The Cost of the 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 

  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. 


Revenue loss due to late market entry

Bad procurement process aftermath: 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.  

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

P.P.S. If you appreciate hundreds of hours invested in researching and writing this blog, you can buy me a coffee or subscribe for the membership by following this link. Thank you!

Buy me a coffee

                                          https://www.buymeacoffee.com/ukrsedo


Follow this blog banner
To keep receiving new insights and research, please subscribe here. 



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.
The Technology Procurement Handbook front page
 


  






Comments

Post a Comment

Popular Posts

The Importance of Supply Chain Collaboration

Image
  Why is supply chain collaboration essential? Once, I was asked what makes the supply chain important to a company. Our profession may not be rocket science. Other peers around the company overlap with us in their functions - Technology tends to manage suppliers , Finance owns the demand planning and budgeting , and Sales and Marketing monopolize the end-customer value chain.  These and other colleagues do not always appreciate us; some believe they are even better at our job.  Shadow procurement, supply chain, and logistics have become standards for many companies.  However, some critical differentiators - like collaboration - justify the very existence of our profession!  The supply chain is the most collaborative function in the business.  We find peers everywhere, even behind enemy lines. We welcome any opportunity to form a cross-functional team with anyone who can bring business value through supply chain strategies, sales  and operations pl...
Read more

The National Program of IT as the Alter-Ego of Procurement

Image
" One of the worst and most expensive contracting fiascos in the history of the public sector ." Some real-life cases only require a little reflection to understand that the project was predefined for failure well before its launch. Can we make appropriate conclusions to prevent that from happening again?  The first step is to deepen our study of such cases beyond populistic cliches.    NHS IT System (2001-2011) The national program for IT in the health service is the largest civilian computer project in the world. It was spawned in late 2001 and early 2002.  A far-reaching vision set out a program to transform people's healthcare experiences. Hospital admissions and appointments would be booked online—the choose-and-book system. Pharmacists would no longer struggle with GPs' indecipherable handwriting, and drug prescriptions would be handled electronically. Politicians set the duration of the program at two years and nine months from April 2003 until December 2005...
Read more

My Q&A on Agility for "Trusted Magazine" (December 2023)

Image
The source link . How could you describe your career path in a few words?   I worked in procurement for 22 years - telecom, airline, railways, public infrastructure services and consulting industries, and multiple geographies. I’m a Fellow of CIPS and an author of “ The Technology Procurement Handbook ,” where I tried to share my passion for what we used to call “IT Procurement.” This is where I started digging deeper into the Agile agenda , thinking of finding repercussions with our professional life and blogging on related topics.      How do you think agile practices have transformed companies over the past two years?   I assume that Agile practices in procurement are hyped more than used : many companies still mandate the use of the RFx as the sole answer to any emerging sourcing requirement, many fear or don’t appreciate the demand management, and digital transformation frequently happens without any comprehensive strategy and benefits trac...
Read more