Each day hundreds - and maybe thousands - of businesses use various competitive bidding methods to pick suppliers, but are they finding the right suppliers for their needs? Maybe not, because it's likely they are using the wrong tools.
The result is that these companies and suppliers are too often mismatched, and their objectives are misaligned. Simply stated, using the wrong competitive bidding method is similar to putting a square peg in a round hole. Forcing a fit can hamstring efficiency at each end of the process - from selection to operations.
A further complication is that newer and more collaborative approaches have emerged that enable buyers to gain deeper insights about today's marketplace and improved supplier innovation. The question arises, which bidding tool is the right tool for your situation?
For centuries, organizations have thought of procurement as a "make vs. buy" decision. This was especially true as organizations explored outsourcing. Many falsely assume if they "buy," they should use competitive "market" forces to ensure they are getting the best deal. In this scenario the default approach is to use a transaction-based model. This works well for simple transactions with abundant supply and low complexity where the "market" can correct itself. After all, if a supplier does not perform, just rebid the work.
However, as organizations strategically outsource and 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; 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 price according to specification is asked for. Increasingly, companies are looking for value beyond cost when it comes to complex goods and services, such as innovation and flexibility; they benefit from recognizing alternative sourcing models. Moving along a continuum to more strategic sourcing and partnership models will enable a more distinct and direct connection to corporate strategy.
The figure below shows the sourcing continuum:
There is a shift occurring in sourcing to more strategic, performance-based and "Vested" outcome-based supplier solutions. This has resulted in the recognition that organizations should use more sophisticated and collaborative bidding (or RFx) approaches that seek to buy "solutions," "strategic partnerships" or "alliances."
Each type of RFx is a solicitation for some sort of "quote" from a potential supplier. The objectives of each RFx type change across the continuum of Sourcing Business Models. Starting with market driven business models such as Basic Provider or Approved Provider, the objective of the solicitation is to get a price. As companies advance along the continuum, the emphasis changes to include other objectives, such as integration into the buyer's business process to gain efficiencies and continuous improvements.
Primary Bidding Methods
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 used to 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; also referred to as a request for qualification): RFIs range from simple requests aimed at gathering market intelligence to more comprehensive requests asking suppliers to answer detailed questions about their qualifications. An RFI is non-binding and is sometimes used to gather benchmark information and general market data from the marketplace. Buyers rarely pick a supplier based on RFI information, rather they use the information to help them further refine the RFx approach. Thus an RFI typically precedes other RFx processes and often is used to help a buyer to select the number of potential suppliers it will evaluate. An RFI is almost always used with a request for proposed solution and a request for partner process.
2. Electronic auction (e-auction): an online, price-centric auction where purchasers specify what they are interested in buying and prospective suppliers respond by entering competing bids. Often suppliers are pre-qualified to participate in an e-auction. There are various types of e-auctions, including a reverse auction where a single buyer uses a fixed-duration bidding event in which 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 Price (also referred to as a Request for Quote): used to obtain price offers for a specified product or service. These are used for more standard acquisitions that are based on price or cost considerations. Buyers using a request for price 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 (also referred to as an invitation for proposal [IFP]): 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 larger, more complex and technical acquisitions where 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 request for information (RFI).
5. Request for Solution (RFS; also known as request for proposed solution): 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 (also known as a Request for Collaboration or a Request for Mutual Value Solution): 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 approaches to sourcing become increasingly sophisticated and ambitious, new models are needed to address the need for innovation and more complex sourcing initiatives, such as services that fall under complex outsourcing or alternative procurement methods such as public-private-partnerships.
A key trend that is proving successful is the shift to more collaborative bidding approaches with suppliers.
Kate Vitasek is a faculty member of the University of Tennessee's Haslam College of Business Administration. Her award-winning research has been featured in six books including Vested Outsourcing: Five Rules That Will Transform Outsourcing and Vested: How P&G, McDonald's and Microsoft are Redefining Winning in Business Relationships. Her latest book is Strategic Sourcing in the New Economy: Harnessing the Potential of Sourcing Business Models for Modern Procurement.