Procurement 101

The Low Cost Illusion: Don't Be Blinded By Misinformation

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Written by

Majdi Sleimen

The Low Cost Illusion: Don't Be Blinded By Misinformation

We are susceptible to illusions, even if we naively believe that a so-called rational mind makes us impervious to such deception. There are countless examples that illustrate the unpleasant consequences of being seduced by a low cost: that ridiculously cheap plane ticket means three long layovers, additional baggage fees, and no inflight meals, while a scandalously affordable piece of real estate is less than a mile away from a factory that manufactures industrial sulfur products. To put it another way, many have succumbed to a plate of $5 oysters that later demanded an offering to the porcelain gods. Perhaps all that glitters isn't gold?

These personal repercussions are insignificant when compared to the devastation caused by corporations that don't use a Technical Evaluation Score (TES) or overlook the Total Cost of Ownership (TCO) when purchasing goods and services. As a result, expenses may accumulate, reputations might be tarnished, and customers can easily be lost. The intelligent approach to ensuring your business will be able to negotiate optimal terms with suppliers (and remove the risks associated with the low cost trap) is by using both TES and TCO in combination with a regular bidding or sealed bidding process. Purchasing with these 3 strategies in mind allows you to get the highest value for your investment.

Let's investigate the 3 tactics for exposing the low cost illusion...

  1. Technical Evaluation Score (TES)Input from individuals with technical expertise is a necessity, especially when purchasing highly complex items. Buyers can compare suppliers' offers to predetermined criteria according to the Statement of Work (SOW), or product quality specifications, as a method of ensuring fulfillment and accuracy. An offer's success can be rated on a scale of either 1-10, or simply 1 for qualified and 0 for disqualified, depending on preferences. Using a TES is an excellent way to promote transparent purchasing (the kind that doesn't involve smoke and mirrors).
  2. Total Cost of Ownership (TCO)It's easy to be misled by a quote, especially if not all costs are apparent at the start. When offers cannot be viewed at the same level (in a comparative format) purchasing departments are susceptible to unpleasant surprises. Why not reduce the likelihood of this outcome and consider the TCO? There's no reason to be fooled by your own lack of information!
  3. Sealed BiddingIf the end goal is to obtain the best offer from a supplier (or suppliers) who can accommodate your purchasing requirements, it's crucial that all parties collaborate to reach an ideal outcome. The buyer's team and participating suppliers could both benefit from sealed bidding, which allows suppliers to anonymously ask questions (and make suggestions) in an open discussion room up until a predetermined date. The result? Buyer's needs can be met at the lowest illusion about it.

"But wait," we hear you shout, "does this mean I'll never be able to purchase anything at a low cost without worrying about poor quality and hidden fees?!" Don't panic, there's still hope for securing genuine low costs that aren't an illusion, thanks to a concept known as disruptive technology. In brief, this encompasses any technological advancement that has displaced established technology, or "shaken-up" an industry. Most noticeably, cloud computing and big data technologies are continuing to "disrupt" developments in Supply Chain Management software. As a result, effective tools are now available for procurement professionals at a fraction of the cost of legacy software. It's safe to bet that these value gains will only multiply across an organization (which is a pretty magical outcome if you ask us).

If this blog has piqued your interest, check out Tradogram - no illusions required to summon procurement management tools when innovative technologies are in the bag.

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