As a sourcing or procurement professional, if you have ever worked with a stakeholder on a project where the supplier was highly service oriented (or a heavily favored incumbent), you’ve probably heard the following:

“We know we could get a better price, but this supplier just provides so much value. You can’t put a price on value.”

Well, actually you can put a price on value. It’s 12 cents per widget. In all seriousness though, value is not as hard to define as stakeholders may want it to be. They want value to equate to service levels. But as described in the illustration below, it is a factor of both service level and cost.

Using this formula, you can see that as service levels go up, and cost stays the same, overall value increases. At the same time, if service level stays the same and cost goes down, value will increase.

Conversely, if service level goes down and/or cost goes up, overall value declines.

Think about buying a car. Cars traditionally rated top of the line in terms of value are rarely those with the highest cost, nor the most bells and whistles. Instead, they are the ones with the right level of features, including safety, reliability, fuel economy, etc, for the given price. They are not the cheapest cars on the market, nor are they the highest price. Maybe I’m not in the right social circles, but I have never heard someone to refer to a Porsche or a 7-series BMW as a “Best Value” vehicle. Mitt Romney may beg to differ.

Yet in business, non-savvy buyers often consider the suppliers with the highest price the ones that can provide the most value. Why is this? Probably because they are confusing value with service levels, relationship, or the overall good feeling the get with when receiving support from a given supplier. As sourcing professionals, it’s our job to shift the conversation away from the intangible “value” they describe, to the more tangible value – which is a factor of both the service level a vendor provides, and the cost they charge to provide it. Without both, your stakeholder doesn’t have a solid business case for vendor selection.
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Joe Payne

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