Paying the right premium for quality

New tools to nail down your SQP

If you’re familiar with the Price Quality Method of tender evaluation, you’ll know that the power and effectiveness of this method is totally dependent on getting the right relationship between the scoring system; the weightings for the attributes and the price; and the scale (value) of the project.

The dynamic between those three factors means it is difficult for procurement professionals to achieve a balance that recognises an appropriate premium to be paid for additional quality in each (and all) of the attribute categories.

The NZ Transport Agency’s Attribute Weight Setting Tool provides a useful means to check the Supplier Quality Premium (SQP) for each attribute point, but the degree of spread in the scoring has a huge (and potentially unmanaged) effect on the overall SQP. Put simply, if the evaluators employ a scoring system that spreads the scores out, the amount paid for additional quality will be high.

If, on the other hand, the scores are awarded within a close range, then it is easy for price to dominate the decision. That may render the choice of Price Quality Method inappropriate, since quality factors become insignificant (and arguably, waste a great deal of evaluators’ time).

Put simply, the spread of the scores can have a disproportionate effect on the overall SQP unless it is managed carefully and aligned with quantifiable factors.

What’s the solution? The answer lies in the way the scoring system is determined. As long as the scoring system is based on subjective descriptors without a factual definition (such as “satisfies the requirement with additional minor benefits”), there will always be variation between evaluators depending on their personal opinion of what is a ‘minor’ benefit, as opposed to a ‘major’ benefit, for example.

The crux of finding a solution lies in establishing an agreed and pre-determined and fact-based scoring system that will yield the same results, no matter who is implementing the system. This mechanism is known as an anchored scale (described in our earlier article in this newsletter on scoring systems).

With this anchored scale providing concrete examples (within each attribute category) of major benefits or major reservations, the task is then to align those examples with potential savings or costs that could accrue as a result. Weightings of attribute categories should then be adjusted within the Attribute Weight Setting Tool so that those savings (on major benefits) or costs (of major reservations) are roughly equivalent to 25 SQP points.

Let’s explain this in more detail. How should you go about analysing the potential savings from opportunities to add value; and/ or costs associated with potential risks?

  1. First, it’s important to assess the risks and the opportunities that could apply on the project. For example, if a contract was awarded to a supplier with very limited experience in the critical aspects of the work, what additional management costs might be incurred? If a supplier’s faulty methodology resulted in environmental fines (worst case scenario), then what could those cost us?
  2. In considering the opportunities or potential areas of benefit, aim to quantify the potential benefit of specific scenarios. For example, what savings could accrue if a supplier has previous working knowledge of the project site that enabled them to mobilise in half the time, address site-specific geotechnical issues, or appoint local subcontractors quickly? What savings could be made over the life of the asset if an innovative methodology allowed for reduced downstream maintenance costs?
  3. This process of quantifying the savings associated with the difference between an average supplier and an outstanding one; or the costs associated with the difference between an average supplier and one for whom you have serious reservations, can be aligned to the 25-point difference in attribute points between those scoring bands. In other words, if an average supplier scores in the range 60 - 70; and a supplier for whom you have major reservations was in the range 35 - 45, then this equates to a 25-point difference.
  4. The SQP multiplied by 25 should roughly equate to the potential costs associated with the risk of appointing that substandard supplier, compared with an average performer.

As long as your scoring scale is then properly anchored, with factual definitions to provide benchmarks for the evaluators to achieve reasonably consistent spread of their scores, you will then achieve what you set out for. You’ll have a balanced scoring scale coupled with a supplier quality premium that will accurately reflect the premium that you’re prepared to pay to avoid the costs that may accrue from appointing a poor quality supplier.

This process requires some trial and error to achieve appropriate weightings in each of the attribute categories to reflect a suitable SQP.

However, once the exercise is done, the benefits are significant:

  • Scoring is significantly easier, faster and more consistent
  • The scoring results in an appropriate spread of SQP values
  • The SQP values provide a fair reflection of the amount that’s justified to pay for additional quality on the project.

We have templates that provide useful mechanisms and examples to help with this process. For more information, please contact us at info@cleverbuying.com or see our resource library at www.cleverbuying.com.