How can I maximize cost savings during the RFQ process?
Procurement cost savings. Even if your department has increased its focus on value production and nurturing supplier relationships, cost savings are probably still at the top of your CPO’s list of concerns. In fact, the Deloitte Global CPO Survey of 2016 found cost reduction to be a primary concern for 74% of CPOs, which is a 5% increase when compared their 2015 results. Buyers can help CPOs meet their cost reduction objectives by employing one of the most common tools of the trade — the RFQ process.
An RFQ is a request sent out to suppliers for specific goods or services asking for offers. Specifications are clearly defined from the start, and when all else is equal (payment terms, quality, etc.), the bid tends to go to the supplier with the lowest price.
How RFQs differ from RFPs
RFQs are best used for goods or services with very clear specifications, either because you repeatedly order the same thing or you’ve spoken with your stakeholders and understand exactly what they need. For example, an RFQ would serve your purposes if you need to decide on a supplier for ink cartridges for your printing business as you already know the make and model of the cartridges your printer takes. Or you need to buy 10,000 black ceramic floor tiles, and you have a sample showing exactly how they should look.
As RFQs are typically used to identify the lowest-cost options, they’re usually sent out only to pre-qualified suppliers. Therefore, you may have run an RFI to identify suppliers beforehand or you have set up framework agreements with selected suppliers. That being said, RFQs can still be used for project-based work where you may only work with a supplier once. To speed up the process, you can send out a supplier qualification questionnaire together with your RFQ.
Preparation makes perfect
A category spend profile falls into the preparation phase of your RFQ. By creating a spend profile for your category, you’ll have a better idea of how much you’re spending, on what, and with which suppliers. This overview can help you see where you might be using multiple suppliers for the same goods or services. Then you can use an RFQ to help you consolidate your suppliers. Or you might see that certain suppliers haven’t been challenged recently; if there’s competition on the market, then it might be time to see if they can offer you a better price.
Make sure to use your spend profile data appropriately, though. You may find that an RFQ is not the best way to approach your suppliers at this time.
Three strategies for maximizing cost savings during the RFQ process
A basic RFQ is relatively straightforward. (Here’s a detailed description of the process.) However, if you want to ensure you’ve taken every step possible to maximize cost savings, there are few additional techniques you can use.
- Price breakdown
To get the most bang for your buck, ask provide suppliers with a pricing template that breaks down the product or service you’re requesting. Doing so will help you identify any cost outliers and help you during the negotiation phase. Of course, this may be done more easily with products, since services often have cost drivers that are more subjective in nature.
Think about labor costs, for example. One company may charge $15/hour for labor and another $7.50. Obviously one is less than the other, but in order to do a proper comparison, you would have to ask each individual supplier for the reasoning behind the charge. You may find that the difference comes down to geographical location, employee qualifications, or any any other number of factors.
- Multiple rounds of bidding
Your RFQ process shouldn’t stop after receiving the first round of bids, especially if it’s been sent out to more than three suppliers. Use the results of the first round to narrow down the field. Notify the selected suppliers and then request another round of bidding. This is particularly effective for highly competitive markets.
If you’ve requested a price breakdown for the first round of bidding, you can try re-bundling the items you wish to buy. You may get a better offer for the lump sum, as suppliers might be able to knock a percentage off the whole total.
- Reverse auction
A regular auction pits buyer against buyer, each offering a higher price. Like the name implies, a reverse auction does the opposite; it pits seller against seller and each tries to offer selling their goods or services for the lowest price. This tool drives down prices and increases competition between suppliers. A reverse auction can be employed after one round or multiple rounds of bidding. Likewise, you could even run a reverse auction without running an RFQ first. However, if you choose this route, you need to make sure you invite only suppliers you have already qualified.
While the straightforward RFQ process can be carried out using email and Excel (although we don’t recommend it for a number of reasons), an e-sourcing tool is an absolute must for running a successful reverse auction. Don’t let your technology replace good supplier management, though. Your suppliers will need to be informed of your plans to run a reverse auction. They’ll also need to know the procedures they need to follow in order to bid and understand how you plan to select the winner.
Cost savings isn’t the procurement function’s only objective, but it does remain one of the top concerns for CPOs. Buyers can help maximize cost savings through a well-managed RFQ process that employs a variety of strategies, including price breakdowns, multiple rounds of bidding and reverse auctions.
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The RFP Process: A Buyer’s Guide to Best Practices
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- How can I use RFPs to encourage supplier innovation?
- What’s the best way to negotiate during the RFP process?