 8.2 7.9 6.8 7.5 8.8 9.1 8
Total Current 41.4 40.1 36.3 30.9 26.5 33.2 38.8
Long Term Debt 20.9 18.9 22.7 22.9 30.6 28.4 21.4
Deferred Taxes 0.3 0.8 1.2 1.1 3.1 1.2 0.9
All Other Non-Current 4.3 5.6 4.1 4.6 5.2 10.8 5.3
Net Worth 33 34.6 35.7 40.5 34.7 26.5 33.6
Total Liabilities & Net Worth 100 100 100 100 100 100 100
Income Data
Net Sales 100 100 100 100 100 100 100
Gross Profit 33.6 26.4 24 25.1 24.2 24.6 27.8
Operating Expenses 28.7 21.1 18.1 17.6 15.3 15.9 22.2
Operating Profit 4.9 5.3 5.8 7.5 8.9 8.7 5.6
All Other Expenses (net) 1.1 1.7 1.7 2.5 3.3 3.3 1.7
Profit Before Taxes 3.8 3.6 4.2 5.1 5.5 5.4 3.9
Ratios
2.1 2.2 2.2 2.1 1.9 1.9 2.1
Current 1.4 1.3 1.4 1.4 1.5 1.4 1.4
1.0 1.0 0.90 1.1 1.2 1.0 1.0
1.3 1.3 1.4 1.3 1.1 1.1 1.3
Quick 0.80 0.80 0.80 0.80 0.90 0.80 0.80
0.60 0.50 0.50 0.60 0.60 0.60 0.50
SAMPLE D&B PAGE: SIC 8711 –ENGINEERING SERVICES
SAMPLE RMA PAGE: SIC 2752 -COM'L PRINTING (SORTED BY SALES)
$0 $1,000,000 $3,000,000 $5,000,000 $10,000,000 $25,000,000

Sales Size -> All
$1,000,000 $3,000,000 $5,000,000 $10,000,000 $25,000,000 and Over
Type of Statement:
Unqualified 1 3 7 24 51 57 143
Reviewed 2 43 43 74 61 14 237
Compiled 10 58 55 31 12 10 176
Tax Returns 11 24 5 1 2 43
Other 13 53 22 49 40 40 217
Number of Statements 37 181 132 179 164 123 816

Assets % % % % % % %
Cash & Equivalents 11.8 7.1 7.2 7.7 7.4 4.3 7.1
Trade Receivables - (net) 27.1 29.6 30.7 29.8 29.3 27.6 29.3
Inventory 8.2 8.5 9.4 9.2 10.8 10.9 9.6
All Other Current 2.1 1.2 1.8 1.1 1.9 1.6 1.5
Total Current 49.2 46.4 49.1 47.8 49.4 44.5 47.6
Fixed Assets (net) 39.4 44.7 43.4 45.3 42.3 42.2 43.5
Intangibles (net) 8.1 3.8 1.9 1.4 2.5 7.3 3.4
All Other Non-Current 3.3 5.2 5.6 5.5 5.8 6 5.5
Total 100 100 100 100 100 100 100
Liabilities
Notes Payable-Short Term 12.2 8.2 7.5 7.9 7.5 7.7 8
Curr.Mat.-L/T/D 9.8 7.9 7.6 7 7.3 5.8 7.3
Trade Payables 13.1 15.4 14.5 13.6 13 13.8 14
Income Taxes Payable 0.2 0.2 0.3 0.3 0.3 0.2 0.2
All Other Current 10.7 7 7.3 7.1 8.7 8.1 7.8
Total Current 46.1 38.7 37.1 36 36.8 35.6 37.3
Long Term Debt 38 33.6 26 31.2 27.3 27.2 29.8
Deferred Taxes 0.2 0.4 1.1 1 0.8 1.2 0.8
All Other Non-Current 2.7 5 1.7 3.1 3 4.9 3.5
Net Worth 13.1 22.4 34.1 28.7 32.1 31.1 28.5
Total Liabilities & Net Worth 100 100 100 100 100 100 100
Income Data
Net Sales 100 100 100 100 100 100 100
Gross Profit 53.8 40.7 34.7 29.8 29.2 25.7 33.3
Operating Expenses 48.3 37.9 31.1 25.8 24.5 19.4 29.1
Operating Profit 5.4 2.8 3.6 3.9 4.6 6.2 4.2
All Other Expenses (net) 1.5 1.8 1.5 1.5 1.4 2 1.6
Profit Before Taxes 3.9 1 2.1 2.4 3.2 4.3 2.6
Ratios
2.7 2.1 1.9 2.1 1.7 1.9
1.9 1.2
Current 1.5 1.4 1.4 1.3 1.2 1.3
0.90
0.70 1.0 1.0 1.0 1.0 1.0
2.1 1.6 1.6 1.6 1.6 1.2 1.6

