Why GP's are bad?

Eric_R_Kissell at whirlpool.com Eric_R_Kissell at whirlpool.com
Fri May 14 23:04:41 EDT 2004


Please explain your statement

"While in the short term the supplier looses"

in business terms.

What am I missing? The group purchase (i.e. volume discount) is intended to
benefit both supplier and customer.

The supplier gets to move more product, spreading his fixed cost over more
units produced so that it is possible to sell those units at a reduced
price while adding to the bottom line. Often costs such as those associated
with processing are reduced because you are doing one setup spread across
many units produced.  For group purchase units produced, you are not
carrying excess inventory because you have pre-sold units associated with
the group buy and can ship immediately.  Furthermore, raw materials costs
can be reduced at the supplier because he can obtain discounts from his
suppliers due to volume buying of raw materials.

The customer gets the reduced price and the product he wants to aid his
slide down the slippery slope.

As was pointed out, often these are customers that would not be making
purchases without the discounted group purchase price. This is another
benefit for the supplier. As mentioned previously, there should be
economies of scale at work for the supplier that translate into equivalent
per unit profit for the group purchase units compared to the normal sales
of one at a time. Therefore, the supplier gets to make more sales that he
would never get to make otherwise at a similar per unit profit as a result
of the group buy.

There are only several ways the supplier could actually be losing here.

1. fixed cost at the supplier are negligible
2. there are no savings realized at the supplier from economies of scale in
processing or raw materials
3. all sales made at a discounted price from a group purchase would have
been made at the regular price anyway
4. the supplier does the math wrong and sets the group purchase price too
low to make a profit

After taking the time to write all of this, I have to admit that I am more
puzzled about you comments now than when I first read them. Please explain
what you are saying.

Eric Kissell

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