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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
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 analysisAssessment 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 into account all relevant costs and benefits, hidden expenditure can be identified and long-term savings potential realized.
- Supplier selectionSelection 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.
Cost-benefit analysis: from manual evaluation to data analytics
Cost-benefit analysis forms a crucial basis for well-founded decisions in purchasing controlling. While it was traditionally based on manual calculations and simple evaluation procedures, the increasing complexity of markets and data volumes requires a modernized approach. The implementation of advanced data analysis technologies enables companies to gain more detailed insights and react more quickly to changes.
Old: Manual cost-benefit assessment
Traditional approach: In the past, cost-benefit analysis was often carried out manually. Buyers collected data from various sources and created extensive spreadsheets to weigh the costs and benefits. This method was time-consuming and prone to human error. In addition, the analyses were often static and could not adequately take dynamic market analysis into account. Limited amounts of data led to simplified assumptions, which impaired the accuracy of the results and made strategic decisions more difficult.
New: Data analytics
Data analytics: The modern approach uses advanced data analytics to increase the efficiency and accuracy of the cost-benefit analysis. By using big data technologies and AI in procurement, large volumes of data can be processed in real time. Algorithms analyze complex correlations and provide precise forecasts. This makes it possible to incorporate dynamic market conditions and variable cost factors into the analysis. Practical benefits include faster decision-making, reduced risk management and the identification of additional savings potential.
Practical example: Introduction of data analytics at Muster AG
Muster AG, a leading mechanical engineering company, was faced with the challenge of optimizing its procurement processes. By implementing data analytics in purchasing, they were able to automate and refine their cost-benefit analyses. Within a year, the company achieved cost savings of 20% in the procurement budget. The analysis time was reduced from two weeks to just a few hours. In addition, thanks to precise forecasts, better conditions were negotiated with suppliers and risks in the supply chain were identified at an early stage.
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.
