I hope that you have enjoyed the article, “What Is Best Value Procurement?”
I’d like to address some potential questions that I anticipate from readers who read the article closely.
In looking at the options of using the value-to-cost ratio or the net value calculation, one may ask why net value calculation wouldn’t always be used. After all, isn’t bottom-line profit maximization always the goal?
In many cases, yes. But, one has to remember a couple things.
First, some organizations simply don’t have enough cash to purchase the most expensive option, even if it is the most profitable in terms of currency, not 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 simply may 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 be investing in one thing at a time. 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 their 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 that 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.
I hope the article and this blog post have helped.