PeopleSoft Strategic Sourcing: Total Cost Modeling
We discussed in my previous blog about bid factors weighting and scoring. Today, we will review total cost modeling which allows bids to be analyzed based upon price, best score and lowest total score. In simple language, total cost modeling allows the flexibility to make the best decision for award. PeopleBooks has some good information and easy to understand examples for this, so we will use those examples to demonstrate how total cost modeling works. When we get to the point of discussing creating events, bidding on events and ultimately analyzing events for award, we will see and demonstrate how total cost modeling functions.
Here’s what PeopleBooks has to say:
By using total cost modeling this feature we can designate cost contributions for bid factors. Depending on the type of bid factor, costs can be calculated based on the bidder’s bid price, the bidder’s bid quantity, a predefined cost range, or a user-defined cost. The system can then calculate a cost related to each bidder’s response to a bid factor, as well as total line cost and total event cost. This information can then be used either during manual analysis, or by the optimization engine to determine an ideal award.
The following example illustrates how the cost modeling can be used. You are purchasing an item that has a warranty bid factor associated with it. You are asking the bidders to indicate the length of warranty provided for the item, with a range of one year to five years. The longer the warranty period provided, the less your organization will need to pay for maintenance and repair costs. You determine that each extra year of warranty provided saves your organization $50 in maintenance and repair per unit. You can assign this cost to the warranty bid factor so that the total cost for this bid factor will be calculated based on the bidder’s response. One bidder may bid $1,000 per unit but only provide a one-year warranty, while another bidder may bid $1,100 per unit but provide a five-year warranty. Even though the first bidder has a lower bid price, the second bidder will have an overall lower cost because the bidder is providing the full five-year warranty.
Here is another example that we will actually show and demo in a future blog. It is an easy scenario to understand with only a header bid factor and the price bid factor at the line level. In this scenario we have one question at the header which is a warranty question. The best warranty is 5 years and the worst warranty is 1 year. For each year of warranty less than 5 years, it costs an additional dollar.
- Vendor A: Bids $20 and has a 5 year warranty.
- Vendor B: Bids $20 and has a 3 year warranty.
- Vendor C: Bids $20 and has a 1 year warranty.
In this simplistic scenario, Vendor A would have the best total cost at $20. Vendor B would have a total cost of $22.50 and Vendor C would have a total cost of $25. All other factors aside, if cost and warranty were the only bid factors, from a total cost standpoint, vendor A would win.
Here’s a screenshot that hopefully illustrates this in Strategic Sourcing:
(Click to enlarge)
When we start discussing creating and analyzing events in later blogs, we will show where you setup the cost factor associated with an event.
Note that for auction events, bidders can compete based on score or price only.
More next week. In the meantime, drop me an email with any questions or comments.
