Military Cost-Benefit Analysis: Introducing Affordability in Vendor Selection Decisions

Abstract

This study extends previous research by the authors that focuses on the growing global challenge of affordability. Ballooning public debt burdens are forcing countries around the world to rethink their approaches to procurement decisions. This paper offers a new approach to government vendor selection decisions in major public procurements. A key challenge is for government purchasing agents to select vendors that deliver the best combination of desired non-price attributes at realistic funding levels. The mechanism proposed in this paper is a three-stage, multiattribute, sealed-bid procurement auction. It extends traditional price-only auctions to one in which competition takes place exclusively over attribute bundles. The model reveals benefits in public procurements by defining an alternative in terms of its value to the buyer over a range of possible expenditures, rather than as a single point in budget-value space. This approach leads to some interesting results. In particular, it suggests that in a fiscally constrained environment, the traditional approach of eliminating dominated alternatives could lead to sub-optimal decisions. The final extension of the model explicitly examines the buyer's decision problem under budget uncertainty. The result is in a new metric proposed to evaluate vendors: an expected utility measure of performance.