Understanding the differences between historical RFQ strategies and changes that are resulting in stronger results ....
Today’s post is from Ronald D. Southard, CEO at SafeSourcing Inc.
I’d like to thank my SafeSourcing associates both past and present for their constant quality input to my posts and whitepapers and upcoming book.
The Request for Quote (RFQ)
A Request For Quote is typically used to solicit price and price related details such as freight, that meet minimum quality specifications for a specific quantity of specific goods and/or services. “RFQs are usually not advertised publicly, and are used commonly for (1) standard, off-the-shelf items, (2) items built to known specifications, (3) items required in small quantities, or (4) items whose purchase price falls below sealed-bidding threshold. Suppliers respond to an RFQ with firm quotations, and generally the lowest-priced quotation is awarded the contract.” 4
Though the above historically represented the industry standard as to what an RFQ was, it is important to expand on each of the points and understand the pieces from a historical and practical standpoint. With online eProcurement tools suppliers have an indication of where they stand and an opportunity to adjust their pricing should they choose. In standard practice this is done by phone calls or e-mails and one at time. As such it is very time consuming and does show some savings, but not nearly the rate of success online tools have historically provided.
Standard, off-the-shelf items. This is a standard misconception of procurement departments everywhere. The fact is that virtually any product or service can be taken through the eRFX process. Strategic Sourcing solutions providers with extensive global supplier databases can invite a number of new suppliers to participate in the bidding process on whatever items or service may be required. Many will have some level of experience in successfully participating in eRFX events in a variety of functional areas within the organization such as HR, Marketing, Construction and IT to name a few.
Items built to known specifications. While this is a valid concern, it is also the biggest reason why projects are never taken out to bid; not having specifications or having the time to assemble them. Working with 3rd party procurement solution providers companies are more able to cover all of their needs, taking into consideration all of the moving parts that affect these items. Such as freight, fuel surcharges, additional fees and hourly rates. Results can be achieved that are comprehensive enough to allow strong decisions once the project has been completed.
Items required in small quantities. Another misconception about RFQs are the quantities of items that can be sourced and duration of time for which those quantities are needed. There should be no limits at all, including number of items to have the suppliers bid on. With that established, however, there are always unique strategies to every event so that the host company can end up with the most complete set of information while allowing suppliers to focus on those areas that need the most attention. This is part of the service that needs time to be considered as sourcing projects are strategized and developed.
Items whose purchase price falls below sealed-bidding thresholds. The recommended approach for pricing within the RFQ should be analyzed based on the historical spend, also taking into account any price indexes that can affect future pricing increases. Using historical spends and any additional information available, a max quote is often established that the suppliers must meet prior to participation. Setting a price decrement is also strongly recommended, and often plays a key role in the strategy as to how you would like to have the suppliers act, giving them the flexibility to make price adjustments they are comfortable with while driving savings as part of the process.
Understanding the differences between historical RFQ strategies and changes that are resulting in stronger results is the beginning of assembling the right strategy for your project. Strategies that have proven successful in the past generally have similar features in common and drive the two most important aspects of every project; valuable results and supplier participation.
Details, Details, Details- In the RFQ, send an invitation to potential suppliers containing a detailed list or description of all relevant parameters of the intended purchase, such as:
- Personnel skills, training level or competencies
- Part descriptions/specifications or numbers
- Quantities/Volumes
- Description or drawings
- Quality levels
- Delivery requirements
- Term of contract
- Terms and conditions
- Other value added requirements or terms
- Draft contract
An RFQ event can have many suppliers participating in your project. They will all be actively participating during the RFQ in a preset timeframe, which is usually 15 minutes, but can be adjusted when the line item count grows over 25 items. Within the 15 minutes, suppliers can lower their bid pricing an unlimited amount of times. Like sealed bidding, suppliers cannot see one another’s pricing. There is only one way they know they have a low quote on an items and that is through the use of a low quote indicator when they achieve that milestone by phishing for it.
Missing Pieces– An easy way to establish specifications and develop base pricing is from the RFP responses submitted earlier. Many times a list of suppliers is established that has already been educated on entering pricing through an online sourcing or bidding tool. The RFQ gives the supplier the opportunity within the live event to view whether or not if they have any low quotes and to “sharpen their pencils” in order to lower their pricing if they wish to do so. From this event an award of business based on the results can be made.
Training and Communication – Suppliers should be trained as to how to use the eProcurement system, how to place their bids, how to look for the low quote indicator, and at the same time communicated with on questions and the pricing and products and services you are looking for. The overall goal is to drive the best overall value, so suppliers should have an opportunity to enter notes within the RFQ during the live event. This additional information often offers additional hidden savings opportunity, i.e. if 1,000 cases are purchased rather than 900 cases, additional discounts, or other value added services such as freight waived for the first 6 months of a 1 year contract if awarded the business. These additional notes can provide and overall benefit, rather than just a low price wins.
Returning to our original RFI example of a company owning a building they intend to repurpose as a Distribution Center, the process began as an RFI in order to understand what was needed so it could be followed by an RFP in order to collect further detailed information and base pricing. These two steps were then followed by an RFQ in order to compress the pricing from suppliers who participated in the RFP and were invited to this final stage. In this last stage running the line items as a complete list of materials rather than an item by item list, total cost of freight, total installation pricing- which could include teardown pricing which could also be listed as its own line item can have great value and provide the opportunity for the suppliers to keep their focus where it is needed rather than on 100’s of individual line items submitted during the RFP. The four items mentioned here represent the largest spend items of the proposal and have the opportunity to lower pricing by 20% or greater from the original RFP pricing.
Determining what stage of the eRFX process to begin with and how to assemble those pieces can be a difficult puzzle to put together especially if a procurement team is already engaged in a myriad of other daily activities. A good Strategic Sourcing solution provider can help put these pieces together in a way that requires less of your company’s time and resources.
For more information on how SafeSourcing can help you through the complex minefield of eRFX strategies, please contact a SafeSourcing Customer Service representative.
We look forward to and appreciate your comments.
Resources————————————————
http://www.businessdictionary.com/definition/request-for-quotations-RFQ.html
