Agroindustrial project analysi

THE PROCUREMENT FACTOR 101credit or technical assistance, that would have been more appropriateobjectives for government action.Pricing mechanismsIt is clear that many forces influence the cost of a plant's rawmaterial. The analyst can consider various alternatives, the followingamong them, for the plant's obtaining its raw material at areasonable cost.SPOT PRICES. Buying at spot prices means the company pays theprevailing price in the market. This is a reasonable procedure ifthe competitors also use it because all firms incur similar costs.Prices, however, tend to vary greatly both annually and acrossyears, thereby causing uncertainty in financial planning.MULTIPLE SOURCES. When using spot prices, it is desirable for thefirm to have multiple sources of raw material. This permits theprocurement officer to shift the mix of raw materials, thus achievingthe best cost and helping to control price variability and theeconomic risk of dependence on one crop.SUPPORT PRICES. Sometimes it is necessary for the firm to pay theminimum commodity price as fixed by the government. Althoughthis may be a deviation from the price that would have prevailedunder free-market supply and demand, support prices are oftenappropriate because they represent the farmers' opportunity costs.CONTRACTING. One method of ensuring the supply of raw materialis to extend purchase contracts to producers. Such contractsoften specify delivery quantities, quality standards, delivery dates,and price. Price is the most problematic of these because, in spiteof the contract, a firm has pricing options. The spot price upondelivery could be used, but the firm and the supplier would have toagree on what the source of the spot price should be. The contractcould also fix the price on a cost plus a fixed fee or margin. Anotherpossibility would be to base the price on opportunity costs, thus tominimize crop shifting and to stabilize supply. Yet another alternativewould be to pay a base price plus a variable bonus derivedfrom the final prices of the processed products. In examining thesevarious contract alternatives, the analyst should compare the costsagainst the certainty obtained under each.