A Value Based Procurement Process
Why Value Based Procurement
Traditional Procurement Systems and Practices Are Problematic
Ask purchasing professionals about the problems they face
purchasing on-trivial products and services and they will typically
come up some or all of the following:
- The process takes too long.
- Vendors are given overly complex and
detailed specifications to meet, leading to
overly restrictive contracts and complex renegotiation
at a later date.
- Proposals are judged chiefly on
cost, not on their overall benefit to the organisation.
- All risks tend to be assigned to
the vendor, and rewards are not used to spur performance.
Today’s procurement systems reached this point because
they are largely built on purchaser/vendor mistrust, the
lack of rigorous purchasing procedures and
a lack of tools that can be used to compare bids and
assess value.
Going for the cheapest option and laying the risk on the
vendor looks attractive, in the short term, but is far less
effective in the long term.
Value Purchasing
Value-based purchasing requires you to buy the goods or
services that produce the best overall value. For example,
if company A offers to build a software system
that costs 5 million but yields 10 million in added revenue, then
company A’s bid has a net value of 5 million.
In contrast, if the system offered by company B costs 10 million
but returns more than 40 million in added revenue, then
company B’s bid has a net value of more than 30 million.
Under a traditional procurement approach, company A’s
bid [the low-cost solution] would win the contract. Under
value-based purchasing, company B wins, paying
more up front but receiving much more in return over the long term.
Value-based purchasing can take many forms. In some
cases, the benefit may be measured in an expanded set of services
provided by one vendor’s solution over another. In other
cases, the winning bid may involve a system with higher initial
costs but lower life-cycle expenses and easier updating
capabilities.
Your problem is how to judge the value of competing
proposals; a task that isn't easy when dealing with large
or complex bids.
To help you with your decision making, we have
our Value Based Procurement methodology
Value Based Procurement Methodology
The Lucidus approach to Value Based Procurement combines
a number of approaches to the procurement process. It aids
you by helping you with:
- Writing solution-oriented bids, where
the bid articulates the problem to be solved
and asks the vendor to propose a solution.
- Using value based purchasing to
evaluate suppliers based not on cost but other factors, such as
total cost of ownership; the technical merit of the vendor's
proposal; the vendor's past performance; and the
probability of meeting your current and future business
objectives
- Sharing the risks with vendors, allowing
you to incorporate a risk/reward structure that
incentivises vendor flexibility and performance.
- Tracks the delivery
of the benefits that the vendor has claimed and allows
strategic decisions to be made based on projected performance
rather than past failures.
To find out more...
You can find out more by contacting Robert White [CEO of Lucidus]
by telephone on +44 (0)1608 678134 or via the Contact web page.
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