Stephen BauldOne simple formula used in procurement is “cost equals full life expenditure on items purchased plus opportunity cost.”
Procurement managers need to give balanced consideration to long, medium- and short-term needs. The utilization of any resource may be viewed as a cost and the allocation of present resources to meet a future need may be viewed as an investment. The general formula is that a cost is justified where it is less than or equal to the benefit received as a result.
Benefit must also be adjusted to reflect both the time element and contingency. For some types of expenditure, the primary benefit is immediate and it either declines over time or such residual value as it may possess is slight.In yet a third class of expenditure, the benefit is dispersed over time, with some of the benefit being received immediately and the rest being deferred.
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