A Scientific Approach to Price Scoring
Saurabh Limaye - CEO, Dataction
Scoring supplier responses is arguably one of the most complex and critical tasks facilitated by the Procurement team. Most companies claim to follow transparent and consistent scoring practices to arrive at a comprehensive, fact-based and fair result. However, the reality is that in many cases, the scores are either flawed or highly subjective, since the price comparison is looked at independently from the response scores.
This blog presents the case for including price as an integral part of the scoring process and also recommends some techniques to score prices.
NEED FOR PRICE SCORING
If price (converted to score) is not considered in the overall scoring process, it is impossible to arrive at a fair decision on supplier selection.
Let’s consider the situation mentioned below:
In the above example, if we were to only consider the scores for response (excluding the price factor), Proposal 4 stands as the clear winner with 7.8 points; however, it’s price is almost thrice as high as the lowest priced Proposal 2. As such, even if we look at the response score and price through a single lens, it is still unclear if Proposal 4 is truly the winner.
DECIDING WEIGHTAGE BETWEEN RESPONSE AND PRICE SCORE:
How does one go about allocating the right weightage between response and price factors?
It is advisable to decide this on a case-to-case basis, including the risk analysis such as price v/s business impact. Also, this should involve sign-off from the entire project team as this can greatly influence the outcome of the overall evaluation. For example; in case of commodity items such as stationary or cleaning consumables, price will command a much higher weightage than the response as compared to strategic purchases such as management consultancy or creative agency.
A SCIENTIFIC WAY OF PRICE SCORING
Once the weightage distribution between the response and the price has been agreed upon, a scientific method to convert comparative prices into scores has to be identified. Essentially, the price scoring method should be fact-based, statistical, transparent and consistent.
As such, to avoid any subjectivity, price scoring should not be based on collective scores from the scorers, rather it should be calculated by the Procurement using the pre-agreed method of price scoring.
Though there can be multiple approaches to calculate the price score, following three are the most recommended:
SLOW FALL: The increase in score is slower compared to the reduction in proposal cost and no proposal gets zero score in this method. This method should generally be used for non-commodity purchases.
RAPID FALL: The increase in score is faster compared to the reduction in proposal cost and a proposal can get a zero (or less than zero) score where evaluated proposal cost is 200% or more than the best proposal. This method is generally used for low-value commodity purchases.
MIN MAX: This method will score the proposals in relation to their position with respect to the best and the worst offers wherein the worst proposal will get a zero score. This method is generally used for medium-value commodity items or services.
Each of these approaches has its own use cases and the decision on the choice of approach should be taken on the tendered scope. However, if unsure, the average score from all three approaches could be used.
Let’s consider the example below, to understand the price scoring pattern from these approaches:
Going back to the earlier example, if the price score is included in the overall score, with an agreed weightage of 70% on Response and 30% on Price factor, then the overall score will be as follows:
As such by including Price score in the Overall scores it is absolutely clear that the Proposal 3 is the winner.
In essence, Procurement team acts as a gate-keeper for fair evaluation of the tender proposals. To make this entire process fact-based and transparent:
Price scoring should be an integral part of the scoring process.
Allocation of weightage between Response and Price factors should be finalized by the entire project team, before the launch of the tender.
Statistical and consistent method should be used to score proposal prices.