Buying the Cheapest – The Biggest Myth about Procurement
Writing off Procurement as the department that finds things for the cheapest price is to write off a complex and important decision-making mechanism that expertly considers several vital factors over “buying cheapest”.
It is saddening how some organisations still think the only idea of Procurement is to buy the cheapest. This leads to numerous erroneous opinions about Procurement function and profession in general. Because of this myth, other departments within organisations try to avoid Procurement department while making strategic decisions. Consequently, in many instances those departments face numerous problems, such as poor service, substandard deliverable, late performance and even disappearing vendors.
It is important to instruct our colleagues and duly inform them about the role and significance of Procurement function in any organisation. It is important to bust Procurement myths.
First, in Procurement profession we do not even use the words “cheap”, “cheaper” or “cheapest”. These are banned words. Because the word “cheap” reflects many attributes, including quality. We say “lower in price” or “lowest-priced” or “less expensive” or “least expensive”.
Second, we never look at the price of goods, works or services, if we are not satisfied with the quality. Even if the price is $0.00. We are simply not interested in seeing the price of a bad quality product.
Third, we do not consider price if delivery schedule and delivery conditions are not what we requested. I.e. if medicines or other vital products are going to be delivered long after they are needed – why do we bother about the price at all?
Forth, most often we give zero attention to price if the company offering products or services is not qualified and reliable. Some exceptions might apply for new technologies, know-hows and monopolies.
Fifth, we do not consider price if a bidder disagrees with terms of the contract we envisage.
Only after all these criteria are met, Procurement starts reviewing, comparing prices.
So, in practice, we might review the prices of only 4 offers out of 20 offers received. The remaining 16 would be filtered out because of the criteria above that come before price.
But, there is “one more thing” (© Steve Jobs). Even comparing the prices at this stage does not mean the contract will be awarded to the lowest-priced offer. Buying organisation might have several other preferences, for example awarding the contract to a greener or more sustainable enterprise, or giving a preference to an SMEs, or local business, or businesses run by women, etc.
In other words, price is just one of those numerous factors Procurement considers.
Additionally, it is vital to acknowledge that while sourcing best value for the organization, Procurement wears two hats:
The first hat is for dealing with the final recipient of the product or service. Procurement needs to listen carefully and understand all the details and peculiarities of the final deliverable. The price of a mistake here is too high. Any concerns or alternative solutions should be properly discussed before going to market.
The second hat is for dealing with vendors. Here procurement needs to obtain the maximum value for the organisation, while keeping the vendors interested and motivated.
Negotiating in two fronts is difficult, but no one said Procurement is easy. Procurement is a complex and important decision-making mechanism that evaluates risks and offers solutions to guarantee the best value for money. It is certainly more than just buying the cheapest.
This article is based on series of lectures by Levon Hovsepyan organised in 2008-2014
This article was originally published on June 9th, 2020. Source: Procurement.org and has been republished here with permission.
