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Value in Bidding

May 10, 2011

At an IACCM member meeting in Chicago, there was a lively discussion about the delivery of value.

Dalip Raheja, CEO of The MPower Group, was presenting on the subject of ‘next practices’ and in particular the need to move away from lowest price to greatest value. The discussion centered not only on Procurement, but also the role of the supplier in helping their customers assess value.

Dalip cited a few examples, including the story of an off-shore oil rig. Procurement was proud of the savings it had generated in accommodation and housing costs on a large off-shore rig. However, the head of HR was irate – because those savings had significantly increased employee turnover rates, as workers moved to competitors offering more luxurious conditions. He rightly pointed out the false economy achieved by cheapening the cost of food and quality of accommodation, while raising the costs of recruitment and training.

On one level, suppliers must take greater responsibility to identify and describe their sources of value and why they offer a better return on investment than competition. In the example above, rival bidders should have known the industry cost structures sufficiently well to highlight the negative cost impact of a lower price.

But even when they have this information, is there an opportunity to share it? As a supplier, I have frequently been frustrated in finding a way to demonstrate differentiated value. It is rare for Procurement bidding processes to place value on innovative ideas or cost-reduction proposals. And with the increasing use of e-bidding, the chance of live conversation has steadily reduced.

Real value is mostly going to be achieved through a different approach. If the procurement process offers insufficient room to explore these different approaches (and their impact) then of course they stifle much of the innovation that the business claims to value.

So there is often a problem with both the method and the rules of the process.

In the past, I have written about other examples where suppliers and buyers together lose sight of value opportunities. The way contracts are structured and negotiated offers many examples. It is understandable that buyers need to force a rigid approach to bidding so that they can make legitimate comparisons. But this process does not need to preclude opportunities for providers to highlight ways in which they could offer higher value if the terms were altered. This then puts onus on the supplier to be clear about those added value areas – possibilities to reduce cost, increase flexibility, improve innovation. By partnering in this way, the buyer’s and the supplier’s commercial staff would have an opportunity to illustrate their contribution to the business.

  1. Thomas N.M. Hansen permalink

    This cannot be more true. Todays focus on KPI’s and savings in the field of procurement have a tendency to blind the purchaser and organization.

    In some areas I agree that strict focus on price is possible, however, this should only be in cases where the product is 100% substitutable and where innovation and improvements does not come from a single supplier, but from the market.

    In all other cases, especially with strategic suppliers and bottleneck suppliers, reffering to the Kralic matrix, you should defenately focus on other value adding aspects.

  2. Is there any reason why buyer evaluation criteria could not include ‘willingness and ability to innovate value adding solutions’, give it a reasonably high weighting in the evaluation, and then ask the supplier the question in the RFP: ‘as an option, which may or may not be taken further by the buyer, describe ways in which your organisation could innovate to add greater mutual value around the scope of this RFP, and what you would need from the buyer to do so. Willingness and ability to innovate in this way will be taken into account in the evaluation of your proposal, though the buyer reserves the right to decide not to take up any suggestions made’.

    In this way, the buyer shows willingness, opens up the idea that innovation and partnering are good, isn’t obligated, but can sort the innovators from the suppliers, and this surely would still meet public procurement ‘level playing field’ rules (which is often cited by the buyer as the excuse for the rigid ‘apples for apples’ approach)?

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