In general, the buyer’s problem is to choose the tender that not only has an agreeable price attached to it but also includes the most desirable package of attributes in association with that price.
Example: Let us consider the purchasing decision of a householder who is contemplating having new windows installed in his somewhat older house. He receives three quotes, as shown in Table 12-4, after inviting representatives from each company to quote on the job. Notice that there is a difference not only in the prices quoted but in the qualitative aspects of the offers.
Table captionTABLE 12-4. Details of Price Quotes on Windows
|
Company A |
Company B |
Company C |
|
|
Price |
$2,200 |
$1,280 |
$1,050 |
|
Frame |
Baked enamel on steel |
Baked enamel on aluminum |
Anodized aluminum |
|
Glass |
Two separate 5-mm panes |
Double 5-mm Thermopane |
Double 3-mm Thermopane |
|
Warranty |
10 years, complete |
5 years, complete |
3 years, complete |
|
Delivery |
12 weeks |
8 weeks |
6 weeks |
504 Pricing Analysis and Decisions
Which quote should the consumer accept? The answer obviously depends upon a variety of considerations, including the consumer’s financial liquidity, his aesthetic feelings and misgivings about the different types of materials and construction, the length of time he expects to own the house, and his attitude toward the risk and uncertainty associated with the different warranties. In the initial discussions with the buyer, the salesperson should attempt to find out exactly what the consumer wants and is prepared to pay for and should then tailor the bid accordingly. The essential consideration is whether the attributes involved in the different bids are worth as much (to the consumer) as the suppliers are asking. Clearly we cannot make the decision for this consumer, but we can say that if he chooses the bid made by company B, this decision indicates that he values the attributes provided by company B for that price more highly than he values the attributes provided by the others, relative to their prices.
Industrial purchasers are often required to rationalize their purchasing decisions in some objective manner in order to demonstrate that their purchasing policy is consistent with company objectives. A means of arriving at a purchasing decision (or for post hoc rationalization of a purchasing decision) is the technique known as value analysis. Using this approach the decision maker identifies the attributes that are considered desirable and which may be present in each of the bids, applies weights to those attributes in order of importance to the decision maker, ranks and scales each bidder under each attribute, multiplies the weight by the scale, and chooses the bid that has the highest weighted score.
This procedure may be illustrated in terms of the above example. In Table 12-5 we indicate that the attributes of interest to this purchaser are price, quality, delivery lag, and warranty. We presume that the purchaser values these attributes in the proportions shown by the weights. The suppliers are then ranked in terms of their performance on each attribute on a scale of 0 to 10: the better the performance, the higher the scale. Note that for price, supplier A receives a value of 1, supplier B is assigned a value of 5, and supplier C is assigned a value of 8. This reflects the fact that supplier C has submitted the lowest price, followed by the price of supplier B, with supplier A’s price a greater distance above. The scale values given to each of the suppliers need not be consecutive numbers if the attributes are different by different amounts.
The buyer then scales and scores each potential supplier on each of the other attributes, as indicated in Table 12-5. Multiplying the scales assigned by the weights
Table captionTABLE 12-5. Value Analysis in Purchasing
|
SUPPLIER A |
SUPPLIER B |
SUPPLIER C |
|||||
|
Attribute |
Weight |
Scale |
Score |
Scale |
Score |
Scale |
Score |
|
Price |
7 |
1 |
7 |
5 |
35 |
8 |
56 |
|
Quality |
4 |
8 |
32 |
7 |
28 |
1 |
4 |
|
Delivery |
3 |
1 |
3 |
3 |
9 |
5 |
15 |
|
Warranty Total score |
2 |
10 |
20 62 |
7 |
14 86 |
4 |
00 1 OJ loo |
for each attribute, we derive each supplier’s score on each attribute, and these may be added up to find each supplier’s total score over the attributes deemed desirable by the purchaser. Given this system of weighting and scaling the various attributes, supplier B has the most desirable bid, since the weighted sum of the scores is greatest.
Note: The choice of the weights assigned to each attribute is essentially arbitrary, depending upon the attitudes and judgment of the decision maker. Similarly, the ranking and then the scaling of the suppliers in terms of these attributes are at the discretion of the decision maker. Finally, other attributes may be included in the analysis, such as the supplier’s previous experience with this type of project, financial stability, quality and reputation of personnel, provision of technical or consulting services, inventory charges, and shipping policy. A different decision maker may score the same three bids differently, such that supplier A or supplier C becomes the successful bidder. 7
The importance of value analysis in purchasing is its ability to force the decision maker to rationalize and scrutinize the purchasing decision. The choice of weights, value scales, and desirable attributes must be stated explicitly and is thus subject to argumentation by the decision maker’s peers and superiors. Out of the discussion should arise a consensus of those weights, scales, and attributes that are considered consistent with the firm’s objectives. Purchasing decisions may thus be justified on this “relatively objective” basis, rather than merely on the basis of unstated preferences and assumptions. 8
From the supplier’s point of view it would be immeasurably valuable to obtain the criteria upon which the purchasing decision is made. With this information the supplier could tailor the bid price and other features such that the bid would score more highly and be more desirable to the buyer. In the previous case of the windows, the supplier should attempt to ascertain the likes and dislikes, willingness to pay for certain features, and other information about the prospective customer. In the industrial purchasing situation the potential supplier should attempt to judge which features the buyer regards as more or less important. In both cases the supplier will then be in a better position to supply exactly what is desired by the purchaser and will thus be more likely to be the successful bidder on the contract.