Market, Cost, Price, and Value Analysis

Market Analysis
Market analysis is using research related to supply and demand to assist in predicting the direction of specific markets based on technical data relating to price movements of those markets.
You should use market analysis to determine:
Product availability and price.
Anticipated supply and demand factors.
Price stability.
What are the risks a purchaser faces?
A major risk for you as a purchaser is not having a true understanding of the market value for the product or service you are procuring. Without this knowledge you will:
• Not be able to accurately determine best value.
• Have little or no negotiating power.
• Be vulnerable to price gouging.
Cost Analysis
Cost analysis is the evaluation of actual or anticipated cost data including materials, labor, overhead, general, and administrative costs by applying experience, knowledge, and judgment to data in an attempt to project estimated contract costs.
What is the purpose of cost analysis?
The purpose of cost analysis is to determine if a price is fair and reasonable for both the vendor and the ordering entity. Knowing the estimated contract cost will also help you determine which type of procurement method to use for your purchase. As we saw earlier in this workbook, the cost estimate can be incorporated into a Work Breakdown Structure (WBS)
Life Cycle Costing
Life cycle costing is a method that focuses on the total cost of ownership rather than just price. Total cost of ownership includes the purchase price of an item and all operating and related costs over the life of the item (acquisition price, operations, maintenance, downtime, energy costs, salvage value, etc.).
Price Analysis
Price analysis is the examination of a vendor’s price without the examination and evaluation of the separate elements of cost and profit that make up the price.
Value Analysis
Value analysis is the study of the relationship between cost and function in order to identify a cost reduction and/or process improvement by looking at the incremental costs of a product or service with the objective of reducing the cost by substituting material or changing design, while accomplishing the same function or purpose. The primary purpose of value analysis in purchasing is to allow purchasers to improve the value obtained from purchases.

The formula utilized in Value Analysis is:
V = Function/Cost

What questions should you ask during the process of value analysis?
1. What function must be performed?
2. How is the function currently being performed?
3. At what cost is the current function being performed?
4. What are the alternate means of accomplishing the required function, if any?
5. How much would each alternate approach cost?
6. Comparing the cost of the current approach and the projected cost of the alternate approaches, which approach should be used to perform the required function at the lowest total cost?