As a procurement professional one of your main objectives will be achieving value for money on purchases. One way to reach this objective is to focus on the cost of acquisition rather than the price of acquisition. Price and cost are often terms that are used interchangeably but in reality, the terms are quite different.
Cost vs Price: What’s the Difference?
Consider two people going to a supermarket at the same time to buy the same list of groceries. The price that the two people pay will be identical, but the costs may be very different. Presume Person A lives in close proximity to the supermarket and can walk there, get their shopping, and walk home. Their shopping experience takes 40 minutes.
Person B lives 20 miles away and has to drive to town in their car. Their shopping experience takes them 90 minutes.
Therefore, the cost to Person A is lower than to Person B, who loses more time out of their day, pays for more fuel, and causes more wear and tear to their car. Whilst the price is a constant, the cost varies for different people and different situations.
Applying Cost vs. Price in Procurement
When making purchases to fulfil business needs, we should consider all associated expenses of a product or service to ensure we are evaluating cost and not price.
We need to consider quality, lead time, supplier reputation, warranty, maintenance, operational expenses, carriage, insurance, and many more aspects.
Whilst the price of a procurement from one supplier may be attractive and the lowest, if the quality is low, the lead time is too long, or the supplier is engaged with unethical practices, the cost will not be attractive. However, if another supplier is offering a price that is 10% higher but the quality is better, the lead time ensures that the item arrives promptly, and the supplier promotes good conduct, their cost is more attractive.
Why the Lowest Price Isn’t Always Best
If we buy on price, whilst the initial expense to our business may be favourable, over a period of time it is likely to cost more than if we evaluated the costs initially. Lower priced procurements often come with defects, reduced efficiency, poor environmental consequences, and high operational requirements. All these elements, mean that eventually the business will have to pay out more money to either replace the item, repair the item, or cover the overheads associated with the running costs. This will offset the money that was saved on buying at a lower price.
In summary, evaluate all your suppliers’ quotations against the key areas of importance to your business such as quality, efficiency, or durability. This will help to ensure that whilst you may pay more initially, over the lifecycle of the procurement, your costs will be significantly reduced and good value for money will be achieved. This blogpost was written by Katie Jarvis-Groves, If you are interested in taking the next step in your procurement and supply career, explore our range of CIPS qualifications or contact our team to find out more.