Price inflation is the enemy of organisations wanting to maximise the efficient use of their financial resources. A legacy Supplier recently won a Tender for the continued supply of Flooring and Carpets, reducing the pretender average property price for the supply of Flooring and Carpets from £2,022.36 to just £1,649.61 for the same quality and specification of flooring products. This is 18.4% lower than pre-tender costs, representing a total saving of £298,200.00 over the Framework Agreement period.
Less proactive organisations utilise supplier
negotiation processes that fail to leverage the greatest cost savings and
benefits as they:
·
Negotiation with limited suppliers.
·
Fail to negotiate prices annually.
·
Do not use fixed price agreements.
This can put an organisation at a commercial
disadvantage as using such restrictive negotiating techniques further raises
the question of how the organisation knows:
·
The suppliers are the best in the market.
·
It has been offered the best in terms of the
available technology.
·
It has selected the best quality/price
offering.
Open tendering is a procedure that allows an
organisation to submit a requirement for goods, works or services to an open
market, offering an equal opportunity, without any buyer or organisational
bias, to any supplier to submit a bid to supply the goods, works or services.
The main benefits of using open tendering to negotiate prices are:
·
It introduces the highest degree of price
competition.
·
The open market is the greatest innovator of
technology.
· The open market selects the highest level of quality/price according to specification.
The art of negotiation is to secure the best commercial advantage for the organisation. Utilising fixed price agreements or contracts shares the commercial risk of purchasing between an organisation and its supply base over a period, rather than traditional terms of an annual agreement or contract where the organisation alone faces the commercial risks of supplier price increases.
Maximising Cost Reductions
Organisations that do not fix the price of their purchases will incur an annual Consumer or Retail Price Index (CPI/RPI) rate increase on their costs. Allowing suppliers to increase prices annually will increase the organisation’s purchasing costs by compounding the annual increase above the free market. The alternative is to negotiate prices annually, which is time-consuming and places the most significant uncertainty on the purchasing organisation as costs may become destabilised.
Not utilising an open tender process and fixed price agreements or contracts will incur costs 7 – 9% higher (£2.1M - £2.7M) than the open market within a £30M annual budget, thus increasing the organisation’s internal cost inflation rate. Over a typical Framework Agreement or Contract budget of £120M, an organisation’s costs will increase by £9.3M - £11.2M.
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