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Cost-benefit analysis: definition & important aspects for buyers
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Cost-benefit analysis in a nutshell:
A cost-benefit analysis is a systematic evaluation method that compares all monetary and non-monetary advantages and disadvantages of an investment or decision. In purchasing, it provides a sound basis for making decisions on procurement alternatives and helps to select the most economically viable option.
Example: When evaluating two suppliers for a CNC machine, maintenance costs, energy consumption, productivity and training costs over 5 years are compared in addition to the acquisition costs (€150,000 vs. €180,000), whereby the more expensive supplier proves to be the more economical option with a total saving of €45,000 despite higher initial costs.
Contents
Cost-benefit analysis: An introduction
What is a cost-benefit analysis?
The cost-benefit analysis is an instrument for the systematic evaluation of investment decisions, projects or procurement measures. It compares the financial expenditure (costs) with the expected benefits (advantages) in order to determine the economic efficiency of an action. By quantifying costs and benefits, it enables well-founded decisions to be made and contributes to the optimal use of resources.
Core elements of the cost-benefit analysis
- Cost recording: Identification of all direct and indirect costs, including acquisition, operating and follow-up costs.
- Determination of benefits: Quantification of the expected benefits, such as savings, efficiency gains or quality improvements.
- Time horizon: Consideration of the entire life cycle of the investment in order to include long-term effects.
- Risk analysis: Evaluation of uncertainties and risks that could influence the costs or benefits.
- Calculation of key figures: Use of indicators such as net present value, profitability or amortization period for decision-making.
Importance of cost-benefit analysis in purchasing
In the procurement process, cost-benefit analysis is a key tool for evaluating the profitability of purchasing decisions. It helps buyers to compare offers, justify investments and make strategic procurement decisions. By taking all relevant costs and benefits into account, hidden expenditure can be identified and long-term savings potential realized.
- Supplier selection: Selection of the optimal supplier based on the best cost-benefit ratio.
- Investment decisions: Assessment of whether the acquisition of new technologies or services is worthwhile.
- Process optimization: Identification of areas in which processes can be made more efficient.
- Budget planning: Precise planning of expenditure and savings for better financial control.
- Risk management: assessment of potential risks and their financial impact on the company.
Application of cost-benefit analysis in purchasing
The cost-benefit analysis helps procurement managers to make informed decisions by comparing the total costs of a project with the expected benefits. This allows investments to be evaluated and the best price-performance ratio to be determined.
Calculation example: Acquisition of a new supplier portal
Situation:
A company is considering implementing a digital supplier portal at a cost of €50,000. The portal is intended to automate the procurement process and increase efficiency.
Costs:
- Acquisition costs: € 50,000
- Training costs for employees: € 5,000
- Ongoing maintenance costs per year: € 2,000
Benefit:
- Savings through reduced process time per year: € 20,000
- Error reduction and quality improvement per year: €5,000
Calculation of the net benefit over 5 years:
Total costs over 5 years:
Acquisition costs + training costs + (maintenance costs × 5)
= 50.000 € + 5.000 € + (2.000 € × 5)
= 50.000 € + 5.000 € + 10.000 €
= 65.000 €
Total benefit over 5 years:
(savings + quality improvement) × 5
= (20.000 € + 5.000 €) × 5
= 25.000 € × 5
= 125.000 €
Net benefit:
Total benefits - total costs
= 125.000 € - 65.000 €
= 60.000 €
Result:
The investment in the supplier portal leads to a net benefit of € 60,000 over 5 years. The company benefits from more efficient processes and cost savings.
Evaluation and strategic findings on the cost-benefit analysis
✓ Critical success factors
→ Data accuracy: Precise recording of all direct and indirect costs as well as quantifiable benefit values
→ Long-term perspective: Consideration of the entire life cycle of an investment, including hidden follow-up costs
→ Stakeholder involvement: Early integration of all relevant specialist areas for a holistic assessment
⚠ Challenges and limitations
→ Monetization: Difficulty in quantifying qualitative benefits such as process improvements
→ Forecast uncertainty: risk of incorrect assumptions in long-term cost estimates
→ Degree of complexity: complex data collection for networked procurement projects
Future trends and strategic implications:
"Digital transformation enables more precise and dynamic cost-benefit analyses in purchasing."
→ AI-supported forecasting models for more accurate cost predictions
→ Automated data acquisition using IoT sensors
→ Real-time monitoring of cost-benefit ratios
→ Integration of sustainability factors into the assessment
Conclusion on the cost-benefit analysis
Cost-benefit analysis is an indispensable tool for strategic procurement decisions. By systematically evaluating costs and benefits, it enables well-founded investment decisions and optimal resource allocation. Despite challenges in quantifying qualitative benefits, it offers a solid basis for future-oriented purchasing processes, especially in combination with digital technologies. Success lies in precise data collection and the consideration of long-term effects.
