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The Cost of Bad Procurement Process [Part 2]

The Cost Of Bad Procurement Process [Part 2]

The actual cost of the bad procurement process

Bad procurement concerns poor planning, untimely delivery, inflated product cost, failed supplier relationships, and many more.

Its consequences have many faces, which we will keep investigating. 

Earlier, we provided some bad procurement examples by researching the RFP procurement process's cost, which can outweigh the benefits of competition. 

We will study the economic effect of late product introduction, which can sometimes happen due to endless bidding and negotiations. 

Product lifecycle 

A well-known view of the product lifecycle includes four stages:
  1. introduction
  2. growth
  3. maturity 
  4. decline.
The sales and gross revenue volume will gradually increase until the stage of maturity and then take the downward trend to form an S-shaped curve.

The lifetime revenue is the area under the S-curve, which can be easily approximated by the area of a grey triangle.

Back to school

We will also remind two simple formulas: 

(1) the area of a triangle is half the product of its base and height.
(2) tangent of an angle is the length of its opposite side divided by the length of an adjacent side. 

Another consequence of a bad procurement process is the loss of revenue 

We created two triangles - one for the on-time product introduction and another for the late launch. Please find the legend in the top right corner of the slide.

The lifetime revenue in the scenario of on-time introduction is the area of a larger triangle.

The area of a smaller triangle represents the lifetime revenue upon the delayed product introduction due to procurement irregularities. 

Two simple formulas, (1) and (2), provide the respective area calculations.

The formula (3) provides the relative loss of revenue due to the procurement challenges of delayed product introduction. 

Consequences of bad procurement quantified: 4% - 34% lifetime revenue loss 

The simplicity and elegance of this mathematical model can be overachieved only by its eye-opening findings (right side of the slide.)

Only one month of procurement process delay in case of a 12-month product lifetime will result in 12% of lifetime revenue loss. 

Knowing how some tenders and then yet another "best-and-final" negotiation can take many months, we should ask ourselves if those are truly worth the loss of heavy chunks of revenue? 

Once again, this post isn't made to disapprove the competitive bidding and BAFO rounds. It would provide some means to quantify the risks of a bad procurement process in an organization.  

Please refer to the original research, "The Analysis of Pricing Strategies for New Product Introduction," for more detail and other exciting conclusions. 

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My Udemy course "Procurement Lab."

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My Udemy course "Adaptive Sourcing: Agile Procurement in Practice."

More information on this and other exciting topics can be found in "The Technology Procurement Handbook." It represents 23 years of experience, billions of dollars worth of successful sourcing projects, and 1000s of hours spent on research, analysis, and content creation for the most demanding professional readers.
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This post first appeared on The Good Spending, please read the originial post: here

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The Cost of Bad Procurement Process [Part 2]