Price versus service is a conundrum as old as the hills, but it remains one that organisations frequently fail to get right when going out to tender.
Too often, say experts, too much emphasis in the final decision-making is given to price when ultimately a greater focus should be on issues such as value added service delivery, account management and product innovation as well as many other features that are key to a successful supplier relationship.
As Carl Stephens, a procurement professional and director of supplier management at Venson Automotive Solutions, says: “Bad procurement people will talk about price; good procurement people will talk about value for money.”
Price is a false economy
He says: “When scoring a tender response, price will be 25-40% of my scorecard in terms of capability.
"Anyone who scores more than 50% for price – unless it is a very simple commodity – is missing a trick and making price too important. There are so many other things in supplier relationships that will be ignored by scoring price so highly.”
Basing fleet decisions on price is therefore a false economy. However, even if price is the ultimate arbiter it is essential to evaluate all the pricing options with the right weightings, according to Stewart Whyte, managing director of leading fleet consultancy Fleet Audits.
Frequently called on to help organisations to manage tender exercises, Whyte says: “If you know you’re going on price, make sure you can evaluate all the pricing options with the right weightings.
"Saving £5 a month on the lease rate of each of 200 Vauxhall Astras outweighs a £100 a month saving on the boss’s Jaguar.”
A Fleet Audits’ assessment of tender responses will typically include about 60 separate lines for analysis, all weighted and scored in agreement with the client.
“In general, price should seldom be more than 50% of the total weightings in the scoring,” says Whyte. “For services like contract hire or accident management the quality of delivered service is very important and needs to be factored in.
“Do not underestimate the ongoing need to monitor contract performance against measurable standards. The account management aspects of the contract are a critical part of the whole deal.”
It’s a view shared by Julie Boyd, managing director of TR Fleet and chairman of the ACFO Midland region, who handles tenders on behalf of clients.
“When assessing tender responses cost reductions are the easiest to see and to mark, while service delivery and innovation is more difficult,” she explains.
“It is vital to keep in mind the business objective of the tender and it is not all about price. Selecting a supplier purely on price can create a lot of problems.”
It is always worth investigating how a supplier may be able to deliver value for money compared to its competitors.
For instance, says Steve Whitmarsh, managing director of RunYourCars.com, an organisation for businesses which uses its collective buying power to secure best terms for fleets while also taking account of service: “Technology may be employed to reduce overheads thus passing savings on to customers.
"The use of online trading platforms such as Epyx’s 1link is a good indicator of this.”
Fleet Operations’ founder and managing director Ross Jackson calculates that savings of up to 10% over a three or four-year vehicle operating cycle are typical through the delivery of managed multi-supplier fleet solutions, which is the company’s speciality.
However, Jackson says there is a misunderstanding by companies when they ask in tenders for respondents to deliver cost savings.
“Organisations are perhaps looking to cut their fleet budgets by 10%, but what they forget is that since acquiring cars three or four years previously prices have increased.
"But there is no doubt that savings can be achieved by improving efficiencies and analysing where costs can be avoided particularly around vehicle maintenance, servicing and fuel management.”
Ultimately, however, as Whitmarsh says: “You generally get what you pay, and if a supplier can significantly undercut its competitors there is usually a very good reason for it.”