Page 158 - DMGT525_MATERIALS_MANAGEMENT

Unit 11: Purchasing Research

vendors studies in developing the vendors (in terms of their technical financial capabilities and Notes
needs), co. In short, purchasing research includes short and long-range studies of the internal
company requirements and the external supply market. This is an important aspect of purchasing,
and all organizations that can afford it, should launch formal purchasing research programs

11.1.1 Price Forecasting

Cost aspects are useful when dealing with the supplier on a one-to-one basis. However, there
are very many situations, particularly regarding raw materials, where the material is subject to
a multitude of economic factors which influence the price of the material. It becomes necessary
on the part of the purchasing executive to take cognizance of and understand the price movements.

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Caution Price forecasting, based upon the time-series methods of computing trends and
business cycles, or based upon the understanding of the influence of various economic/
business parameters should be of some interest to the purchasing executive who would
like to keep the costs low.

The objective is to keep the costs of purchases reasonably low, and if the prices of the materials
do “run away”, then to ensure the availability of supply of the material for the current and near
future requirements.
11.1.2 Techniques of Price Forecasting

An important part of anticipating both future price levels and the risk that anticipated prices
will not be achieved is developing strategies for forecasting prices. In general, there are two
basic approaches to forecasting prices: fundamental analysis and technical analysis. While they
are often presented as substitutes or competitors in price forecasting, the two can be
complimentary. Most market analysts pay attention to both fundamental and technical factors
even though they may emphasize one over the other.
 Fundamental Analysis: Fundamental price analysis is based on the notion that the
underlying supply/demand conditions in a given market ultimately determine price.
Since the futures market is attempting to discover prices that will balance supply and
demand in some future time period, there is uncertainty in initially establishing an
equilibrium price. The market may be “shocked” by new information resulting in traders’
changing their assessments of what the equilibrium price will be in the future. Fundamental
analysis is attempts to both anticipate changes in supply/demand information, and to
evaluate the direction and range of price movement resulting from new information.
Fundamental analysis may be simple (intuitive), or complicated (using quantitative
statistical or mathematical models). In both cases, analysts are attempting to assess price
implications of economic variables including:
 seasonal use patterns
 seasonal supply patterns

 prices of substitute goods
 prices of compliment goods
 market structure
Intuitive analysis uses a basic understanding of economic principles to hypothesize about
price changes. Quantitative analysis combines knowledge of economic theory with
mathematics and statistics to establish explicit relationships between economic variables
and price. Several indicators are used to understand a given market. For example, the
following reports are used by analysts to understand the respective markets.

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