Understanding Pricing and Bidding Strategies

Objectives

After completing this lesson, you will be able to:

  • Identify key differences between total cost and Bid Transformation Events

Total Cost

Total Cost requires its own template, and is available in both auctions and RFPs.

How Is Total Cost Helpful?

Total cost events enable you to include factors other than price, such as shipping costs, taxes, and the cost of switching to a new supplier.

You can configure different values for cost components for each supplier or participant (participant-specific values).

Add Item screen. Set participant specific initial values is highlighted. Item Participants area is highlighted.

Adding Cost Terms

The total cost can be expressed in a formula, such as: Price * quantity + shipping + taxes + switching

Project owners can add terms to line items and choose from a standard list, the Term Library or create new terms.

Add Terms from the terms list.

Total Cost Example

For example, there’s no switching overhead for suppliers you already work with (incumbent suppliers), so for incumbent suppliers you assign a zero value for switching.

You determine whether the values for cost factors are to be provided by the suppliers during the event. You can also choose whether you want suppliers to see only their own rank, their own rank and the lead bid, or all supplier responses.

Supplier ranks are based on the unit cost. Suppliers see their total cost and unit cost. They also see the cost terms that you made visible for them.

Bid Transformation

Bid Transformation can compare your total cost for each bidder when prices and other components vary widely. Bid transformation allows you to transform participants' bids by adding cost terms you define.

These terms can be different for different suppliers, such as adding an import duty for one supplier and a switching cost for another. Yet it enables each bidder to see a "bid to beat" that is adjusted for them.

How Is Bid Transformation Helpful?

Bid Transformation is useful for:

  • Helping you to fairly and consistently factor the differences between suppliers and their offerings into your awarding decisions.
  • Bringing dissimilar suppliers and their offerings into competition.

Strategy:

The strategy of bid transformation is to cause suppliers to compete on your costs, in a way that brings suppliers into competition with one another and create a new, unified market.

When quantifying your factors, it's important to understand the difference between soft and hard costs.

  • Soft costs are costs based on perception, judgment, or experience; costs that aren’t quantifiable.
  • Hard costs are quantifiable costs or expenses.

Creating Terms in Bid Transformation

When creating line items, cost terms are used to transform suppliers' bids into your costs.

Project owners can modify existing cost terms, or create new terms, such as adders, subtractors, multipliers, and percentage discounts.

The basic formula is: Your cost = (price * multipliers) + adders.

When creating cost terms, verify that they’re behaving as you intend by validating the changes in suppliers’ ceiling price by using Supplier View under Actions.

Bid Transformation Example

  • There's an import duty of eight percent on parts from Company A, A.K. Consultants.
  • There’s an import duty of five percent on parts from Company B, Apex Corporation.
  • The ceiling price for a crate of parts is $10,000.
  • The bid decrement and buffer values are all $100.

When A.K. Consultants starts bidding, they see a ceiling value of $9,259.25. They don’t see the eight percent that you add to make the ceiling price of $10,000. The bid decrement they see is $92.60. Note that the bid transformation feature has transformed both values to hide the cost component you added for them.

The highest bid A.K. Consultants can submit is $9,259.25.

When Apex Corporation logs in to bid, they see the leading bid and the required decrement transformed into their own terms.

The required decrement is $95.24. When the bid transformation adds Apex Corporation’s transformation of 5 percent, it comes out to about $100. At this point A.K. Consulting sees the leading bid as $9,166.65.

The buyer sees these bids as the adjusted costs. So, bid transformation transforms participants’ bids into your total cost as an adjusted value that’s different for each participant.

Key Differences Between Bid Transformation and Total Cost Events

Total Cost

  • Participants can edit cost components.
  • Participants bid on the item price and other cost components that contribute to the total cost.
  • The cost components aren't hidden and all participants see the same bid-to-beat.
  • The bid decrement value isn’t adjusted.

Bid Transformation

  • Participants can’t edit cost components because they aren't visible to them.

    The project owner can set up cost components that modify bids to arrive at a total cost. Participants can’t see these cost components.

  • The cost components can be different for different suppliers (switching cost, import duty, shipping costs, custom terms).
  • Bid transformations have only one cost component to bid on as the other cost components aren’t visible to them.
  • The bid-to-beat is adjusted for each participant according to the cost components that you added.
  • The bid decrement value is adjusted for each participant, so that each sees a different bid decrement value.

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