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