Supplier offers: 6 steps to compare future costs

Key takeaways

• Put both quotes on the same unit and purchase basis.
• Exclude past spending and identical future costs.
• Count discounts only when you expect to qualify.
• Record your choice and check deliveries against the selected quote.

The method comes from managerial accounting, where decision analysis is built around a narrow question. A managerial accounting textbook on OpenStax describes short-term decision analysis as "determining the appropriate information necessary for making a decision that will impact the company in the short term, usually 12 months or fewer, and using that information in a proper analysis in order to reach an informed decision among alternatives." Choosing a supplier for stock you reorder is often a decision of that kind, so the same logic applies. Owners and managers will recognize the decision itself. Staff who check deliveries will recognize the other side of it: a quote is a promise until the goods arrive and match it.

1. Put both offers on the same basis

Before you compare anything, make sure the two quotes describe the same purchase. If a quote is silent on an item, ask the supplier to clarify it before comparing totals.

Quotes often use different units. One supplier may price by the case and another by the single item. Convert both to the same unit before you look at price. If you skip this, you will be setting a case price beside an item price and calling the lower number a bargain when it is not.

Check what each price includes. If one quote includes delivery and the other leaves it off, add the delivery charge to the offer that excludes it, using the figure the supplier gives you. If the two products differ in packaging, grade, or lead time, write that down too. A lower price on a lesser product is not a like-for-like comparison, and the staff who will receive the goods need to know the difference.

Minimum order quantities need the same care. A supplier with a lower unit price may require a larger first order, which means a larger cash commitment and more stock to hold. Put the minimum in both columns. You will need it again in step five, where you test the terms that only apply in certain cases. Use your shop replenishment checks when deciding how much stock you need.

Note the terms that surround the price as well. Ask what happens if the product is out of stock: does the supplier substitute another item, cancel that line, or hold your order open? Check how much notice you get before a price change, and whether either supplier needs a signed agreement or a credit check before the first order. A substitution you did not agree to can create costs that never show up in the unit price, so these terms belong on the sheet.

2. Set aside money you have already spent

Money already spent is a sunk cost. Choosing a different supplier cannot get it back, so it should not push you toward or away from any offer. You may feel that switching would waste what you have already paid, and so stay with a quote that costs more over the coming year.

Consider a common situation. Your business set up an account with a supplier last year and paid a setup fee. Or you bought a pallet of product that is now sitting in the back room, and the supplier who sold it is quoting again. Those payments are gone whatever you decide now. Whether you reorder from that supplier should depend only on what the next order costs, and what the alternative would cost you from here.

Managerial accounting uses a personal example to show the same reasoning. In it, you spent money last year on repairs and new tires for an old car, and your mechanic now says the car needs more repairs to operate safely. The textbook is direct about the money already spent: "Remember, the $1,600 you have already spent (note the past tense) is a sunk cost; it is a consequence of a past decision." The same OpenStax section builds its comparison on the future costs alone, not the past spending.

A practical test helps. For each amount on your sheet, ask whether it would change if you picked the other supplier. This does not mean the past spending was wrong or that nobody should learn from it. It means the past spending cannot be a reason to choose now.

The pull of sunk costs is strongest when the earlier decision was your own. If you chose the current supplier, or argued for them in a meeting, a recommendation to switch can feel like a judgment on you. Set that feeling aside. A supplier that was the right choice two years ago may not be the right choice today, and the comparison should be made as if you were choosing fresh now. Reviewing the offers this way is a fair test of the earlier decision, not an attack on it.

3. Remove costs that are the same in both offers

The second cost to set aside is any cost that would be identical whichever offer you accept. Such a cost does not differ between the alternatives, so it cannot decide between them. Managerial accounting describes these costs as irrelevant to the choice, and its examples carry over well to supplier comparisons.

One example from the same textbook compares two baked goods. If a company is considering baking either bagels or doughnuts, and both require $0.30 worth of flour, then the cost of flour would not be a relevant cost in determining which of the two had the highest production cost. The flour is the same either way, so it cannot separate the two. The OpenStax page gives a second example. A company planning to make either red widgets or blue wingdings would need to hire 10 additional employees for either product. The cost of those 10 employees is irrelevant, because it does not differ between the alternatives.

Translate that to your purchasing. If both suppliers deliver to the same dock on the same schedule, the time your staff spend unloading does not favour either one. If both quotes include the same labelling, or both require the same signed delivery note, those costs are identical. If one supplier's product needs the same shelf space and handling as the other's, the cost of that handling is the same too.

Go through your sheet line by line and mark every row where the two quotes match. Mark those rows as irrelevant to this choice. What remains is the part of the comparison that can actually change the outcome. Be careful about one thing here: a row is only matching if both suppliers really charge the same amount or create the same cost for you. If the labels look alike but the terms differ, do not mark the row.

Once you have marked the matching rows, check that you have not removed a row by mistake. A common error is to treat a shared item as fully shared when only part of it is. The fee looks identical on the page, yet it grows differently as your buying changes. Keep that row in the comparison and note the difference, because a matching label can hide a real gap.

4. Compare only the costs that differ

With sunk and matching costs removed, you are left with the costs that change with your choice. Managerial accounting calls these relevant costs. The car example shows how to total them for each alternative: "In this example, the relevant costs for each alternative are the following: $1,200 in current repair costs to keep your current car or $3,400 (from the 24 payments of $150 minus $200 for the trade in) to buy a newer used car." The OpenStax source sets out the two totals side by side, one for each alternative.

