Deciding How to Decide

This post continues the thread “Why Travel Disses Procurement…And What To Do About It“. In that post I explained why procurement has a bad reputation among many (not all!) travel managers, and two steps that will help travel managers overcome this problem.  This post describes the third step.

Get Your Flu Shot

This third step is a lot like getting kids to take their flu shots.  A parent’s good sense has to overcome the kids’ impending fear of pain.  This step is the vaccination your travel and procurement team needs to fight off a nasty bout of political pushing and shoving. It may seem painful, but it’s worth it!

I’m assuming that you’ve got a good way to evaluate each supplier’s quality (typically some form of weighted ratings) and have decided who gets to vote on the quality ratings.  I’ll also assume that you can put a total cost on each supplier’s bid.

Decide Before You Get Your Bids

Note that I didn’t write “Decide which supplier wins before you get your bids”.  This step is purely about the process.  You want to agree early on how your team will decide which supplier to choose, and you want to do this before the heat of battle.

Get Theoretical

Start by agreeing that there is a logical trade-off between price and quality, in that higher-quality products generally cost – and are worth – more than the lower-priced alternatives.  You can also agree that there is a  limit to  how much you can reduce quality, just as there is a limit to how much more you’d pay for higher quality.

Now, take this reasoning down to a more tactical, yet still calmly theoretical, level.  Do this by working through these questions.  Note that the reference point (ground zero) is the incumbent’s bid and associated quality score. This means that you’ll compare each bid’s  incremental difference in quality and cost to that of the incumbent’s bid (or its current contract, if there is no incumbent bid)

  1. We’d pay (take a loss of) no more than $X to get a 20% improvement in Quality.
  2. We’d pay no more than $X to get a 10% improvement in Quality.
  3. We’d pay no more than $X to get a 5% improvement in Quality.
  4. We’d need at least $X in savings to change to a supplier of equal Quality.
  5. We’d need at least $X in savings to accept a 5% reduction in Quality.
  6. We’d need at least $X in savings to accept a 10% reduction in Quality.
  7. We’d need at least $X in savings to accept a 20% reduction in Quality.

Plot the Rejection Line

Once you’ve worked through the answers to the questions above, you’ve now got the ingredients for a simple X-Y plot.  Let’s make the X (horizontal) axis the Loss/Savings line, and the Y axis the Quality line.  Here’s what the results might look like:

Bid Rejection Line

Bid Rejection Line

You’ve now got a good basis for putting each supplier’s bid into the proper context.  You can immediately reject any bid below (to the south and west) of the line, assuming that you’ve got at least one bid on the “Consider” side.

This doesn’t really tell you which bid you should take, but in general, the bids that are closest to the upper-right corner are probably the best value.  Value, of course, is in the eye of the beholder.  That’s why you should definitely make time (again,  before the bids come in ) to decide how you’ll measure quality.

All Suppliers Look the Same?

What happens if you’re buying in a category that doesn’t offer much differentiation in quality?  It makes it tough to use this approach.  If you’re sure that you’ve got the right dimensions, appropriate weightings and have given good (meaning thoughtful and unbiased) ratings, then you need to use a slightly different approach.

The good news is that you’ll still make use of the Incremental Loss/Savings calculations.   I’ll post the rest of the story, Valued Reader, later this week.

This entry was posted in Airlines, Data, Travel Management, Travel Procurement and tagged , , , , , , . Bookmark the permalink.

3 Responses to Deciding How to Decide

  1. Pingback: Why Travel Disses Procurement… « Gillespie's Guide to Travel Procurement

  2. Pingback: When Travel Suppliers Look The Same – Beware! « Gillespie's Guide to Travel Procurement

  3. Pingback: Travel Procurement Workshop at NBTA 2010 | Gillespie's Guide to Travel+Procurement

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s