Quick 1.2 1.0 1.0 1.10 1.0 0.90 1.0
0.60 0.60 0.70 0.80 0.70 0.60 0.70
APPENDIX - E
PRODUCER PRICE INDEXES
Source
U.S. Department of Labor, Bureau of Labor Statistics

Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20420.
Telephone (202) 275-3054
Also available through the Anklesaria Group, Inc. website: www.anklesaria.com
Description
The Producer Price Index is a monthly report on producer price movements including text, tables and
technical notes. An annual supplement contains monthly data for the calendar year as well as annual
averages. The information is useful for price trend analysis, cost modeling and benchmarking. For sample,
please see next page.
Contents
Table 1: PPIs and percent changes by stage of processing

Table 2: PPIs and percent changes for selected commodity groups by stage of processing
Table 3: PPIs for selected stage-of-processing groupings, seasonally adjusted
Table 4: PPIs for the net output of major industry groups
Table 5: PPIs for the net output of selected industries and their products. Sorted by industry code and
by product code. Information includes (1) index base date, (2) current month, i.e., DEC, (3)
previous month, i.e., NOV, (4) previous quarter, i.e., AUG, (5) one month percent change,
i.e., NOV to DEC, and (6) 12 month percentage change, i.e., DEC to DEC.
Table 6: PPIs and percent changes for commodity groupings and individual items. Same information as
Table 5 except it is detailed by commodity.
Table 7: PPIs by durability of product
Table 8: PPIs for special commodity groupings
Table 9: PPIs and percent changes for selected telephone services
Table 10: PPIs for material inputs to construction industries
Table 11: PPIs and percent changes for the net output of industry by stage of process
Table 12: PPIs and percent changes for net material inputs to industry stage of process and final demand
Table 13: Experimental price indexes and percent changes for the computer industry
Notes
• The index is published monthly with approximately a 3 to 4 month lag.

• It is available on-line and can be accessed through the Bureau of Labor Statistics website.
APPENDIX - E (continued)
SAMPLE PPI PAGE
Producer Price Index Revision-Current Series
Series Id: PCU2621#4

Industry: Paper mills
Product: Uncoated free sheet
Base Date: 8106
Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Ann
1998 137.3 136.8 137.3 135.1 134.9 134.2 133.2 132.6 128.6 127.0 124.9 123.9 132.2
1999 125.2 125.7 126.5 126.9 127.9 128.0 130.3 131.0 131.6 136.6 137.2 139.4 130.5
143.3 143.1 142.3 143.3
2000 139.7 140.8 142.8 143.6 143.5 143.7 143.2
(P) (P) (P) (P)
P : Preliminary. All indexes are subject to revision four months after original publication.

Industry: Platemaking services
Product: Lithographic plates
Base Date: 8512
1998 113.8 113.8 113.8 113.8 113.8 113.8 113.8 113.8 113.8 113.8 113.8 113.8 113.8
1999 113.8 113.8 113.8 113.8 113.8 113.8 113.8 113.8 113.8 113.8 113.8 113.8 113.8
113.8 113.8 113.8 113.8
2000 113.8 113.8 113.8 113.8 113.8 113.8 113.8
(P) (P) (P) (P)

