RFPs are formal, written requests that organizations send to suppliers with whom they wish to do business. They outline the goods or services to be purchased or the problem to be solved along with the criteria suppliers should follow when submitting a proposal. They are one of the basic tools buyers use to select suppliers and award contracts, particularly for large purchases.
The pitfalls of an immature purchasing process
Organizations without a structured procurement function often follow a traditional buying process: they order from the same suppliers for years without considering outside competitors or running RFPs to gauge the market situation.
Working with the same supplier year after year is comfortable and convenient. Nonetheless, this means buyers in these organizations do not have to develop a good understanding of market prices. Consequently, the suppliers tend to have the upper hand throughout the buying process, which means they are able to negotiate contracts of more value to them as suppliers than to the purchasing organization.
The role of RFPs in the purchasing process
When using RFPs as a central component of the purchasing process, buyers focus more of their effort on specifying internal needs and analyzing the supply market to find categories where they can force competition to their benefit. Then the buyer has a more detailed overview of market prices, is fully prepared for negotiations and, therefore, has more power during the purchasing process. When the buyer has the upper hand, he or she is able to uncover additional opportunities for savings.
Why don’t buyers run more RFPs?
RFPs require significant preparation for both buyers and suppliers. However, this often means buyers opt out, reasoning that dealing directly with a preferred supplier is the easier way to go. While sometimes that is the best option for the organization, there are many reasons to give RFPs a more prominent place in the procurement toolbox.
Excuse #1: The RFP process is too complicated.
Points to consider: RFPs can be simple and straightforward, or they can be very complex. It depends on what you’re buying, of course. The RFP process, on the other hand, should not have to be too complicated. This guide aims to provide buyers with practical suggestions for running requests thereby creating a more methodical approach for using the RFP as a tool for achieving objectives in a wide variety of situations.
Excuse #2: It isn’t worth it for purchases under a certain threshold.
Points to consider: Ideally, a price threshold should not dictate whether or not a purchase goes to tender; a solid supply market analysis should. For some high-cost purchases, there may be a need to work strategically with one preferred supplier. Likewise, for some lower cost purchases, a competitive supply market may mean you can achieve savings in a category you hadn’t considered before. A one-size-fits-all sourcing strategy means a lot of opportunities for savings, for sustainability, or for CSR improvement get left on the table.
Excuse #3: The RFP process takes too much time.
Points to consider: Did a water pipe break and flood your office? If yes, then it’s probably not the time to request bids from multiple plumbers. If you think RFPs take too long, then look again at the tools you’re using and the preparation phase of the process. You can significantly decrease lead time by implementing an e-sourcing solution to speed up manual processes and putting extra thought in specifications and preparation to decrease the time spent on evaluation and negotiations.
Excuse #4: We don’t have much volume to leverage, so suppliers won’t bid.
Points to consider: Many SMEs tend to feel as though they are not a big enough market player and suppliers are the ones who get to dictate the rules of the game. This may or may not be true; it depends on the category. If the supplier market is saturated, the buyer has the power to choose, whereas in monopoly situations there’s not much choice. Nevertheless, you are the customer and you have money to spend. You can use an RFP to test the waters with your suppliers and see where you stand.
Excuse #5: We’ve tried RFPs in the past, but suppliers didn’t submit bids.
Points to consider: If this has been your experience, you may need to take a look at your overall RFP process. Did you send the RFP out to every supplier in the phone book? How clear were your specifications? Did suppliers need to dedicate hours to reading pages of jargon? Were you responsive to suppliers’ questions? RFPs are two-sided by nature — request and response. If you don’t consider the other side of the equation, suppliers will likely see it as an indication of what to expect in the future.
Excuse #6: RFPs may hurt our existing supplier relationships.
Points to consider: This misconception comes from a poor understanding of the supplier market situation. True, you may hurt existing relationships if you force suppliers to go through the RFP process just because your policy says you have to. However, you should know when to push for supplier competition and when to lean back.
Don’t let these excuses get in the way of achieving your sourcing goals. The RFP, when used correctly, is an invaluable tool. Click below to access a free guide for RFP best practices.