Value for Money Concept

·??????Value for Money Definition

Value for money is defined as the most advantageous combination of cost, quality, and sustainability to meet the customer needs in which the cost means the consideration of total cost of ownership (TCO) including the total cost of acquisitions and quality means meeting a specification which is fit for purpose and sufficient to meet the customer requirement, and sustainability means the economic, social, and environmental benefits are considered in the business case in support of the government.

·??????Importance of Value for Money

VFM is the primary driver for procurement. It is the key to ensure the optimum utilization of resources. It usually means buying the product or service with the lowest whole-life costs that is fit for purpose and meets specification.

·??????Value for Money key Components

Value for money model has many components such as:

1-?????Economic

Economic means buy what is necessary and don’t buy what is not necessary. Considering the product substitutes and the low cost sourcing countries could result in acquiring the most economical products and spending less cost than expected.

2-?????Efficiency

Efficiency is always associated with (inputs) resources. So, efficient procurement implies that the procurement resources are utilized properly.

The resources which we utilize during the procurement process are as following:

Manpower:

Manpower can be utilized by minimizing the time spent on the procurement activities through many techniques (e.g. adopting the lean processing, e-procurement). Utilizing the manpower in a proper way leads to efficient procurement process and consequently achieve the best value for money.

Machines:

Digitalizing the procurement process would minimize the utilization of unnecessary machines. Hence, the process become more efficient.

Material:

Organization are trying to minimize the material used in the procurement process these days. However, more proper utilization of the material would contribute in making the process more efficient.

Mother Nature (Environment):

Each procurement process should consider clean environment to support the government’s efforts and save the societies from the pollutions.

Money:

Money is the most important factor in the process. Therefore, well spending on the procurement process would have a major impact on the process efficiency whether the money will be spent on the process procurement process activities and resources or on the purchased product and services. However, the quality shall be well considered.?

Time:

Time is key player in the process efficiency. Utilizing the time properly by focusing on the most important activities and spend more time in reviewing the high value items instead of spending the time on the low value items would make the process more efficient and ensure the high value items are well managed. Also, considering the use of blanket purchase orders and framework agreement would contribute on minimizing the time spent on the procurement process.

Finally, the combination of efficient resources would help eliminate and reduce the administrative works and time. Hence, the organizations will spend well and maximize the value for money out of the procurement process.

3-?????Effectiveness

Effectiveness is always associated with results and outputs. So, if we get the desired result as outcome of a process then we can say that the process was effective.

There are five rights of procurement which imply the process was effective. These five rights are expressing the basic objectives of procurement and supply and the general criteria by which the procurement performance is measured.

Below is a brief of the five rights of procurement:

??Right quality

Obtaining goods which are of satisfactory quality and fit for their purpose (suited to internal and external customer’s needs), by:

o??Accurate specification of requirements and quality standards.

o??Supplier and buyer quality management.

If the right quality is not achieved:

o??Stock may have to be rejected or scrapped.

o??Production machinery may be damaged.

o??Finished products may be defective and have to be scrapped or re-worked.

o??Defective products may reach customers, resulting in recalls, returns, compensation claims, lost goodwill, damaged reputation.

o??The firm will incur high costs.

??Right Quantity

Obtaining goods in sufficient quantity to meet demand and maintain service levels while minimizing excess stock holding (which incurs costs and risks), by:

o??Demand forecasting.

o??Inventory management.

o??Stock replenishment systems.

If the right quantity is not achieved:

o??Insufficient stock may be held to meet demand.

o??Stock outs may cause bottlenecks or shutdowns in production; costs of idle time; late delivery to customers; lost credibility, goodwill and sales.

o??Excess stock may be ordered and/or held: tying up capital in ‘idle’ stock; wasting storage space; risking deterioration, theft or damage; risking obsolescence or disuse; incurring ‘holding costs’.

??Right Place

Having goods delivered to the appropriate delivery point, packaged and transported in such a way as to secure their safe arrival in good condition, by:

o??Distribution planning.

o??Transport planning.

o??Packaging.

If the right place is not achieved:

o??Goods may be delivered to the wrong place, creating delay and correction costs.

o??Goods may be subject to unnecessary transport and handling (and related costs).

o??Goods may be damaged, contaminated or stolen in transit.

o??Transport may cause unnecessary environmental damage.

??Right Time

Securing delivery of goods at the right time to meet demand, but not so early as to incur unnecessary inventory costs, by:

o??Demand management.

o??Supplier management.

If the right time is not achieved:

o??Goods may be too late, causing production bottlenecks (and associated costs) and/or delays in delivery to customers (with costs of damages, lost business).

o??Goods may be too early, causing undue risks and costs of holding inventory.

??Right Price

Securing all of the above at a price which is reasonable, fair, competitive and affordable. Ideally, minimizing procurement costs in order to maximize profit, by:

o??Price analysis.

o??Supplier cost analysis.

o??Competitive pricing and negotiation.

If the right price is not achieved:

o??Suppliers will be free to charge what they like, without checking.

o??Supplier’s profit margins will be ‘squeezed’ unfairly, leading to insecurity of supply.

o??Materials and supply costs will rise.

o??Profits will fall – or prices charged to customers will have to rise (losing sales).

o??There will be less profit to motivate shareholders and re-invest in the business.

It is worth mentioning that there are other rights which can be considered for effective procurement such as:

Right relationship

Right sources

Right Process

Considering all the above means the organization will spend its fund wisely and maximize the value for money for the procurement process.

4-?????Equity

The equity in procurement help spread economic development to all area and allow it to express its value of inclusion. Equity in procurement means the money spent should benefit all equally and fairly.

·??????Conclusion

Achieving value for money in the procurement process requires competent professional able to follow the right procedures of the process and ensure all concerned parties are involved.?