Identifying the best value proposal: The challenge of vendor selection
Site Visits
At some point in the evaluation process the evaluation team should visit the vendor production
locations. This will provide an opportunity to see how the production organization is organized
and how accessible it is. When making a site visit, individual team members should be assigned
“roles” in order to help you to get a consistent evaluation. For example, you might assign one
person to ask questions on one general topic while another lags behind to see what happens as
the group moves on.
Project Justification
Another activity that should take place during the period of time when the respondents are
preparing their proposals is a review of how the project was justified and the ramifications that
this has on scheduling.
CEOs of organizations don’t like projects (large one time expenditures) unless they will
significantly improve the processes (the on-going day-to-day operations of the organization).
Thus projects which can be justified as either “strategic” (“We need it to run the organization the
way that we want to and to stay competitive”) or “tactical” (“The cost is justified by the
reduction in on-going expenditures that it will bring”) are almost always justified as “tactical.”
Thus there are specific benefits that our project is supposed to provide and there are expected to
be cost reductions or savings that will begin to accrue as each project delivery is accepted and
brought online. Therefore, there are specific “lost benefit dollars” that occur if your project does
not stay on schedule.
For this discussion, let’s assume that you have budgeted $ 4 million dollars for the work covered
by this RFP and that you are expected to deliver a completed project with all data on line and up
to date within 2 years. Furthermore, let’s assume that the payback period for the project is 4
years and that you expect to divide the work so that there will be 18 production delivery batches.
Let’s also assume that you have estimated your cost for checking and accepting each delivery
batch at $15,000. for each delivery and that you have allowed for 4 “re-deliveries” as you
prepared your project justification.
Price Quotes
Up to this point we have not talked about price or the price quotes. The evaluation process
should have sorted out any vendors who do not appear to be appropriate for the current project
leaving a group who are generally capable of accomplishing the desired results. It is important
that the project justification be reviewed and that the reference checks are both completed before
the prices (bids) are revealed so that objectivity is maintained. These “Actual Quoted Prices”
may not represent the final cost to the project which we will refer to as the “Probable Real Cost.”
Let us suppose that vendor “A” provides a quotation of $ 3,400,000, while vendor “B” quotes $
3,600,000, and vendor “C” quotes $ 3,800,000. With the high and low quotations being within
6% on either side of the median bid we can feel reasonably comfortable that our RFP and it’s
specifications have not left a significant number of unknowns that resulted in a big price range.
If
the range of the prices had been over 10% from the median, or in one price had been extremely
high or low, there would be cause to eliminate the out of range prices as being suspicious.
Now we turn to the information that we gained during the review of our project justification and
during our reference checks on each vendor. We learned that vendor “A” averaged 6 months late
on all deliveries and that the quality was such that they averaged an extra 1.5 deliveries for each
batch, thus it would be reasonable for us to conclude that they might need to make a total of 27
extra deliveries on our project.
The references on vendor “B” indicated that required an extra delivery on about half of the
batches on their previous projects and that they averaged 3 months behind the original schedule
on all of their deliveries.
Vendor “C” was said to be on schedule or within a week of the schedule across their deliveries
and seemed to need to make redeliveries on about 20% of their batches.
The following table summarizes the implication of this information.
The Actual Quoted Prices are adjusted by adding a probable cost for “lost savings” due to late
deliveries and an additional amount for the cost of checking re-deliveries. The Probable Real
Costs as shown in the bold numbers reverse the low to high order of the three vendors. You may
also want to adjust the Actual Quoted Price for other items such as expected additional legal
expense to negotiate the contract, extra cost if a Performance Bond was requested but cannot be
provided, or probable scope change requests.
In the example given above we have a clear case of the comparison of “high quality versus low
cost” and we see in this example that the high quality of vendor “C,” as evidenced by the
information gained from the reference checks, has a value that out weighs the lower quotes from
the other two respondents. This information needs to be combined with, and factored into, the
rest of the information in the evaluation process.
Careful use of a structured process as described here combined with careful, complete reference
checks can go a long way toward insuring that you make the best value selection for your
project.
