SmartProcurement

What are the non-price criteria for determining the winning bidder and how can you use formula metrics to save your company money? We invite you to find out about this from Vladyslav Rozhanskyi, Head of SmartTender Partnership Development.

How Is the Purchase Price Formed?

Historically, procurement has become an integral part of every business. And now we are talking not only about commercial organizers. Supplier companies constantly replenish their stocks of raw materials for production, funds for administrative needs (office, water, office equipment, etc.), spare parts for units, and also use the services of contractors (logistics, information technology, repair, construction). All these costs affect the cost of goods and services sold by suppliers.

Let's simulate the situation. The buyer has the task of increasing the company's profitability. To do this, for each application received from internal customers, they monitor the market and find suppliers who can supply goods and services of appropriate quality. Then they conduct an electronic competitive reduction between the participants and get the best price due to rebidding.

Everything seems to be correct. But what have we left out? The final purchase price will not be equal to the actual cost of the lot proposed by the winner of the auction but will include additional costs (for example, logistics, insurance, customs clearance) and other important non-price factors (for example, payment terms, possible delay in payment, etc.). Will the customer's profitability increase as a result? Difficult to predict.

Therefore, we can conclude that the best price for a product or service is not always the key to a successful purchase.

What Are the Possibilities of the SmartTender Reduced Price Calculation Tool?

The SmartTender team is constantly improving the functional part of the site, relying not only on our knowledge but also on the unique experience of our customers. To further automate the procurement activities of commercial organizers, we have developed an automatic system for calculating the reduced price.

Initially, we had the task of simulating the "Non-price criteria constructor", with the help of which each customer, individually for their own needs and requirements, could create as many criteria for evaluating a supplier as they needed to fully calculate the costs of a specific purchase. But we decided to go further and received a full-fledged tool for creating the required number of individual criteria for evaluating suppliers. It allows you to build your cards of criteria individually for each tender, as well as to template specific sets of criteria for the corresponding categories of procurement and various types of tender procedures.

SmartProcurement

By creating a card of non-price criteria, the organizer of the tender independently models the page for submitting proposals for their future suppliers. Each formed criterion is a separate field on the page for submitting proposals, which the participant must fill in with the appropriate data. This allows receiving from suppliers full information about possible additional costs for the subsequent calculation of the reduced price.

How Is the Reduced Price Calculated?

The reduced price of the purchase is the price that the supplier indicated in their tender proposal but recalculated taking into account the indicators of non-price criteria and conditions that the participant offers. Let's take a closer look at how the formula works and how you can digitize the received from the supplier conditions.

Mathematically, the formula looks like this:

SmartProcurement

Everything is clear with the "Offer price" indicator – this is the cost of a product or service, which the participant noted in their tender offer. It remains to figure out what the "Correction Factor" is and how it is calculated.

SmartProcurement

The "Correction Factor" indicator in the general formula is dynamic, and its value depends precisely on the non-price criteria that we talked about above. And more specifically – on the participant's answers for each criterion when submitting an offer.

An Example of the Reduced Price Calculating

Let's imagine a situation. The customer published a tender for the purchase of sugar and, in addition to the price, fixed a mandatory non-price criterion – "Terms of payment", with options for answers:

- payment upon receipt of the goods;
- 100% prepayment;
- deferred payment of 15 calendar days.

In this case, the customer must assign an appropriate weight to each of the three options – the degree of priority of each condition for the customer when choosing a winner. By default, the total weight is 100%, so the buyer decides which priority they give to the quotation, and how much they distribute among the non-price criteria for calculating the reduced price. In practice, our customers give up to 30% weight to non-price criteria, which confirms their importance in the calculations.

To complete the example, I propose to distribute 20% of the weight between our answer options:

1. 100% prepayment is not the most favorable payment condition – therefore, I will lay down 0% of the weight for this condition.
2. Payment upon receipt of the goods is an acceptable condition, but not ideal – we will assign 10% of the weight to it.
3. If the payment could be deferred by 15 calendar days, it would be best for me as an organizer to work – therefore, I give 20% weight to this answer option.

Thus, upon receipt of a price offer from a participant, the customer simultaneously receives the payment terms offered by the supplier. This will allow you to calculate the correction factor and display the reduced price, which will visually show which supplier will be mathematically more profitable to work with.

What Are the Benefits of the Reduced Price Calculation Tool for Customers?

We have figured out how the reduced price is calculated according to the standard accepted formula, which, by the way, is also used in public procurement. But I want to note that the non-price criteria constructor developed by us additionally allows you to lay down any calculation formula for evaluating suppliers, adopted in your company, and add the required number of variables to this formula. This will allow you to automatically understand when you receive price offers, cooperation with which supplier will be the most profitable.

But remember that reduced price is a tool that allows you to find out which of the suppliers will be in the priority, relying not only on the price of products. At the same time, the price of products remains unchanged.

Summing up, I want to say that each non-price condition, according to which the participants plan to supply you goods and services, makes a significant contribution to the final cost of the purchase. Therefore, timely information and analytical assessment of the proposal, according to the experience of our customers, saves invaluable time, maximally excludes the human factor when choosing a winner, and allows you to save up to 30% of company funds.

How to Start Using Non-Price Criteria in Your Purchases?

If you are already working on SmartTender.biz as a commercial customer – contact your personal manager for information on using the reduced price calculation tool.

If you are just planning to transfer your bidding online, leave a request to connect to the site using the contacts below. After registration, you will be provided with a free 2 weeks adaptation in Smart Procurement e-procurement with the constant support of our managers.

For details, please call 0 800 75 10 10 (line No. 4) or mail rozhanskyi@smarttender.biz

Use convenient purchasing tools and be successful with SmartTender!