As we continue our discussion on best value procurement, we look at the options of using the value-to-cost ratio or the net value calculation. One may ask why one wouldn’t always use net value calculation. After all, isn’t bottom-line profit maximization always the goal?

In many cases, yes. However, one has to remember a couple of things.

First, some organizations don’t have enough cash to purchase the most expensive option, even if it is the most profitable in terms of currency, not a percentage. In the example, the company had the option of purchasing two machines: one for $2 million and one for $5 million. Even if the net value gained from the more expensive machine exceeded that of, the less expensive machine, the organization might not have had that extra $3 million lying around.

Second, it is important to keep in mind that it is rare for an organization to only invest in one thing. It may be buying the machine. But it also may be considering building another plant, buying another company, outsourcing a function, whatever. Each of those other projects will have its own returns on investment. So, looking at value-to-cost ratios across separate projects can help organizations identify those projects that get a higher priority.

True best value procurement – not the weighted average scoring some organizations mislabel – is likely to become more widely used. It is important to understand it and think through all of these types of details.

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Recommended Reading

• Best Value Definition
• Cultivating Procurement Value
• Value Creation Ideas
• Adding Procurement Value to Marketing Spend
• Savings Strategy Development

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