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Calculatating opportunity costs? 9 Steps to consider

Calculating opportunity costs from a procurement perspective involves assessing the potential benefits or value that could have been gained by choosing an alternative procurement option. Here are the steps to calculate opportunity costs:

1. Identify the chosen option: Start by identifying the procurement option or decision that has been selected or implemented. This could be a specific supplier, product, service, or procurement strategy.

2. Determine the alternative option: Identify the alternative procurement option(s) that were considered but not chosen. These alternatives could involve different suppliers, products, services, or procurement approaches.

3. Assess the benefits of the alternative: Evaluate the potential benefits or value associated with each alternative option. Consider factors such as cost savings, improved quality, faster delivery, enhanced supplier relationships, innovation, or any other relevant advantages.

4. Quantify the potential gains: Assign monetary values or other measurable units to the benefits or value associated with each alternative option. Use available data, market research, or expert estimation to determine the potential gains that could have been achieved.

5. Compare the chosen option to the alternatives: Compare the benefits or value of the chosen procurement option to that of the alternative options. Calculate the difference in value between the chosen option and the best alternative.

6. Calculate the opportunity cost: The opportunity cost is the value or benefits that are foregone or sacrificed by selecting the chosen option instead of the best alternative. It represents the potential gain that could have been achieved if the alternative had been chosen.

7. Consider timeframes: Consider the timeframe over which the opportunity costs will be incurred. Some opportunities may have short-term benefits, while others may have long-term advantages. Adjust the calculations and assessments accordingly.

8. Use the opportunity cost in decision-making: The calculated opportunity cost can be used as a factor to evaluate the desirability or effectiveness of the chosen procurement option. It helps to assess whether the benefits obtained justify the foregone benefits associated with the alternative option.

9. Continuously reassess and refine: As circumstances change or new information becomes available, reassess the opportunity costs and adjust the calculations accordingly. This allows for ongoing evaluation and improvement of procurement decisions.

By considering opportunity costs, procurement professionals can gain insights into the value and potential gains that could have been achieved by choosing alternative procurement options. This analysis supports decision-making processes and helps to optimize procurement strategies and outcomes.

Want to learn more? Attend our Strategic Sourcing and Category Management Training (2 days), Finance for Procurement Professionals (2 Days) and Managing Total Cost of Ownership – TCO (1 Day) courses.

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