Flexible Price Agreements: Purchasing’s View

by Dale Varble



The article examines perceptions about, and the use and strategy of flexible price agreements (FPAs), methods of handling revenue-resource risk. The research for it included a survey of purchasing personnel. The purchasing agents surveyed overwhelmingly preferred a fixed price. Deviation from fixed price agreements could be interpreted to mean a change in the supply environment. The magnitude of change can be assessed by the type of price arrangement being offered and accepted. If a set, fixed price has recently been employed, a drastic change in the supply environment is signaled by an offer of cost in effect at time of delivery. An offer of fixed price and extreme conditions to renegotiate indicates only a slight change. If purchasing personnel are not already alerted to a changing supply environment, they should examine it carefully when suppliers offer any change in the type of price agreement. Suppliers should look for changes in the market when purchasers request a different type of pricing arrangement. Awareness of a changing market is useful in bargaining strategy, allowing for better preparation of the details of the price agreement.

California Management Review

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