A subscriber to PurchTips asked me how the term “best value” is defined in procurement.
Best value is one of those terms that is defined differently by different people. I’ll give you my take…
Best value relates to systematically identifying a measurable monetary difference between a winning supplier’s proposal and all other suppliers’ proposals. The term implies that more than just price is taken into consideration.
Most commonly, best value (which I sometimes call “net profit impact”) is determined by completing a total cost of ownership (TCO) analysis. However, when suppliers’ work can have some type of impact on revenue, both revenue and cost are factored into an equation determining best value/net profit impact.
Beware though…I’ve seen government purchasing organizations use the term best value to mean that they’ve simply used a weighted average supplier scorecard to evaluate proposals based on a number of variables rather than just price. In these cases, no true TCO analysis nor profit impact calculation was performed.
If you are unfamiliar with TCO analysis or weighted average supplier scorecards, these topics are covered in depth in our online classes “Mastering Purchasing Fundamentals” and “Microsoft Excel For Purchasing Professionals” respectively. You can learn more about what is covered in these classes at the following links:
Mastering Purchasing Fundamentals – http://www.NextLevelPurchasing.com/fundamentals-purchasing.html
Microsoft Excel For Purchasing Professionals – http://www.NextLevelPurchasing.com/classesexcel.html