Common errors in the assessment of offers

Written by  Itbid Team on 23 June 2015
9 mistakes to avoid in the evaluation of offers - The offers’ evaluation is one of the key skills to develop by the buyer. Its aim is to determine the order (or priority) and the score of the bids received, as a rule, to select the most advantageous, both economically and technically.  

 

For the bids’ evaluation, the purchaser and the technicians or users must first determine the battery criteria that will be used to “measure” offers as well as what requirements must accomplish to be valid. The buyer should develop its ability to establish the most appropriate criteria for each purchase or specific need and even help technicians in preparing their.

Creating and weighting of criteria requires experience, knowledge and common sense by the purchaser, and is the basis of a correct assessment of offers. Here’s a guide to avoid making some common mistakes.

 

 

 Offers Valuation Process

1) Do not set the criteria previously or subsequently modify

Good practices tell us that the endpoints of offers should be communicated to suppliers, so they are required to be established previously to avoid subjective decisions with offers on the table. The phase of obtaining market information, previous to the request for proposals, is essential to determine which criteria and requirements are necessary. If, for any reasonable circumstances, we were forced to change the decision criteria, the change should be reported, giving suppliers the opportunity to present a new offer.

2) Establish useless or distortionary criteria

The criteria must be directly related to the object of purchase. For example, create a criterion with the solvency or economic report of the provider, for a time purchase, no repetitive and without any other risk, is a mistake that would give advantage to a financially strong supplier against another, without this implying an improvement in purchasing.

3) Confusing criterion requirement (and vice versa)

This is one of the most frequent errors. For example, we can establish (requirement) that the payment is made within 60 days. Or we could establish that the supplier choose between cash payment, 30 days or 60 days (criterion). What makes no sense is to create (payment period) a criterion if it is a requirement (we paid within 60 days). Obviously, if it sets as criterion, each option will have an economic impact on the final price. Our general advice would be to make a criterion anything may be, since the range of open options to suppliers and opportunities may arise. But be very careful with the scores given to the various options not to overestimate or underestimate the alternatives.

4) Do not penalize the unfulfilled improvements on criteria

Often, some criteria are created and give points for certain improvements that the provider can offer. Let’s suppose you are hiring a production with a lead time of 24 weeks, and we create a criterion “Execution Term” with the values “20 weeks / 22 weeks / 24 weeks” where the two first answers mean an improvement over what expected. What would happen if the winner, that won because he promised to deliver the work in 20 weeks, violates this term? It is not a mere failure because he has won the contract precisely based on an unfulfilled promise. Therefore, the contractual penalty must not only exist, but has to be aggravated when referring to a criterion of voluntary improvement.

In connection with the previous section (“Confusing criterion with requirement”) is the same case than when we set a minimum level of service, for example, 90% but the supplier offered us 95%.

5) Do not objectify what is objectified

This error occurs frequently, for convenience in the evaluation of technical criteria. Suppose that we need the chosen supplier to have certain minimum production capacity, assuming that this minimum capacity already includes a sufficient safety factor. For the sake of security of supply, the technical proposes the following score: “Minimum Capacity = 1 point; Capacity x 2 = 2 pts; Capacity x 3 or higher = 4 pts “. This comfortable and safe point of view from the technical, approach lacks rigor: it may seem reasonable; subjectivity is given both in the preparation of sections and the score itself. The solution goes through the risk analysis: What is the probability that the supplier’s capacity is insufficient? What is the economic damage -measurable- we have if such a situation occurs? The additional advantage of doing it this way is that the result will be an additive price factor (total cost) and not additional points to get. Although the theory of probability and economic impact has some of subjective, it will be always much more accurate than the original proposal. As a general rule, we must make an exercise of trying to objectify any criterion.

6) No scoring twice for the same objective reality

Interestingly, this is also a common mistake, which tends to favor certain suppliers. Suppose the following case: a company wants to hire the just-in-time service of a certain component. It establishes, as a requirement, that orders must be served within 24 hours. But also, and here comes the error, introduces a criterion such as “Distance to the supplier’s factory” which will give advantage to the supplier that it’s closer. As we see, the criterion is really unnecessary, given the requirement for delivery in 24h: a better logistics can replace a greater distance.

7) Overweight subjective evaluation criteria

When we hear that in a purchase decision, “it has been assessed the economic and technical aspects to a 50%”, we worry. And we worry because we understand that under the name of “criteria or technical aspects” what underlies is unawareness of criteria we should have previously set and subjectivity in decision. The “technical assessment” is, above all, a Boolean: “Pass/Fail”.  An offer cannot be economical assessed if is not technically competent. Or what is the same: without technical aptitude no offer cans be consider. However, if an offer is technically competent, the differences with other technically competent offers should not be too large: only small improvements and differences with an impact on our business that can offer one or the other.

Take an example of criterion which inevitably requires a subjective assessment: a report from the dealer with the proposed work plan and the affected resources. Even if we consider them insufficiently detailed, it’s reasonable and correct to ask the provider to expand the information, not give him bad score. And if after the enlargement of information we are still dissatisfied, you should declare a technically unfit offer, never supply their deficiencies in technical score with additional points obtained from an abnormally low price.

8) Avoid scoring formulas that alter the normal perception

This bad practice that sometimes goes unnoticed can alter very significantly the order or priority of offers. Suppose we have established the base price (baseline, budget amount, etc…) and what the provider offers is a discount on the base price. If we set as scoring formula: “The biggest discount offered will get 100 points, and the rest of offers, the proportion,” and we have 2 deals with discounts of 2% and 0.5% respectively, we get:

Offer 1: Discount 2% = 100 points

Offer 2: Discount 0.5% = 25 points

1.5 percentage point difference generate 75 points of difference! This is a clear example of formula with distorting effects that alter the normal perception of differences through the score. The solution for the previous example is that points should be allocated on the Total Offered (Baseline – Discount).

9) Errors with price criteria

They are the most known and studied. In our professional practice, we often observe frequent mistakes and errors in the calculation of the following factors that profoundly affect the price:

- Cost of service transition or change of supplier: it’s usually underestimated in some less complex products and services and overestimate in more complexes.

- Cost of use: for example, we cannot assess the cost of a printer without considering the cost of consumables or a machine regardless of the number of pieces/hour which manufactures or their failure rate.

- Cost of return of serve: especially in complex products or services, it has to be valued the cost of the previous supplier transferring documentation and facilitating the transition to the new provider.

IN CONCLUSION

The determination of requirements and criteria under which a purchase decision is taken is the key to the assessment of offers and, therefore, an essential element in the performance of the purchasing function. In this article, we wanted to draw attention to frequent errors made in the evaluation of offers and how to avoid them.

ESourcing systems (electronic negotiation with suppliers) of ITBID help in creating criteria and evaluation of offers, simplifying and documenting the process of negotiation with suppliers, but cannot substitute the human intelligence and experience of the professional buyer himself.

How do eSourcing solutions add value? The ITBID solutions incorporate the best practices, facilitate the transfer of knowledge, help to reduce errors, improve control without interfering with user autonomy and automate tasks that do not add value. Therefore, the best valued companies for their performance in Purchasing endow their excellent professionals with these technological systems.

 

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