Notice what that comparison includes and leaves out. The repair figure is a future cost of keeping the car. The payments are future costs of the new car, reduced by the trade-in. The money spent last year appears in neither total. That is the discipline you want for a supplier comparison: each option gets its own future costs, counted over the same period, and nothing else.

For most supplier offers, the relevant costs are the things you will actually pay if you accept the offer. Usually that means the unit price multiplied by the quantity you expect to buy over the period you are comparing, plus any delivery charges and fees that apply to each order. Add the costs of any terms you are likely to trigger, which is the subject of step five.

One clear layout is a separate list for each offer. Start each list with the unit price multiplied by the quantity you expect to buy. Then add delivery charges and fees, then add any conditional terms you expect to trigger. Add nothing else. Each list should contain only items that exist because you accepted that particular offer. When both lists are finished, compare the totals, and then check the lists against the rows you marked as matching in step three, to confirm that no shared cost has slipped back in.

Use the same period for both offers. A quote with a lower unit price but a shorter validity window is not directly comparable to a quote that holds for longer, unless you account for the difference. Choose a period that makes sense for how often you buy the product, then total each offer over that same period. If the totals are close, do not stop there. Go to step five first.

Timing matters too. If one supplier asks for payment when you place the order and the other lets you pay later, the timing differs even when the amounts match. Cash that leaves your account earlier has a real cost to the business, even when the total is the same. Note the timing next to each cost, and treat it as part of the comparison rather than a footnote.

Illustrative example: compare future totals

Suppose comparable orders cost $150 from one supplier and $200 from another over the same period. Handling costs an illustrative $40 either way, and an illustrative $10 account fee was paid earlier. Exclude the handling and past fee. The relevant totals remain $150 and $200. With no other differences or conditional charges, choose the $150 offer.

5. Test the terms that only apply sometimes

Many offers include terms that matter only in certain cases. A volume discount may begin above a certain quantity. A rebate may apply after a set amount of purchases. Some suppliers charge a surcharge on small orders, and some offer a discount for paying early. These terms are easy to overlook, and easy to overvalue, because they look like a bonus on the quote.

Managerial accounting handles this kind of term with a clear test. In an example about two jobs, the textbook explains: "If both jobs pay the same hourly wage, it would have an irrelevant revenue, but if the road crew job offers overtime for any time worked over 40 hours, then this overtime wage has the potential to be a relevant revenue if overtime is a likely occurrence." The lesson for a supplier comparison is that a conditional term counts only if the condition is likely to happen. The OpenStax section puts the key word on likelihood, not possibility.

Apply that to each conditional term. For a volume discount, ask how often you actually order at that quantity. Look back over your order records for the last 12 months and see whether you have reached the threshold in most months or only in a rare busy period. A discount you reach once in a while is worth little in a standard comparison. A discount you reach every order is worth a lot.

Be honest about how close the condition is. A threshold set just above your usual order size is a warning sign, because a small change in your buying will decide whether you get the benefit at all. Ask whether you could reach the threshold by changing your orders, and whether that change would carry its own cost, such as more stock held for longer. Those costs are relevant to the choice, so count them alongside the discount.

For an early-payment discount, check whether your business can pay early without strain on cash. For a small-order surcharge, check how often you place small orders. For a rebate, check whether the rebate is paid in cash, as a credit, or against future orders, since that changes what it is worth to you. Put the likely amount of each conditional term into your totals only if you expect it to happen. If you cannot tell whether it will happen, show it as a separate line, so you can see how much the decision depends on it.

This step also covers conditional charges. Some terms cost you money only in certain cases, such as a fee for a late change to an order or a charge for returning goods. If your records show that these come up regularly, they are relevant. If they are rare, they are a risk to note, not a number to add to every order.

6. Choose the offer and write down why

Once the comparison is down to relevant costs over the same period, with likely conditional terms included, pick the offer with the lower total. Check that the total is not hiding a different product, a different unit, or a different delivery arrangement. If it is, go back to step one.

Then write down the reason in a line or two. This matters more than it seems. Staff who check deliveries will later see the order, and a short note such as "chosen on relevant costs over the same period; past account fees and matching delivery costs excluded" tells them why this supplier was selected. It also stops the next person from reopening the same argument on a sunk cost, which is how the same mistake gets repeated across several orders.

Make sure the delivery is checked against the quote you chose. When goods arrive, the person receiving them should compare the unit, quantity, and price on the delivery note with the figures on the sheet you used. If they differ, the supplier should be asked to explain before the invoice is paid. A good decision made on the quote is only useful if the goods that arrive match it. Keep your receiving checks for goods alongside the selected quote.

Share the decision with the people who will live with it. The person who places orders, the person who checks deliveries, and the person who pays invoices each see a different part of the process. A brief note to each, saying which supplier was chosen, which unit and price apply, and which rows were excluded, keeps a receiving clerk from checking a delivery against an older quote.

Finally, set a reminder for the date until which the price is valid, and review the comparison again before that date, or when a term changes. Prices and terms move. Repeating this process for each renewal takes a short time, and it keeps your supplier choices based on what the next order will cost, not on what has already been spent or on costs that were the same from the start.

Today, take two current quotes and mark any missing unit, delivery charge or minimum order quantity. Ask for clarification before calculating your totals.

Questions about supplier comparisons

What if a delivery charge is missing?

Ask the supplier for the delivery charge before treating the quotes as comparable. Use the figure the supplier gives you rather than assuming delivery is free.

What if a discount threshold is uncertain?

Show the discount separately until you can judge whether you will qualify. Check your order records and note how much the choice depends on receiving it.