Cost-benefit analysis (CBA) in procurement decisions

CBA is a systematic approach used to evaluate the economic and financial implications of purchasing goods or services. Here’s how it generally works:

1. Identify Costs and Benefits

Costs: These include initial purchase price, maintenance, training, and any hidden costs associated with the procurement.
Benefits: These can be direct financial gains like increased productivity or indirect benefits such as improved quality or customer satisfaction.

2. Quantify Costs and Benefits

Assign monetary values to all identified costs and benefits. This can be challenging, especially for intangible benefits, but it’s crucial for a meaningful analysis.

3. Discount Future Costs and Benefits

If the benefits and costs occur over time, you should discount future amounts to their present value. This accounts for the time value of money and makes comparisons easier.

4. Compare Costs and Benefits

Net Present Value (NPV): Subtract the total discounted costs from the total discounted benefits. A positive NPV indicates that the benefits outweigh the costs.
Benefit-Cost Ratio (BCR): Divide the total discounted benefits by the total discounted costs. A ratio greater than 1 suggests a good return on investment.

5. Sensitivity Analysis

Assess how sensitive the results are to changes in key assumptions or variables. This helps understand the risk and uncertainty associated with the procurement decision.

6. Make a Decision

Use the results of the CBA to make an informed decision. Consider not just the numbers, but also qualitative factors and strategic alignment with organizational goals. This approach helps ensure that procurement decisions are economically sound and align with overall business objectives.