The Target Price is a value derived from the Buyer’s market research.
When buyers do have expertise in a category, they know what the costs will be prior to getting quotes. So they can set a target price for their suppliers rather than the supplier telling them what the price will be.
In many cases, buyers purchase a variety of items and can’t be technical experts for every category. As such, they need to get quotes from suppliers to know what their price will be. In these cases, target pricing should not be used.
Target pricing works well when:
1. You are buying a custom product that is manufactured to your specifications
2. The material costs and labor hours can be clearly identified
3. The primary materials are not commonly subject to volatile commodity pricing fluctuations
4. The buying organization understands the costs
5. Labor represents a significant enough portion of total cost so that the buyer can factor in aggressive productivity improvements in the target price
Setting a max target pricing allows to:
- Quickly qualify suppliers that are able to deliver at that pricing level.
- Speed up the negotiations and the back and forth with suppliers