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procurement, strategic sourcing

Prescription glasses for procurement myopia

The procurement principle is simple: “Go for the lowest bidder, with highest quality/value”. Translating this principle to reality is often a daunting task. In this blog, I will discuss a slightly different issue.

“How to evaluate vendors who have quoted the same cost, assuming they all provide the same quality/value“.

Of course, it is a hypothetical case. However, this simple case demonstrates how complex a real-life situation can be.  Let us assume all the 3 vendors have quoted the final price of $60000. They all deliver the same quality.

Vendor A Vendor B Vendor C
Project A $60000 $60000 $60000

The first reaction will be that, there should not be any difference in the outcome to the organisation that is procuring the service, whether they choose Vendor A, Vendor B or Vendor C. The cost to the organisation will be $60000 and there are no perceived difference in the deliverable(s) quality.

This is a short sighted approach as we do not see the details. We need prescription glasses to see through the final quotes.

The problem:

Let us assume the procurement is for a civil project. The bill of quantities (BOQ) consists of the following 3 line items.

id description unit quantity
N01-1-1 Plain concrete in blindings, mass fillings, foundations, beds
100
N02-5-1 Interlocking coloured paving blocks 50 mm thick of approved pattern laid on and including 50mm sand bed

100
N03-17-1 Chockfast black epoxy non shrinkable grout under bed plates

100

I have to make a confession here. I am not a civil engineer. I have used a section of a real life BOQ. This format is similar to many engineering projects that are based on material/quantity.

The 3 responses from vendors are:

id quantity VendorA (rate) Vendor A (cost) Vendor B (rate) Vendor B (cost) Vendor C (rate) Vendor C (cost)
N01-1-1 100 300 $30000 100 $10000 200 $20000
N02-5-1 100 200 $20000 200 $20000 100 $10000
N03-17-1 100 100 $10000 300 $30000 300 $30000
Total $60000 $60000 $60000

Now you see that the final figure of $60,000 quoted by 3 vendors have different break up. In a complex project, understanding the loading is very critical to success of the project. In any complex project, it is impossible to estimate the quantities of line items. Some items will vary more than others. If the chosen vendor has quoted higher price for that particular line item, the cost will be much higher than choosing another vendor who has quoted a lower price for the same line item.

Prescription glasses:

I will explain a 3 step approach to systematically analyse a vendor response. We have developed a tool, Kloudax Comparison Assistant (www.kloudax.net.au/software) which streamlines the process steps. However, you can still use the process using Excel spread sheet.

  • Step 1: Understand the vendor final cost break-down
  • Step 2: Estimate the possible variations in the quantity
  • Step 3: Conduct a “what if” analysis based on quantity variation

Step 1: Understand the vendor cost break-down

As you can see in the following table, the cost breakdown of each vendor is different. In a table format it may be difficult to read. In the comparison spreadsheet, you have to highlight the differences.

For example, in the following “heat map” the vendor line item breakdown is visually shown. The tool highlights the lowest price for each line item.

Step 2: Estimate the possible variations in the quantity

This is an interesting bit. Based on your experience and historical data, you have to estimate the variations. It may not be sound as difficult as it initially appears. For example, you may estimate the concrete for foundations can vary by 20%, whereas the paint for the walls may vary only 5%.

The typical BOQ will have hundreds of line-items. You need not estimate the variations. Especially in step1, will give some insights of how each vendor is positioning.

For our hypothetical case study, let us assume the following variations:

id quantity Quantity variation percentage Varied quantity
N01-1-1 100 10% 110
N02-5-1 100 20% 120
N03-17-1 100 30% 130

Step 3: Conduct a “what if” analysis based on quantity variation

When we apply the estimates in quantities, the final quoted figure changes for each vendor.

We see that if the quantities are varied the following figures are obtained:

Vendor Estimated figure
Vendor-A $70000
Vendor-B $74000
Vendor-C $73000

The tool allows you to visually see the estimated quote based on different “what if” scenarios.

Want to trial KCA tool?

If you are not a fan of Excel spread sheet and want an elegant solution for comparing vendor responses side-by-side, please contact us. We are very confident the features will blow you away. For example, you can directly upload BOQ in Excel or word document. When you load the vendor responses, instantly the comparison heat map is created. In addition, the tool has advanced features to evaluate the “value” and provides a cost-value analysis.

You can either send us a sample BOQ and we will show a sample output. If you want to play with the tool yourself, we can create a test account. The tool is currently at a beta testing phase. So, there is no cost obligation from you.

Contact: info {at} process-symphony.com.au

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About Murali Ramakrishnan

Murali is the Managing Director of the boutique consulting firm "Process-Symphony". Process-Symphony specializes in IT enabled business process orchestration. http://www.process-symphony.com.au http://www.kloudax.net.au

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