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 pre-tender 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.
Negotiation is used to secure the best
commercial advantage for the organisation. Fixed-price agreements or contracts
share 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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