Most companies use well-known and standard competitive bidding methods to pick suppliers. The most common is the Request for Proposal (RFP)
. However, in many cases, a conventional RFP falls short of finding the right supplier. Why? Conventional RFPs don’t always ask the right sourcing questions and as a result generate wrong (or less than ideal) answers from suppliers.
Simply put, the tried and true tools and tactics adopted over the last 30 years as the procurement “gold standard” are no longer as effective as they once were. One of the tools under challenge is the purpose and nature of conventional competitive bidding tools.
So, what is the solution? It’s time to go back to school for new perspectives on bidding in the 21st century.
Let’s start with the basics of the “make vs. buy” decision. Many assume that if they “buy” they should use competitive “market” forces to ensure they get the best deal. In this scenario the default approach is to use a transaction-based model almost exclusively. This works well for simple transactions with abundant supply and low complexity when the market can correct itself. If a supplier does not perform, you can simply rebid and find another.
However, as organizations strategically outsource to procure more complex goods and services, the transaction-based model no longer works very well. All too often buyers become co-dependent on suppliers, switching costs are high and suppliers have a “locked-in” position.
Moving beyond transaction-based sourcing models is not only a way to manage complex goods and services, but it is also a means to unlock value. In a transaction-based model it is unlikely that the buyer will get any value beyond cost cuts, as only the price according to specification is sought. Increasingly, companies are looking for additional value when it comes to complex goods and services, such as innovation and flexibility, and they benefit from recognizing alternative sourcing models.
Shifting Along the Sourcing Continuum
To unlock potential value with suppliers, a sourcing professional must understand the basics of Sourcing Business Model theory. Based on research by the University of Tennessee, this theory uses systems thinking to help companies determine the right Sourcing Business Model for their situation. The figure below illustrates the sourcing continuum:
Moving along the continuum to more strategic sourcing and partnership models means consciously using contract structures that shift from transactional and commodity-based thinking to one based on more of a “partnership” between the buyer and supplier. As a buyer and supplier move along the sourcing continuum, they design contracts that are purpose-built to drive productivity improvements and innovation.
As organizations shift to strategic, performance-based and “Vested” outcome-based supplier solutions, they also need to adopt competitive bidding methods. This means using more sophisticated and collaborative bidding approaches that seek to buy “solutions,” “strategic partnerships” or “alliances.” Below is a primer on the six primary types of RFx methods.
RFx Methods: What They Are and When to Use Them
There are six primary types of RFx methods, but often these methods have different names. I use the term that is most popular, but also list alternative names that describe the same or roughly similar concept. (For more details, see the Vested white paper
, “Unpacking Competitive Bidding Methods: The Essential ABCs of the Various RFx Methods.”)
1. Request for Information (RFI) – This can also be referred to as a request for qualification. RFIs range from simple requests aimed at gathering market intelligence to more comprehensive ones asking suppliers to answer detailed questions about their qualifications. An RFI is non-binding and sometimes used to gather benchmark information and general market data. Buyers rarely pick a supplier based on RFI information, rather they use the information to help further refine the RFx approach. Thus, RFIs typically precede other RFx processes and can help a buyer select the number of potential suppliers to evaluate. An RFI is almost always used with a Request for Proposed Solution and a Request for Partner Process.
2. Electronic Auction (e-Auction) – This is an online, price-centric auction in which purchasers specify what they want to buy and prospective suppliers respond by entering competing bids. Suppliers are often pre-qualified to participate in an e-auction. There are various type, but the most common is a reverse auction, in which a single buyer uses a fixed-duration bidding event. Multiple, prequalified and invited suppliers compete for business. Potential suppliers review the requirements, choose to bid and enter their selling price(s) and other qualifying criteria as requested. Suppliers’ prices are visible to other competitive bidders, often resulting in successively lower prices.
3. Request for Quote (RFQ) – Also referred to as a Request for Price, this is used to obtain price offers for a specified product or service. This method is typically used for standard acquisitions that are based on price or cost considerations. Buyers who use a Request for Quote must be sure to properly define the requirements so there is no ambiguity for the supplier. It may or may not be a binding offer.
4. Request for Proposal (RFP) – This method may also be referred to as an Invitation for Proposal (IFP). It is used to obtain pricing as well as detailed descriptions of services, methodologies, program management, cost and other support provided by the supplier. Requests for proposals are used for large and complex technical acquisitions in which selection is based on factors beyond just price or cost, such as technical capability, capacity and potential shared design with the supplier. It is often a follow-up to an earlier RFI.
5. Request for Solution (RFS) – This can also be known as a Request for Proposed Solution. This is a collaborative process in which a buying organization has a dialogue with potential suppliers with the intent of collaborating to determine the best solution to meet the buyer’s needs. A Request for Solution is different from a Request for Proposal because the buyer does not know the exact solution; rather it is asking suppliers to propose the most appropriate solution.
6. Request for Partner – This is also referred to as a Request for Collaboration or a Request for Mutual Value Solution. This is a highly interactive process used when a buyer is actively seeking not just a solution from a supplier but also compatibility across multiple providers’ cultures, mindsets and willingness to engage in a collaborative relational contract. A key part of this process is a Request for Proposed Solution, which is often used when selecting a supplier for a Vested model. A Request for Partner is typically focused on supply solutions that include joint investment or collaboration between the buyer/company and the supplier(s) selected over a longer time horizon.
As organizations mature and their goals for creating more value out of supplier relationships broaden, make sure you are using not only the right Sourcing Business Model, but also the right RFx approach.
A key trend that is proving successful is the shift to more collaborative bidding approaches with suppliers. In future articles, I’ll explore the process in more detail and examine collaborative bidding in action.