Industry: Printing ink
Product: Lithographic and offset ink (black and color)
Base Date: 8406
1998 136.2 136.2 136.2 136.3 137.1 137.2 137.0 137.0 136.8 136.8 135.6 136.3 136.6
1999 136.0 135.4 135.2 135.0 135.0 135.0 135.0 135.0 134.9 134.9 135.0 135.0 135.1
135.5 135.5 135.4 136.0
2000 135.1 135.1 135.1 135.1 135.3 135.5 135.5
(P) (P) (P) (P)
APPENDIX - F
BUREAU OF LABOR STATISTICS
Bureau of Labor Statistics, US Dept. of Labor, Room 4110, 2 Massachusetts Avenue NW,
Washington DC 20212
Telephone: (202) 606-5900 Home page (URL): http://stats.bls.gov/
Also available on the Anklesaria Group, Inc. website at www.anklesaria.com
The Bureau of Labor Statistics (BLS) is the principal fact finding agency for the federal government
in the broad field of labor, economics and statistics. It collects, processes, analyzes and
disseminates sensitive economic and statistical data to the American public, Congress, other federal
agencies, state and local governments, business, and labor.
Most BLS data is available on-line at the above URL. The data is presented in various form-based
query applications, tables and news releases:
Most Requested Series is a form-based application which allows you to quickly obtain BLS time
series by selecting from lists of the most commonly requested timeseries.
Selective Access is a form-based query application which allows you to selectively obtain BLS
timeseries data based on search criteria you formulate and execute.
News Releases are the most current news releases produced by BLS programs and surveys.
Series Report is a form-based application which uses BLS timeseries identifiers as input in
extracting data from each survey-specific database according to a specified set of date ranges and
output options.
Economy at a Glance is a table which contains current data on various economic indicators.
The BLS web site also directs users to various national and international statistical agencies. The
following are the other statistical sites one can access through the BLS home page:
Principal Federal Statistical Agencies International Statistical Agencies
Census Bureau Statistics Canada
Bureau of Economic Analysis British Columbia, Canada
Statistics of Income Statistics Norway
National Agricultural Statistics Service Statistics Finland
Economic Research Service Statistics Sweden
Energy Information Administration EUROSTAT
National Center for Health Statistics Statistics New Zealand
National Center for Education Statistics Statistics Singapore
Bureau of Justice Statistics IBGE - Brazil
Bureau of Transportation Statistics Australian Bureau of Statistics
INDEC - Argentina
Statistics Netherlands
Office of National Statistics (UK)
Institut National de la Statistique (France)
Landesamt fur Datenverarbeitung (Germany)
National Institute of Statistics of Italy
Statistics Bureau of Japan
Statistic s from the OECD
Spanish Statistical Office
APPENDIX - F (continued)
Labor Productivity:
The Bureau of Labor Statistics provides reports on Labor Productivity in the US. These reports are listed
under the section “Productivity and Costs” and fall into three broad categories:
• Multifactor Productivity Trends

• Productivity and Cost Measures
• Productivity by Industry
Both annual and quarterly data are provided. Users can browse through reports, tables and matrices
classified by sector and industry.
Contents:
Technical note
Table 1: Business sector: Productivity, hourly compensation, unit labor costs and prices
Table 2: Nonfarm business sector: Productivity, hourly compensation, unit labor costs and prices
Table 3: Manufacturing sector: Productivity, hourly compensation and unit labor costs
Table 4: Durable manufacturing sector: Productivity, hourly compensation and unit labor costs
Table 5: Nondurable manufacturing sector: Productivity, hourly compensation and unit labor costs
Table 6: Nonfinancial corporations: Productivity, hourly compensation, unit labor costs, unit profits and
prices
Sources and footnotes for tables 1-6
APPENDIX - F (continued)
SAMPLE BLS PAGE - PRODUCTIVITY AND HOURLY COMPENSATION
Major Sector Productivity and Costs Index
Series Id: PRS30006092

Duration: % change quarter ago, at annual rate
Measure: Output Per Hour
Sector: Manufacturing
Year Qtr1 Qtr2 Qtr3 Qtr4 Ann

1997 1.9 3.9 9.0 5.4 3.8
1998 5.1 5.7 8.7 5.9 6.2
1999 6.8 4.8 4.5 10.2 6.3
2000 7.9 5.7 7.3
Series Id: PRS30006152

Duration: % change quarter ago, at annual rate
Measure: Real Hourly Compensation
Sector: Manufacturing
Year Qtr1 Qtr2 Qtr3 Qtr4 Ann

1997 -2.1 -0.8 2.1 4.6 -0.2
1998 6.0 3.4 3.5 2.9 3.9
1999 2.8 2.5 3.2 1.7 2.9
2000 0.5 0.4 3.4
APPENDIX G
OTHER SOURCES OF DATA
GALE RESEARCH:
Source: Gale Research, Inc.

835 Penobscot Building
Detroit, MI 48226-4094
Phone: (313) 961-2242

(800) 347-GALE
Fax: (313) 961-6815
Manufacturing, USA: Industry Analyses, Statistics and Leading Companies (MUSA):

MUSA provides statistical information on 459 US manufacturing industries. It represents a
synthesis of relevant data from various sources such as the Census of Manufactures, Annual Survey
of Manufactures, County Business Patterns data series, the US Industrial outlook, the Benchmark
Input-Output Accounts for the US economy and others. Data is grouped by SIC code. It also
contains data on more than 2,000 products/materials; approximately 400 occupational groupings
employed in manufacturing and more than 22,000 public and private companies.
Data is presented in 9 tables, Trend Graphics, General Statistics, Indices of Change, Selected
Ratios, Leading Companies, Materials Consumed, Product Share Details, Inputs and Outputs
Table, Occupations Employed, Maps and Industry Data by State.
Manufacturing Worldwide (MW):

