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08 Mar 2018 | Filed under: Procurement | Tagged:

What is the right price to pay?

As a procurement specialist I often have meetings with FDs who tell me that “you can’t save us any money, we are already getting the best price in the market”. When I hear this, it is music to my ears because they are simply looking at procurement as a one-dimensional exercise and focused purely on the unit price of the items they purchase.

So, what is the right price if it isn’t the cheapest?

Well contrary to popular belief, price should sit some way down your priority list before you can determine you are paying the right price for anything. The very basic areas you need to consider first are as follows:

Quality – does the product, service or component tick all your boxes for quality? If it doesn’t then keep looking until you find the right specification to meet your needs. Compromising on quality leads to high levels of rejects, items having to be reworked and possibly customer complaints because, despite your best efforts, poor quality will filter through to your customers. Poor quality costs you more in the long run, so is it worth paying more for?

How much you are buying – the quantity you want to buy needs to be clearly defined. Bulk buying will give you the opportunity to negotiate discounts, however it costs more overall to transport and store. Dependant on value, there is also the risk of damage or theft in transit. Alternatively, you can buy in small quantities, but then the transportation cost per unit increases, there are no bulk discounts, and there are increased staff costs for unloading and loading stock as it arrives. This also applies to services purchased. How frequently the service is used and by how many will have a bearing on the final price you pay.

Delivery –where and when you want the items delivered is often overlooked. In this age of global sourcing on the Internet, it is relatively easy to buy from abroad, however this can incur additional costs and usually takes longer to arrive. Plus, you have the risk of it being damaged in transit, so you may need to consider insurance and transportation/packaging costs. Alternatively, you could buy local, reduce your delivery time but you may pay slightly more for the privilege. You must have a clear understanding of how quickly you need the goods and the impact of it not being available.

Only after you have considered all these areas can you then carry out an effective tendering exercise that encompasses all of these and any other service level standards, regulatory requirements and organisational policies that must be fulfilled. The outcome of this will get you closer to what truly is the right price to pay.

If you have a project in mind and need any advice on how to get closer to your “right price” then please get in touch.

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