Price Vs Cost Vs Value - Find the right combination

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Information about Price Vs Cost Vs Value - Find the right combination

Published on March 3, 2014

Author: SusieDay



The optimum mix - the roles of price, cost and value in the decision making process by Banner Business Services.

Originally presented by Ian McCreeth at eWorld Purchasing & Supply event.

WHAT ARE THE DRIVERS IN THE DECISION MAKING PROCESS? PRICE “the quantity of payment or compensation given by one party to another in return for goods or services” COST “the value of money that has been used up to produce something” VALUE “a measure of the benefit that can be gained from either a good, service, or provider of the good or service” Any contract is dynamic and not static and should be considered in terms of how performance can be improved and the total cost reduced.

PRICE Frequent tendering of “commodity” products tends to lead to the following: Supplier margins are squeezed Supplier behaviour is governed by assumptions made Supplier looks to influence ordering away from tendered items Does this generate a supplier/ customer relationship built on trust and mutually aligned goals? Does this activity tend to require a lot of supplier supervision? Does this encourage the supplier to work closely with the customer and understand their specific goals and challenges? Ultimately, does this drive the supplier to move focus from contracts where their opportunity is limited or is more profitable?

PRICE # Element Tactic Tools Result 1 Price Reduce price Negotiate, leverage and volume discounts Margin erosion


COST Price versus Cost Customers’ perspective Price is what we “pay” What we paid and what it costs are not the same thing Suppliers’ perspective How (and when) do I recover all my costs and capture those in my “price” How well we manage the contract will determine how cost effective the outcome

COST Acquisition Costs •Tender Process Costs •Initial Price •Implementation Costs •Development Costs Variable Costs •Account Management •Customer Support •Pick/ Pack/ Despatch •Delivery •Ongoing Development •Debt •Funding Fixed Costs •Infrastructure •Support Functions

COST Cost Getting to a “steady state” quicker means we can start to improve quicker Addressing the Challenges means we can mobilise and deliver more and sooner Learning Mobilise Getting Better Methodology needs to be designed to address each lifecycle stage Competitors Identify lessons learned to be applied elsewhere or in next iteration of the contract We can identify the Risks including what we will do at the end of the contract Exit Us Who is going to do what, why and when? Time “…………..the optimum combination of whole lifecycle costs and quality (fitness for purpose) to meet the user’s requirements”

COST # Element Tactic Tools Result 1 Cost Eliminate Waste Lean, 6 sigma and continuous improvement approaches Lower total cost

VALUE The view as to whether or not a supplier “adds value” can be a subjective one: “Is my supplier working with me to meet my specific objectives?” “Is my supplier one who delivers against the contract and demands little of my time?” “Is my supplier bringing additional products and services to my attention?” How does a Supplier perceive “adding value”? Meeting contract objectives Driving cost out of the contract Consolidating the supplier base Delivering innovation Driving process improvement

VALUE # Element Tactic Tools Result 1 Cost Value Add Access to other opportunities including revenue and benefit in kind Create or add value directly or indirectly through delivering the contract (horizontal or secondary procurement objectives)

VALUE # Stakeholder Concerns Value Add 1 Buyer Is there a commercial or cost implication in relation to providing value add. Other commercial opportunities, 1. Sharing resources, 2. Leveraging other resources, 3. Other commercial benefits, cost reductions and enablers for other things to “happen”. 2 Specifier How does this enhance the efficacy of the solution provided. Service delivery benefits, 1. Performance, 2. More for less, 3. Drives innovation in other areas. 3 End User Does this “add” to the experience or benefit beyond the core delivery or requirements of the contract. End User, 1. Receives better and more access to other things, 2. Social, economic and environmental benefits for individuals and communities, 3. Engagement and inclusion.

SUMMARY The considerations of Price vs Cost vs Value are driven in the main by the customer requirement and route to market Commoditised markets challenge solely on price It is beholden on the prospective supplier to engage early, before any tender has been specified Is the supplier willing or able to take a risk on price to then be able to move through to adding value? Demands – Commercial capability – Resource allocation – Engagement from the customer The supplier will be willing, the customer needs to be engaged and open to suggestion

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