MW provides manufacturing data in much the same way as MUSA but on a worldwide scale.
However, it is not as highly developed as MUSA. It contains data on 190 countries and 480
products. Data is grouped by ISIC code (International Standard Industrial Classification).
Categories of information include number of establishments, employment, wages and salaries,

production workers, wages to production workers, hours worked, output, value added, capital
investment, investment in machinery and equipment and selected ratios.
Service Industries USA: Industry Analyses, Statistics and Leading Organizations (SUSA):
This is a comprehensive presentation of statistical data on the US service sector. It combines federal
statistics from various sources. It contains information on 2,100 services, grouped into 151
industries. It presents data on 288 occupational categories employed by the service sector. Data is
sorted by SIC code.
Categories of information include number of establishments, employment, payroll, revenues,

ownership, indices of change, leading companies, occupations employed by industry group, and
selected ratios.
APPENDIX H
INTERNATIONAL DATA SOURCES
For financial statistics in over 160 countries:
ICC On-line, Ltd:

Field House
72 Oldfield Road
Hampton, Middlesex TW12 2HQ
United Kingdom
Phone: 081-783-1122
Fax: 071-251-4616
For specific country statistics contact the respective government agencies responsible for the
collection of industrial and economic data.
Example: Statistical Data for Germany

Statistisches Bundesamt
Allgemeiner Auskunftsdienst
65180 Wiesbaden
Phone: 06 11/75 24 05
Fax: 06 11/75 33 30
URL: http://www.statistik-bund.de
The publication “Produzierendes Gewerbe” contains production and financial data similar to
information provided in the Annual Survey of Manufacturers (ASM) and Robert Morris Associates,
Annual Statement Studies (RMA). (See Sample that follows).
You can find access to various statistical websites for the following countries at the
Anklesaria Group, Inc. website: www.anklesaria.com
Americas Europe Asia/Pacific
Canada Office of the EC Hong Kong, PRC
Mexico Germany Indonesia
Brazil UK Singapore
Argentina Ireland Japan
Peru France Malaysia
Ecuador Italy South Korea
Bolivia The Netherlands Taiwan
Spain Israel
Switzerland
Finland Australia
Sweden New Zealand
Austria
Denmark
Other Eastern European countries
APPENDIX - H (continued)
SAMPLE PAGE - PRODUZIERENDES GEWERBE - SECTION 4
APPENDIX - I
PRESENT VALUE INTEREST FACTOR TABLE
COURSE EVALUATION

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STRATEGIC COST MANAGEMENT

Improving Supply Chain

Anklesaria Group, Inc.

Copyright © 2001, Anklesaria Group, Inc.

Zero Base Pricing™ is trademarked

AIM & DRIVE is a registered servicemark by Jimmy Anklesaria

The material included in this Program Manual is

Copyright © 2001, Anklesaria Group, Inc., Del Mar, California

All rights reserved

The Anklesaria Group, Inc. Team 1

Firms That Have Participated in Anklesaria Group, Inc. Programs 3

Seminar Agenda and Objectives 4-5

Strategic Cost Management: The Concept 6-11

Cost and Price Management 12-42

Should Cost Models 16

Implementing SCM 43-46

Case 1: Coating the Price 48

Optional Exercises: (Service Cases): 71-82

Case 1A: Price Maintenance 72

Appendix A: Economic Census 84

M.P. “SID” SIDDHARTH

Anklesaria Group, Inc. 

Anklesaria Group, Inc. 

Anklesaria Group, Inc. 

This slide is intentionally blank

Anklesaria Group, Inc. 

It’s unwise to pay too much.

When you pay too much you lose a little money,

When you pay too little you sometimes lose

The common law of business balance prohibits

If you deal with the lowest bidder, it is well to add

And if you do that, you will have enough to pay

There is hardly anything in the world that

Anklesaria Group, Inc.  2001

u The ‘50’s: Rebuilding the infrastructure

Anklesaria Group, Inc. 

SUPPLY CHAIN COST FLOW Customer

Supply Base Your Company

GS&A & Profit

Anklesaria Group, Inc. 

Comparative Negotiation (SCM) Breakthrough (AIM&DRIVE®)

Initial Cost Your Company

Anklesaria Group, Inc. 

USING COST DATA

Manage Cost Observations

Anklesaria Group, Inc. 

u Only request “relevant” data

Anklesaria Group, Inc. 

This slide is intentionally blank

Anklesaria Group, Inc. 

•Break down Primary Cost

•Evaluate cost drivers and

Anklesaria Group, Inc. 

Anklesaria Group, Inc. 

To evaluate Purchase Price:

Ø Service Should Cost

u Percentage of Sales Model

u Price Discipline™ Model

To determine Life Cycle Costs:

Anklesaria Group, Inc. 

THE POWER OF COST MODELS

u Educate the user in the cost structure of a

Anklesaria Group, Inc. 

Direct Material Bill of Materials (BOM)