How Do I Prepare RFPs for Services and Transportation Procurement?
Indirect procurement best practices
Indirect procurement refers to the purchase of all goods and services needed to keep a business up and running. Direct procurement, on the other hand, encompasses the sourcing and purchasing of all materials directly related to your company’s product offerings. Summarizing indirect procurement best practices is tricky as they cover a wide range of categories requiring specialized knowledge.
This article will address RFP creation and management for two of these challenging categories: services and transportation.
Most services fall into the indirect category although some services may be part of your product offerings for customers. These would qualify as direct services, such as after sale and warranty services.
Here are typical indirect services:
The primary difference between direct material procurement and services can be understood by looking at quality specifications.
For direct materials, quality specifications generally outline measurements or other quantitative values that allow you to easily see that the correct materials, of the specified quality, have been delivered to the right place at the right time.
Now, try to define “correct” services. Think about an office cleaning service. How do you quantify a “correctly” cleaned office? Do the janitors come three times a week or twice a day? Has the garbage been emptied? Have the desks been wiped down? The cleaning service could potentially check all of the correct boxes, yet still not provide cleaning at the required quality level.
Because of the subjective nature of their measurement, services procurement should begin by defining needs with your internal stakeholders. An initial lack of agreement is almost guaranteed to happen, especially if it’s the first time you or someone in your company has tried to write down requirements and evaluation criteria for a particular service.
Here are eight things to keep in mind as you begin creating your services RFP:
- Speak with your stakeholders and ask them to help you define the desired service in as much detail as possible.
- Refer to quality standards and guidelines from professional associations, if they exist for the services you are contracting.
- Try to quantify quality criteria whenever possible. Then decide who will be responsible for measuring and how often.
- Consider using a pricing template. Doing so allows you to break down bids into individual components and identify outliers. It can also provide you with insight on key cost drivers for each provider.
- Outline how often you expect to receive the service and clearly define time expressions. For example, rather than say day, say a specific day of the week or business days or calendar days.
- Make sure to ask for information about the key people involved in providing the service. You may want to ask for qualifications, time at the company, and current and past projects. The provider should also be able to provide a contingency plan should the key person leave the company.
- Decide who will check invoices and how often.
- Be aware of the “incumbent’s curse” when inviting current suppliers to re-bid. They know how you do business, which may lead to a higher, but more accurate, bid.
As each service is different, it’s essential to think through the whole sourcing process as you put together your RFP — from defining specifications to ensuring contracts are adhered to.
Transportation services are different from other types of services you might hire through an RFP process. For one, reliability is often of the utmost essence — it’s up to the carriers to make sure your products reach consumers. Secondly, there’s usually a certain amount of risk involved that may be difficult, but not impossible, to plan for. For example, when choosing a carrier, you have to take into account geographical challenges, the weather, and even infrastructure issues.
Start your transportation RFP with data collection
Collect your historical freight statistics and learn about your current set-up. Analyze your current lanes by carrier, noting how each one performs and responds as a supplier. Consider your cost level — do your stakeholders find it acceptable? Compare actual volumes with forecasted volumes. Have they increased or decreased and by how much? If your actual volume has decreased, then is it worth running an RFP? You might find yourself facing increased prices from carriers due to lower volumes!
Take a look at your carrier base and their monthly performance statistics and number of claims, and use the information to highlight the carriers you hope to do business with and those with whom you do not.
Preparing your transportation RFP
Analyze the statistics you’ve gathered and try to outline a historical behavioral pattern. Do you have data for all your shipping lanes, the total volume by lane, shipping frequency, preferred pick-up day, and the average single order freight size and volume? Your RFP should include the most accurate data possible, including but not limited to precise routes and daily volumes vs. annual averages. These specific details will allow carriers to make accurate bids, which will help limit any surprise price hikes.
Don’t forget to speak with all of your stakeholders. They are an invaluable source of insight on future projects and potential volumes. They will help you get a clear understanding of your transportation requirements, including anticipated seasonal spikes or future business initiatives that could affect volume.
Clearly define your service level expectations by asking yourself these five questions:
- What type of cooperation will you have with the carrier?
- What is the expected response time and order to pick up time?
- What kind of reports do you require?
- How will you measure performance?
- How will claims be handled?
Transportation costs are paid either by the seller or the buyer of goods; it depends on the Incoterm. If you buy goods for a price that includes transportation, you could include that volume in your RFP. As this volume could be of interest to the carrier, you may mention that this potential volume could be awarded if the offer is competitive.
After running a transportation RFP, you’ll likely be faced with one of three possible outcomes:
- Award the carrier with the best bid the entire volume:Awarding the whole volume to one carrier makes sense when the shipper utilizes multiple lanes with small volumes. Alternatively, this could work if the shipper has one main lane for the majority plus additional small-volume lanes. Even if you do award the bulk of the work to one main carrier, best practice means you still need to have alternative partners available for unexpected situations.
- Award the job to the best carrier for each lane: If you have enough volume for several lanes and the lanes are spread out geographically, then it is worth it to assign one main carrier and one alternative to each lane.
- Shortlist a couple of carriers for each lane and then run RFQs as the need arises: The third option is to find the most competitive partners for each lane. When you have a real freight order, then you can run a single RFQ only for this order. You can only do this for large-volume lanes in a country or region with high supply. For countries or regions where supply is low, it is a risky option since carriers might not have resources available when you need them.
While both transportation and services are two very complex indirect procurement categories, there are a couple best practices to keep in mind as you prepare your RFPs. One, include your internal stakeholders early on in the process and communicate with them as often as needed to fully understand their specifications. And two, educate potential service providers and carriers to avoid the “incumbent’s curse” and obtain the most accurate bids possible, as it’s never too early to start building positive supplier relationships.
Don’t forget to share this guide with your colleagues!
The RFP Process: A Buyer’s Guide to Best Practices
- What role do RFPs play in an effective sourcing strategy?
- What are RFIs and how can they be used for supplier qualification?
- How do I prepare RFPs for services and transportation procurement?
- What can I do to maximize cost savings during the RFQ process?
- How do I manage the RFP evaluation process?
- How can I use RFPs to encourage supplier innovation?
- What’s the best way to negotiate during the RFP process?