Purchasing and Value

Purchasing managers have to look at customer value and full-life value in making purchasing decisions. Stephen Bauld in procurement perspectives, enunciates it best. Both buyers and sellers need to understand and read. This is how they can create value, where full-life cost equates to best value.

From the perspective of any sensible customer, it is obvious that cost is a full-life concern.

It is axiomatic that the best value and the cheapest price are not synonymous. It is perhaps less clear that the lowest full-life cost and the best value for money (VFM) are not necessarily the same.

The problem with the best value concept is that while the sticker (or bid) price associated with an item is a hard number, the same is not true of either the full-life cost or the best value.

The “West Virginia Purchasing Procedures Handbook” provides that the term “best value procurement” describes:

“Purchasing methods used in awarding a contract based on evaluating and comparing all established quality criteria where cost is not the sole determining factor in the award.”

So conceived, this equates “best value” determinations with an RFP, in which a variety of stated non-price criteria are also factored into the choice of supply. Most of the considerations are likely to be subjective in nature, or at the very least incapable of precise estimation so as to result in a direct comparison of two sources of supply.

In contrast, the “full-life cost” takes into account a wider range of price or cost related information than the sticker price.

In contrast to the best value approach, the factors incorporated in determining the full-life cost are either hard numbers or numbers that can be reasonably approximated on a common basis, so that the different sources of supply can be fairly compared at the time of purchase.

In the U.K, the Office of Government Commerce (OGC) states:

“The set of award criteria will be a combination of both financial and non-financial factors. The financial criteria will cover the whole-life costs of the contract. Key non-financial criteria will usually include areas of deliverability, service quality, innovation, organizational culture, environmental issues, risk management and partnering/team-working. To promote price realism and solution deliverability, the recommended approach to VFM evaluation is to differentiate the financial and non-financial criteria for consideration in separate strands. Attempts to balance these criteria during the process should be avoided. Via a methodology agreed by the Tender Board, the two strands should be brought back together prior to the award decision. Procurement professionals within the department should be involved in the process. Unless the best quality bid is also the lowest price bid, the Tender Board must come to a judgment balancing the business risks”.

We hope you found this interesting. Creating Value is our business

Source: .Stephen Bauld, Canada’s leading expert on government procurement, is president and CEO of Purchasing Consultants International Inc. He is also the co-author of the Municipal Procurement Handbook, published by LexisNexis Canada. He can be reached at stephenbauld@bell.blackberry.net.

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Contact Customer Value Foundation for help

Gautam Mahajan
Customer Value Foundation
K-185, Sarai Jullena
New Delhi 110025
Mob: +91 9810060368
Tel: +91 11 26831226
email: mahajan.g@customervaluefoundation.com
website: http://customervaluefoundation.com

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