Is this a right course of action?

Blakenall District Hospital (BDH) is a large hospital that is a major part of the government’s health service. Purchasing staff are in the habit of placing many long-term contracts with suppliers and sub-contractors. Whilst these contracts are usually carried out successfully, prices are often paid that are well over budget. The purchasing manager is concerned to find that, in some cases, members of staff are forcing suppliers to accept fixed price contracts. The policy has caused several problems such as some suppliers refusing to deal with BDH and a few going out of business mid-way through performing a contract with BDH. This is due to fluctuating market prices of materials. The procurement manager suggests supplier to adopt variable pricing arrangement with price index.

Is this a right course of action?
A . No, variable pricing would only benefit the suppliers
B. Yes, this type of arrangement would provide absolute certainty when budgeting
C. Yes, this pricing arrangement would reimburse the fluctuation of material prices
D. No, price adjustment should be applied to short-term supply contract only (3-month
duration or less)

View Answer

Answer: C

Explanation:

Procurement staff in the Hospital is forcing suppliers into fixed price contract. If the costs generally rise, supplier may operate at a loss. This situation can disrupt the relationship, that is the reason why some suppliers refusing to deal with BDH and a few going out of business mid-way.

Alternative methods could be variable pricing arrangement. This method would reimburse the fluctuation of market price. It will also benefit buyer if the market price drops. This type of arrangement should be applied to long-term contracts (i.e. 18 months or more).

Reference: CIPS study guide page 179-184

LO 3, AC 3.3