Below is a “classic” procurement article, modified slightly for 2010, that appeared a few years ago in the Supplier Selection and Management Report, the content rights to which SCDigest acquired.
Basing a buying decision on price alone does not necessarily deliver the most value for your money, which is why it is important to make a “total best value” purchase.
Total best value elevates sourcing to its highest and most effective level, because it is about attaining the best quality, performance, and price for goods and services a company buys. It also factors in the quality, performance, and capability of the supplier’s company.
Therefore, total best value sourcing evaluates the quality of the goods or services a company is purchasing and the quality of the supplier from which the goods and services are being purchased.
Total vest value was making a comeback in corporate procurement organizations, but has been tested by the recent economic climate, when unit-based price reductions from suppliers have largely been the focus.
But overall, companies usually understand that every sourcing decision should be a total best value decision, and not one solely based on price reduction – even if they don’t always execute that way.
For example, before the concept of strategic sourcing, many companies targeted price reduction as the only goal to measure performance of a purchasing organization. Reverse auction technology, for one, encouraged companies to focus on making most buying decisions based on price alone.
While total best value sourcing has been around for a long time, it almost has become a lost art, primarily because company leaders at the highest level under appreciate the value of sourcing, particularly total best value sourcing. Even though management is under pressure to improve bottom line results and shareholder value, it does not view sourcing as a strategic element of its plans to deliver those results. Additionally, companies have been tightening their belts because of market pressures and, therefore, have been focusing on reducing costs. This cost-only focus forces buyers to do more with less.
This appears in various forms such as staffing reductions in purchasing organizations, cutbacks or eliminations of training programs and departmental spending, and a concentration on price reduction as the only performance measure for purchasing professionals.
Total Value Sourcing and the Supplier Community
Measuring a supplier’s company performance is an important component to achieving total best value sourcing. There are many hidden costs that can be associated with a supplier’s performance, such as scrap rate, staffing charges, and managing inventory levels.
Through incorporating total best value sourcing into purchasing decisions, sourcing organizations can uncover some of the hidden costs and evaluate each supplier on a “level playing field” to select the top performing supplier with a proven track record of excellent quality, performance, and capability.
Sourcing goods and services from a total best value approach is much more than selecting a supplier on price alone. In a price-only sourcing approach, the amount of savings that can be delivered by a sourcing organization is limited by the suppliers own costs and need for sufficient margin to remain viable.
and Procurement Article - Continued Below)