PRODUCTION MANAGEMENT- MATERIALS MANAGEMENT/PRICING STRATEGY & TECHNIQUES

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MATERIALS MANAGEMENT/PRICING STRATEGY & TECHNIQUES

QUESTIONS AND ANSWERS:

1.      State the basic functions of materials management

Answer:

BASIC FUNCTIONS OF MATERIALS MANAGEMENT

Material management is often an opportunity to organize related functions under one manager to provide increased control and avoid wasteful overlapping of activities.  Among these functions are planning, Production Control, Inventory Control, Scheduling, Purchasing, Stores, Receiving, Warehousing, Shipping, Materials Handling, Values Analysis, Statistical Analysis, Operation Research, Distribution Control, Forecasting and Materials Control.

Materials management today would include the following functions under the materials manager’s direction: Production Planning, Materials Control, Purchasing, Receiving, Handling and Shipping and Distribution Control. 

2.      Explain some of the symptoms of poor materials management

Answer:

Warehousing is that part of materials management responsible for providing space for incoming raw materials, in process goods and finished goods as well as the drying area.  Inventory control monitors the financial investment tied up in stocks of raw materials. 

Symptoms of poor materials management

Firms often experience problems resulting from poor or diffused control of the raw material input to the production operation.   Some of these problems which demand materials management related solutions are:

-          Pilferage and other inventory losses:

-          Failure to account for materials lost through the kiln or air drying

-          High materials cost relative to total production costs;

-          Under-utilization of machinery and equipment

-          Considerable losses in direct labour time

-          Frequent delays in delivery;

-          Too high an inventory of raw materials, semi-manufactures and finished products;

-          High obsolescence rates of basic raw materials; and

-          Congestion in manufacturing areas.

3.      Explain the reasoning that underlies each of the following:

i.                    Loss-leader pricing

ii.                  Pricing below the market price

iii.                Odd number pricing

iv.                 Price lining

v.                   Pricing above the market price

Answer:

Loss-Leader Pricing: This strategy involves selling a product below cost, that is, at a loss to the firm.  At first glance, this would seem to violate business or economic logic.  Why would a firm ever willingly sell a product at a price that is less than the cost of the product? Several situations arise that justify this behavior.  First, this may be another type of wedge to gain entry into the market.  A new product may be priced at less than cost until a foothold is established and then the price may be re-evaluated. 

The most common use of loss-leader pricing is to sell some product at less than cost as a promotional activity.  This frequently observed in a retail sector, especially in large supermarkets.  An item that many shoppers would be likely to purchase may be priced below cost to attract customers to the store. 

It is important to note that in some cases, a firm can use loss-leader pricing to destroy competitors who are not financially strong enough to survive a price war.  This is called “Predatory Pricing” – a firm price in such a way as to attempt to drive a competitor out of the market.

PRICING BELOW THE MARKET PRICE -  it is sometimes preferable for a firm to set price below the current market price for its product group.   Two particular cases of this type are most important.  Consider first, the case in which a firm wants to expand its product mix to utilize excess capacity and in which the new product must compete with established brands already on the market.  Setting the price on its new entry somewhere below the prevailing price of competitors will provide a wedge to help it become established in the market.

ODD NUMBER PRICING – Most of the products we buy at the retail level are priced at odd values; for example, N5.98 rather than N6.00, N6.89 rather than N7.00; and so on. It is not accident that these odd value prices are used rather than their even valued price.  This strategy is based on an assumed psychological force which cases consumers to perceive a slightly lower odd number price as significantly less than its even numbered counterpart. 

PRICE LINING – This pricing strategy is particularly common in furniture, appliance and department stores.  A particular class of product will be offered in more than one line based on quality, or design characteristics.  In all likelihood, at least, three lines will be offered to the prospective consumer, like the:

-          Basic model

-          Basic model with added quality and design features

-          A top line model with all features

Price lining has been quite widely used in a variety of situations.  A single manufacturer may produce their product in different lines to appeal to various income groups. 

PRICING ABOVE THE MARKET PRICE -  this strategy occurs when the firm is trying to establish a prestige image and is more common than might be expected at first.  Firms may also set prices at a high level on new products in a strategy known as skimming.  By price skimming, we mean roughly charging what the traffic will bear.  The relatively high price dictated by this strategy will of course tend to attract competitors.  It is worth noting that price skimming usually results from temporary monopoly power created by advertising or innovation in either case, the temporary monopoly power results in a higher price.  As monopoly  power is reduced, demand becomes more elastic and price declines.  This can also be related to the concept of second degree price discrimination.  By starting with a high price and then lowering price, the firm is able to extract a greater portion of the consumer’s surplus than they would with the more usual single price strategy.

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