In the long running game show series The Price is Right, contestants vie for the opportunity to win prizes by coming the closest to what the true price of the product is. In many ways the procurement process reflects aspects of this but hopefully only when all the other components have been negotiated.Unfortunately too often organizations weight the price of a product or service too highly compared with the quality and other aspects that severely affect the total cost.
You see cost and price, although often lumped together are two infinitely different parameters from which to define the best alternative.
Price focuses only on the actual dollars paid, while a cost matrix considers all elements which can eventually render the actual price meaningless.
In procurement, price should never be the deciding factor -- it should be what is called the total cost of ownership(TCO), or the total deliverable cost (TDC).
What goes into TCO or TDC? Items such as:
- Quality of product or service, which can be determined through references, piloting the product/service etc.
- Warranty provisions
- Total scope -- is one firm only providing the basics and then "nickel and diming" you on minor additions to the scope?
- Flexibility to adjust to changing business needs
- The ability to re-negotiate pricing throughout the term of the contract based on fluctuating demands and also the price that the product demands in the market place
- Servicing of the account -- response to issues
- etc., etc., etc.
When Monty Hall asked contestants to pick Door Number 1, 2 or 3, they did so blindly and often
they could end up with a donkey and cart (with Jay in whatever weird costume he was in at the time). This could very well end up being the door an organization chooses if they focus on the price rather than all the other parameters that go into defining the cost!
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