The framework for obtaining and selecting offers
There are various ways in which the process of obtaining and selecting offers can be carried out. How the buyer does this will depend on a number of factors, including the nature of the procurement items, the kind of relationship that is sought with the suppliers and how interested the suppliers are likely to be in the buying organisation as a potential business partner. Company rules, policies and other guidelines may also influence the decision on how to obtain and select offers.
In the midst of the confusion as to where to begin, this section examines a structure to organise the thought process by looking at three main dimensions to consider regarding obtaining and selecting offers:
1. The method or process to be used and its degree of formality — that is, informal, enquiry/quotation, formal tendering (open tendering, restricted tendering and two-stage tendering) or e-marketplaces.
2. How deeply the buyer will need to evaluate suppliers’ offers and what criteria to use — that is, based on price, total cost of ownership, supplier’s capability and supplier’s motivation.
3. The number of suppliers to contact — that is, single supplier, selected suppliers or open competition.
Based on the general characteristics of the four categories of procurement items, these three dimensions can be applied to the supply market segmentation of these items as summarised in Figure 4.2. We have studied the same figure in our previous course of supply chain management.
Figure 4.2 Supply positioning approaches to suppliers’ offers
There are many ways of evaluating suppliers’ offer. Suppliers’ offers can be evaluated based on lowest price or lowest total cost of ownership as the main criterion or they can also be scored against a range of criteria that have been ‘weighted’ to reflect their relative importance.
A weighted scoring approach can be used to rate suppliers against the two key factors that determine their performance, that is, capability and motivation, which we have covered in Unit 3. The supplier with the highest overall score is awarded the contract/order.
It is important to realise that, in this approach, cost is treated in the same way as all other criteria. Before pursuing this approach, those involved should therefore be sure that they are prepared to select a supplier based on the overall assessment of many relevant criteria, of which cost will be just one. An alternative approach where cost is considered separately to all other criteria is given in the value judgment approach, described next.
This method of evaluating bids compares the merit of the non-cost aspects of an offer against its associated costs. Cost can be either the purchase price or the total cost of ownership, as appropriate.
The value judgment approach reflects what many of us do in our personal life. When buying a TV, for instance, we are normally presented with a number of choices at differing prices. Of those that pass our stated or unstated screening criteria, we normally compare the price against the benefits, e.g., “Model Y costs $100 more but I get a 5-year warranty”. This is basically the value judgment approach to procurement.
Using the value judgment approach can mean employing a weighted scoring model, but in this case only to assess the non-cost aspects of the offer. In other words, cost does not feature as a criterion in the weighing itself. The overall scores compared with the corresponding costs only after the weighting is completed. Then, a judgment is made as to which combination represents the best value as a whole. Thus, a supplier who is not the lowest bidder may be selected if it offers better overall performance than the lowest bidder does and a subjective evaluation indicates that the additional cost is justified.
|Question to activity 4.1
||Suggested answer to activity 4.1