According to economists, value for money includes two aspects – first, the establishment of a specification and the second, finding the ‘best value for money’. The first involves the trade-off of the functionality against the cost to the buyer. It is influenced by the strategy of the firm, apart from operating relevance. Surplus Value becomes the key factor in gaining value for money in this context. Commonly, deals include a particular cost for production. It also includes a notation of ‘value’ a buyer places on the product or service. The difference between the production costs incurred by the supplier and the value notation of the buyer effectively describes the Value for Money aspect.
In order to achieve Best Value for Money, buyers have to capture Surplus Value of the deal entirely. This should ideally be in the form of Consumer Surplus. When a buyer is able to achieve consumer surplus in both types of relationships – collaborative and arm’s length , then there is creation of best Value for money.
In the case of National Audit Office, the huge number of hip replacement types proved to be purchasing processing hurdle. The organization used 63 different types of replacements, which did not work out profitable for purchasing managers. They were unable to negotiate on the prices with their suppliers. Neither were they able to gain ‘surplus value’ due to the diverse medical practices involved.
All of these management problems due to mishandling of the ‘demand’ factor often influence the “value for money” that the buying organization can achieve. There are 8 distinct aspects which influence VFM (Value for money prospects) for the organizational buyer.
When an organization has large number of suppliers, then the cost of transactions remains high, especially in the case of maverick buying. If there is frequent changes to the specifications, costs are affected.
Do not evaluate alternatives for best VFM deals, and overlook better deals in the firm.
Spend category is not assessed for restructuring, and VFM is lost as fragmented spending is not possible.
Poor management of internal demand through over-specification and fragmentation.
If selection of supplier is flawed. Leads to increase in ‘costs to serve’.
Opportunities for collaboration and value-adding relationships are overlooked.
Contingency or ‘let and forget’ operations lead to sub-optimal outcome.
VFM is lost, when supplier—facing executives are inexperienced, and are take-in by suppliers with opportunistic behaviour.
Supplier alliance can influence an organization. Case Studies demonstrate the oversight and poor OBB practices influenced purchase processes.