BB5: Criteria to evaluate Offers-Contd

Life cycle cost= Cost of Acquisition + Cost of

ownership
Cost of Acquisition


Cost of Ownership

2. Lowest total cost ownership (TCO)
Price, acquisition cost and total cost of ownership
Design Specify Request Purchase Receive Store Pay for
Install Commission Operate Maintain Service Upgrade Dispose of
PP5: Criteria to evaluate Offers- Contd
2. Lowest total cost of ownership (TCO)
Price, acquisition cost and total cost of ownership
Price: The amount of money or goods, asked for or given in exchange for something else
Acquisition costs: Include purchasing price, planning, administrative, quality and financing
costs as well as taxes
Total cost of ownership (TCO): It is a financial estimate designed to assess all direct and
indirect costs considering total life cycle cost of a product especially equipment TCO covers
the following cost elements:

Pre-transaction cost Transaction cost Post-transaction cost
Identification of needs
Investigation of supply source
Qualification and registration
of suppliers
Communication between
buyer and or supplier
Price
Administrative cost of
purchasing
Transport/delivery
Tariffs, duties, $ taxes
Invoicing & payment
Inspection & testing
Return
Follow-up correction
Installing & commissioning
Late delivery
Operating costs (energy, labor
& consumables)
Stockholding costs
Maintenance & repairs
Downtime/lost output
Wastage in production
Defective outputs
Lost customer goodwill &
reputation
De-commissioning and
disposal
Criteria to evaluate offers
3. Weighted scoring method

Evaluating offers Purchase item: Measuring equipment
Bid evaluation criteria ( and components with allocated weights) Supplier A Supplier B

Supplier C

Score Weighted
score
Score Weighted
score
Score Weighted
score
2.Technical performance
Precision in measurement(3)

4

40

1

10

2

20
2.Reliability
Low meantime between failures (3)
Low output rate (3)
Durability of the equipment (4)

3
3
4

9
9
16

2
2
2

6
6
8

3
2
3

9
6
12
3.Lead-time to delivery
Durability of the main equipment (9)

2

18

4

36

3

27
4.Supply horizon- continuity of availability spares
Offer of continuity of supply(1)
Financial stability (3)
Core product for supplier (3)
Sustainable market position (3)


3
3
4
4

3
9
12
12

3
3
2
2

3
9
6
6

4
1
3
0

4
3
9
0
5.Technical support
In installation & commissioning (2)
Training of staff-on-site(3)
Response time to queries(2)
Response time to maintenance & repair (3)


2
2
3
3


4
6
6
9

3
4
3
4

6
12
6
12

3
3
2
2

6
9
4
6

6.Life- cycle cost
List price(2)
Cost of spare parts(2)
Cost of staff training(1)
Response time to maintenance & repair (3)



1
1
1
1


2
2
1
2


3
3
4
3


6
6
4
6


4
1
2
1


8
2
2
2
Maximum score possible (564) =224 total weighted score 160 148 129
PP5: Criteria to evaluate offers-Contd
4. Value Judgment method
This method compares the merit of non-cost aspects of an against its associated costs




A
$ 610,000
D
C
B
$ 640,000
$ 560,000
$ 676,000
100%
50%
0%
C
a
p
a
b
i
l
i
t
y

N L M H
Motivation
Suppliers B offers lowest cost at $540,00
However, for an additional $20,000 (i.e.
App. 4%), supplier c offers the prospect of
much better performance, while supplier D
offer excellent performance for only $
15,000 above supplier Cs cost.
Supplier A can be quickly excluded
science it offers no benefit over supplier D
and yet is significantly more expensive.
The team responsible for making the
supplier selection recommendation needs to
decide whether supplier B, C or D
represents the best overall value


Suppliers