Posted by: ahmedashfaque | August 12, 2014

Business conversations 4

In the last post, we had seen that the customer had an issue with maintenance of pricing components and so they had asked for a meeting with the IT consultant company. Mahesh, the project manager from the IT company arrived for meeting with Steve (The business owner) and Bryan (the project manager from customer side). So here goes the conversations at the meeting.

Mahesh: Good morning Steve and Bryan. How can I help you.

Steve: Bryan says your solution will create a large number of pricing components and maintaining them will be a difficult task for Bryan. Right Bryan!

Bryan: yes, this is true. Mahesh, the solution you have proposed will create a problem for us as described by Steve.

Mahesh: Let me explain how the solution works. We will discuss the issues later.

Steve: OK, go ahead.

Mahesh: There will be a pricing component which will keep track of all the discounts and at the same time adding them up and matching them against the reward points offered by your vendors.

Suppose, your vendor V is offering a 3% reward points when you buy at least $50,000 worth of goods (Material A and Material B) within 3 months period. Now suppose your buying activity for the months of March to June is like this:

PO on March 5 – Material A – $ 500 + Material B – $ 1000 – Total = $ 1500

PO on March 17 – Material A – $ 2500 + Material B – $ 2000 – Total = $ 4500

PO on April 15 – Material A – $ 3500 + Material B – $ 12000 – Total = $ 15500

PO on April 25 – Material A – $ 6500 + Material B – $ 10000 – Total = $ 16500

PO on May 15 – Material A – $ 8500 + Material B – $ 7000 – Total = $ 15500

Total purchase = $ 53500

Discount applicable (@3%) = $ 1605

The discount of $1605 you see here is an accrued amount. there will be a pricing component which will be calculating the discount from each purchase and keep adding. Finally when you are actually able to purchase at least the threshold amount worth of goods then this discount in form of reward points is realized. Otherwise the discount or the reward point is not realized.

For this kind of calculation to happen, you need to create a separate pricing component for each of your vendor. One pricing component can not calculate discount amount for all your vendors. I guess, you realize now how it works!

Bryan: We have some 600 vendors. Your solution will mean, we need to maintain 600 pricing components. Whenever the reward point scheme is changed, we have to change values in all of these pricing components.

Mahesh: That is right.

Steve: Can’t you suggest a better solution?

Mahesh: Please tell me one thing, Steve. How you are presently managing your pricing?

Steve: We are managing them on excel sheets.

Mahesh: How many times, your vendors change prices or discounts?

Steve: Well, we have long term contracts with them. So we expect price change or discounting formula change hardly once in a year.

Mahesh: That means, even if all of your vendors change their prices or discounts once a year, you only need to make changes in 600 pricing documents.

Steve: yes, that is true.

Mahesh: See, changing 600 prices in a year is not a big deal. The other thing is that when prices or discounts change, you have to change them whether you are using paper or computer based program. Price changes can not happen automatically.

Steve: You are right Mahesh. Bryan, I will tell my purchasing department people not to worry about maintaining pricing components. they have to do it anyway. Prices can not get changed automatically. Thank you Mahesh for coming in and explaining everything.

Mahesh: Thank you Steve and Bryan.


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