PurchTips edition #320<\/p>\n<\/div>
A commonly-used term is \u201cbest value procurement.\u201d In most cases where \u201cbest value procurement\u201d is used, people use it to describe purchasing decisions where factors other than price are given \u201cpoints\u201d and used in determining the supplier to select.<\/p>\n
That\u2019s a fine methodology, which I refer to as \u201cweighted average supplier scoring.\u201d But, I argue that \u201cbest value procurement\u201d should mean something more.<\/p>\n
I believe that \u201cvalue\u201d is something that can be measured in financial terms. Value might be increased revenue. Value might be reduced cost. Or value might be a combination of the two. Regardless, \u201cvalue\u201d can and should be expressed in units of currency.<\/p>\n
So, if one machine (Machine A) can help a company reduce its labor force by 10 people and, thus, its payroll by $500,000 per year for 10 years, then that machine has a value of $5,000,000. If a competing machine (Machine B) can help the same company reduce its labor force by 15 people and, thus, its payroll by $750,000 per year for 10 years, then that machine has a value of $7,500,000.<\/p>\n
But those numbers alone wouldn\u2019t tell you the \u201cbest value.\u201d Because true \u201cbest value\u201d factors in cost as well.<\/p>\n
If, on a total cost basis, Machine A costs $2,000,000, then it has a value-to-cost ratio of 2.5 ($5,000,000 \/ $2,000,000 = 2.5). If Machine B costs $5,000,000, then it has a value-to-cost ratio of 1.5 ($7,500,000 \/ $5,000,000 = 1.5). Additionally, net value subtracts cost from value.<\/p>\n
Both a higher value-to-cost ratio and higher net value are more attractive, so on a purely \u201cbest value\u201d procurement decision, Machine A would be chosen. For best value procurement decisions to work well, all suppliers considered must meet minimum supplier qualification criteria, which may include factors like financial stability, service capability, quality requirements, etc. Those criteria are not subjectively ranked and scored \u2013 they are evaluated to ensure that they meet the high standards of the buying organization as a prerequisite to consideration.<\/p>\n
Both true best value procurement and weighted average supplier scoring are legitimate procurement decision methods. So are decision-making methods based on low bids, reverse auction outcomes, lowest total cost of ownership analysis, and sourcing optimization.<\/p>\n
The key is using the right method in the appropriate situation.<\/p>\n
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