PRICE VS COST VS VALUE
WHAT ARE THE DRIVERS IN THE DECISION MAKING PROCESS?
“the quantity of payment or compensation given by one party to another in return for goods or services”
“the value of money that has been used up to produce something”
“a measure of the benefit that can be gained from either a good, service, or provider of the good or service”
PRICE
COST
VALUE
Any contract is dynamic and not static and should be considered in terms of how performance can be improved and the total cost reduced.
PRICE
Ultimately, does this drive the supplier to move focus from contracts where their opportunity is limited or is more profitable?
PRICE
Frequent tendering of “commodity” products tends to lead to the following:
Supplier margins are squeezed
Supplier behaviour is governed by assumptions made
Supplier looks to influence ordering away from tendered items
Does this generate a supplier/ customer
relationship built on trust and mutually
aligned goals?
Does this activity tend to require a
lot of supplier supervision?
Does this encourage the
supplier to work closely with the customer and
understand their specific goals
and challenges?
PRICE
# Element Tactic Tools Result
1 Price Reduce price
Negotiate, leverage and volume discounts
Margin erosion
WHAT ARE THE DRIVERS IN THE DECISION MAKING PROCESS?
COST
COST
Price versus Cost
Customers’ perspectivePrice is what we “pay”What we paid and what it costs are not the same thing
Suppliers’ perspectiveHow (and when) do I recover all my costs and capture those in my “price”
How well we manage the contract will determine how cost effective the outcome
Price
Cost
Energy
Environmental
Financing
TUPE
Resources
Acquisition Costs
Variable Costs
COST
Acquisition Costs Variable Costs Fixed Costs
•Tender Process Costs•Initial Price•Implementation Costs•Development Costs
•Account Management•Customer Support•Pick/ Pack/ Despatch•Delivery•Ongoing Development•Debt•Funding
•Infrastructure•Support Functions
COST
“…………..the optimum combination of whole lifecycle costs and quality (fitness for purpose) to meet the user’s requirements”
Time
Cost
MobiliseWho is going to do
what, why and when?
Addressing the Challenges means we
can mobilise and deliver more and
sooner
Methodology needs to be designed to
address each lifecycle stage
Learning
Getting to a “steady state”
quicker means we can start to
improve quicker
Getting Better
We can identify the Risks including what we will do at
the end of the contract
Identify lessons learned to be applied elsewhere or in next
iteration of the contract
Competitors
UsExit
COST
# Element Tactic Tools Result
1 Cost Eliminate Waste
Lean, 6 sigma and continuous improvement approaches
Lower total cost
VALUE
VALUE
The view as to whether or not a supplier “adds value” can be a subjective one:“Is my supplier working with me to meet my specific objectives?”“Is my supplier one who delivers against the contract and demands little of my time?”“Is my supplier bringing additional products and services to my attention?”
Meeting contract objectivesDriving cost out of the contract
How does a Supplier perceive “adding value”? Consolidating the supplier base
Delivering innovationDriving process improvement
VALUE
# Element Tactic Tools Result
1 Cost Value Add Access to other opportunities including revenue and benefit in kind
Create or add value directly or indirectly through delivering the contract (horizontal or secondary procurement objectives)
VALUE
# Stakeholder Concerns Value Add
1 Buyer Is there a commercial or cost implication in relation to providing value add.
Other commercial opportunities,1. Sharing resources,2. Leveraging other resources,3. Other commercial benefits, cost
reductions and enablers for other things to “happen”.
2 Specifier How does this enhance the efficacy of the solution provided.
Service delivery benefits,1. Performance,2. More for less,3. Drives innovation in other areas.
3 End User Does this “add” to the experience or benefit beyond the core delivery or requirements of the contract.
End User,1. Receives better and more access to other
things,2. Social, economic and environmental
benefits for individuals and communities,3. Engagement and inclusion.
TO SUMMARISE
The considerations of Price vs Cost vs Value are driven in the main by the customer requirement and route to market
Commoditised markets challenge solely on price
It is beholden on the prospective supplier to engage early, before any tender has been specified
Is the supplier willing or able to take a risk on price to then be able to move through to adding value? Demands
– Commercial capability– Resource allocation– Engagement from the customer
The supplier will be willing, the customer needs to be engaged and open to suggestion
SUMMARY
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