Appendix 1 — GOODS_MANUAL

2.0Total Cost of Ownership 1. While the value of a product covers all components of value over the “Whole-Of-Life” (WOL), the costs incurred on the product should also take into consideration the total of various elements of costs incurred over the WOL of the product. For this purpose, future costs are discounted to present value (not to be confused with the value we are discussing – this is a financial discounting concept). For example, it would not be prudent to buy a cheap car that has a high cost of operating. This is called WOL, “Life-Cycle-Cost” (LCC), or “Total Cost of Ownership” (TCO). The last is a preferred nomenclature in procurement and is defined as the total of all costs associated with a product, service, or capital equipment that are incurred over its expected life. Typically, these costs can be broken into four broad categories: a) Procurement price. The amount paid to the vendor/ contractor for the product, service, or capital equipment; b) Acquisition costs. All costs associated with bringing the product, service, or capital equipment into operation at the customer's location. Examples of acquisition costs are sourcing, administration, freight, taxes, and so on; c) Usage costs. In the case of a product, all costs associated with converting the procured part/material into the finished product and supporting it through its usable life. In the case of a service, all costs associated with its performance are not included in the procurement price. In the case of capital equipment, all costs associated with operating the equipment through its life. Examples of usage costs are inventory, conversion, wastage, lost productivity, lost sales, warranty, installation, training, downtime, and so on d) End-of-life costs. All costs incurred when a product, service, or capital equipment reaches the end of its usable life, net of amounts received from the sale of the remaining product or the equipment (disposal value), as the case may be. Examples of end-of-life costs are obsolescence, disposal, clean-up, and project termination costs.

Appendix 1: Advanced Concepts of Value for Money 1.0The Concept of Value Value is a management and economics concept. It represents the extent of satiation of a person's hierarchy of needs by a product bought for this purpose. This is subjective and difficult to quantify. This is because different persons (or the same persons under different circumstances) would have different hierarchies of needs and would perceive different extents of satiation or value from the same product. There are three sources of the value of a product. The first source of value is from the functional usage of the product (known as use value), and the second source comes from the social status associated with the ownership of the product (esteem value). This can be shown as the difference between a luxury branded gold-plated, diamond-encrusted pen and a disposable non-descript functional pen, though both fulfil the broadly same function and have the same use value. The luxury branded pen, in addition to the use value, also has additional esteem value. The third source of value comes from the price that one can get by exchanging or scrapping the product at the end of its useful life. This is called the disposal value. Normally, when people buy a car, they consider the estimated disposal value of different choices of models. Value is the sum of all the three values.

3.0Value for Money 1. Besides the value of a product or service, the customer also has his notion of the “value” of a particular sum of money. This is different for different people or even for the same person in different circumstances. When the perceived value of a product matches the perceived value of the amount of money (cost of the product), the customer feels he got the full value for his money. This is called the VfM. In procurement, the Total Cost of Ownership is taken to evaluate value for money. Given the limited resources available to the Government, ensuring VfM in procurement is the key to ensuring the optimum utilisation of scarce budgetary resources. It usually means buying the product or service with the lowest WOL costs, which is ‘fit for purpose’ and just meets the specification. VfM also incorporates affordability; clearly, goods or services that are unaffordable cannot be bought. This should be addressed as soon as possible within the process, ideally at the need assessment stage before procurement commences. To address this issue, a change in the procurement approach, specification or business strategy may be required.

2. Where an alternative that does not have the lowest WOL costs is chosen, then the additional ‘value added’ benefit must be proportional and objectively justifiable. Assessment of bids should be conducted only in relation to a published set of evaluation criteria (which should be relevant to the subject of the contract), and any ‘added value’ that justifies a higher price must flow from these defined criteria. In public procurement, VfM is often primarily established through the competitive process. An intense competition from a vibrant market will generally deliver a VfM outcome. However, where competition is limited or even absent, other routes may have to be used to establish VfM. These can include benchmarking, construction of theoretical cost models or ‘shadow’ bids by the procurement agency. Major contracts can require considerable financial expertise and external support. A VfM assessment, based on the published conditions for participation and evaluation, may include consideration of some factors such as:

a) Fitness for purpose; b) Potential vendor/contractor’s experience and performance history; c) Flexibility (including innovation and adaptability over the lifecycle of the procurement); d) Environmental sustainability (such as energy efficiency and environmental impact); and e) Total cost of ownership

3. However, due to uncertainties in estimates of various components of TCO (and actual costs over the life-cycle) and intangibles of Value, some element of subjectivity may become unavoidable and hence is not normally useable in routine Public Procurement cases. Therefore, preference is given to alternative means for ensuring VfM by way of optimal description of needs, development of value-engineered specifications/ Terms of Reference, appropriate packaging/ slicing of requirements and selection of appropriate mode/ tendering systems of procurement, etc.