Use of Price Indexes in MRO Buying

By Hanafee, Patrick L. | Journal of Purchasing & Materials Management, Spring 1989 | Go to article overview

Use of Price Indexes in MRO Buying


Hanafee, Patrick L., Journal of Purchasing & Materials Management


Use of Price Indexes in MRO Buying

Commodity price forecasts can be used as an effective tool in identifying potential "inflation offset" opportunities and in measuring purchasing performance for MRO materials. The use of such forecasts at the General Motors Corporation's regional purchasing operations in Detroit helps reduce cost increases by alerting buyers to potential price changes for indirect materials. The same forecasts are also used by management to provide an independent measurement of purchasing performance.

Most of the commodity price forecasts are based primarily on projections made by an independent econometric forecasting firm.1 This firm forecasts price changes for approximately 150 disaggregated producer price indexes (PPI) as well as consumer price indexes and other broad-based aggregate indexes. These PPI forecasts are generated by a complex set of mathematical models that reflect the composition and interaction of specific sectors of the economy.

PPI forecasts indicate anticipated price changes in the major commodity categories tracked by the U.S. Department of Labor, Bureau of Labor Statistics (BLS). Hence, since the index series used in the forecasting activity corresponds with the widely published BLS indexes, both the forecasted and historical data are compatible with numerous other data series published by the BLS and other governmental agencies. This continuity can be helpful when attempting to relate developments in indirect material price movements to other economic conditions and trends (e.g., industrial production and real growth in GNP).

In order to be useful in buying and purchasing management activities, the producer price indexes must be compared with internal commodity price data based on actual purchases. The relative movement of the two series provides a basis for forecasting and measuring purchasing performance.

DEVELOPMENT OF THE INTERNAL INDEX FOR

PRICES PAID (IPP)

Since it is impractical to track prices for each of the thousands of individual items purchased, a group of items must be selected carefully to represent a general commodity group. In actual practice, the nature and number of items selected to represent a commodity group should be based on dollar volume, consistency of item usage, and the ability to track price changes. In the example that follows, certain paper products have been selected because their dollar volumes are large, they are purchased repetitively, and their precise product specifications enable the buyer to track prices.

In order to track the prices paid by GM for paper products, the IPP shown in Exhibit 1 was constructed. A review of all paper purchases during a four-month test period identified sixty items which accounted for over two-thirds of the total dollars expended for paper products. January, 1979, was selected as the base month from which to measure price changes, because price data were readily available from that time forward and the data provided an adequate historical pattern for analytical purposes. Prices for each of the sixty items were tracked from January, 1979, through April, 1980.

The price for each item was then weighted to reflect the number of dollars expended for each one. This step was necessary since there was a wide variation in the amount of money spent by type of paper product. Thus, expenditures for one type of paper called "offset" accounted for .25 percent of the total sample, compared with 9.43 percent for "groundwood," another type of paper (see Exhibit 1). The weighted value was calculated by multiplying the unit purchase price by the appropriate percent of total dollar purchases. In the case of offset, the weighted value of 8.21 was found by multiplying $32.84 by .25. The example in Exhibit 1 shows only the weighted values for January, 1979, and April, 1980, although values were calculated for each interim month.

After the weighted values for each item were calculated, the values for a given month were totaled. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Use of Price Indexes in MRO Buying
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.