Suppliers: Squeeze ‘em or Friend ‘em Part 2

Nov 30, 2014 by Tim Schmidt

The best sourcing strategies for Facility Managers… and everyone else

Some folks subscribe to the idea that suppliers are advisories to be squeezed for every dime while others embrace the old-boys network. As we saw in part 1 of “Suppliers: Squeeze-‘em or Friend-‘em,” it is important to understand that different sourcing strategies should be applied to different categories of spend. While the first article focused on categorizing suppliers, this article will explain the following different procurement strategies and offer suggestions on how they should be applied:

  • Competitive Bidding
  • Blanket Purchase Order
  • Partnerships
  • Secure Supply + Find Alternatives

As a reminder, the following chart shows the four categories (Leverage, Routine, Strategic, and Bottleneck) and the corresponding procurement strategies (Competitive Bidding, Blanket PO, Partnership, and Secure Supply + Find Alternatives).

Kralijic_portfolio_purch_model Figure 1 Kraljic’s Portfolio Purchasing Model

Procurement Strategies

Competitive Bidding

Competitive Bidding is an area often overlooked by companies, particularly small and midsize companies that do not have a centralized procurement group. Instead, they source to “known” or existing suppliers rather than reach out to the marketplace and consider new suppliers.

The typical process looks like this:

  • A capital budget is approved
  • The managers “preferred” supplier or contractor is asked: “can you do X or provide Y?”
  • Manager performs minimal review of the solution
  • A supplier is hired that may or may not be the best qualified or most cost effective

If competition is required, they may get quotes from three known suppliers or get a quote or two from unknown supplier that does not get true consideration. Companies typically save an additional 10 to 20% through a competitive process that includes new suppliers. In Guidelines for Competitive Bidding we provide eight rules to ensure more competition.

Competitive bidding is ideal for infrequent purchases of equipment or services that tend to have a high cost or high financial impact. Examples include construction, software, equipment, or janitorial services. The competitive bidding processes used are collectively referred to as the RFx process and include:

  • Request for Proposal (RFP): This type of sourcing is usually applied towards more complex procurements in which the need could be filled in many ways. The buyer outlines the problem and provides a general framework of the expected solution. The seller will submit a proposal of how they recommend solving the problem. The proposal typically includes a description/narrative, company credentials, pricing, and other information that should be considered in a decision. The buyer typically outlines what information should be provided.
  • Request for Quote (RFQ): This process is typically used when the buyer knows what they want and they simply want competitive pricing from different suppliers. This could include supplies or equipment or even services like janitorial or construction where the buyer has very specific requirement(s). While credentials will be factored, it is usually just a pass/fail evaluation of the supplier on if they are qualified. [spacer size=”6″]RFQ is sometimes applied to a Request for Qualifications process where suppliers are invited to prequalify for a project. To avoid confusion, I prefer to use the Request for Information (RFI) acronym for this process.
  • Invitation to Bid (ITB): The Invitation to Bid can be used interchangeably with Request for Quote. This designation is typically only used by companies that use RFQ for Request for Qualifications.
  • Request for Information (RFI): This process is typically applied for problems where the buyer has not decided on an approach or type of solution that is required. They may not know what solutions are available so they use the RFI process as a way to survey the market. The buyer may make a selection following this process or simply use this process as a way to gather information for a subsequent RFP. The “information” sought could be about possible solutions or possible suppliers.

Companies typically avoid the competitive bidding process because they lack the tools to manage the process efficiently. eBid Systems software reduces the time it takes to manage the competitive bidding process by up to 75%, while providing greater standardization and control across the organization. It is particularly useful in organizations with decentralized procurement responsibilities.

Blanket Purchase Order (PO)

A Blanket PO is for purchasing routine items. Typically the company will go through a competitive bidding process to establish fixed pricing on key items over a specified term for up to a specified value. Rather than making a single purchase, however; the company will order the items as needed over the specified term. There may or may not be fixed pricing or fixed discounts and the company may or may not guarantee its purchasing volume.

Because routine purchases are typically for inexpensive items that the costs of processing the transactions may be more than the items themselves, companies will often implement eProcurement systems that automate orders, requisitions, and payments. They often include a catalog management system like Vinimaya that provide internal staff a simple shopping cart experience while enforcing terms of the Blanket Purchase Order.

Partnerships

Partnership is a term commonly misused in procurement today. Suppliers always promise to “be your partner” while many companies refer to their employees and suppliers as partners. While it is nice that both buyers and sellers are so committed to each other, the reality is that true partnership arrangements apply to few buyer/supplier relationships. They are only relevant when they buying company’s existence or pricing is dependent upon the supplier. For example, a software integrator for a specific company like Microsoft or IBM would want to secure a “partnership” arrangement that specifies what will be provided by both companies. Another example could be a product that makes another company’s component a defining element of the product such as a Windows phone or a computer with “Intel Inside.”

Partnerships are complex and have an infinite number of variables to be negotiated directly by the company’s senior management.

Secure Supply + Find Alternatives

The Secure Supply + Find Alternatives procurement approach applies to Bottleneck Suppliers or those that provide proprietary products or services. Typical examples are parts and maintenance service of proprietary equipment; however, anything can become a Bottleneck supply if we are not careful.

A more unusual example is the carpet used in a office building. The building owner inadvertently used a unique pattern only available from one supplier. It was not until the supplier started raising prices and delaying shipments that they realized they were stuck. To replace the supplier would mean a patchwork carpeting or replacing the carpet throughout the building.

This leads to the first point about Bottleneck Suppliers, avoid them if possible. Try to find alternatives that are readily available from a variety of suppliers. In cases where you cannot avoid having proprietary products or services, use the Secure Supply + Find Alternatives procurement approach. What this means is that you Secure a Supply through contracts with performance guarantees while identifying other suppliers for the emergency needs. For crucial production items, you may want to have active contracts and spend with multiple suppliers so you can minimize supply risks.

As we have learned, there are four primary sourcing strategies – each of which is applicable to different types of suppliers. While different organizations may have a dominant approach, the strategist Peter Kraljic teaches us that a singular approach will result in higher costs, lower quality, and greater inefficiencies. While large organizations have teams of staff dedicated to the execution of these ideas, any organization will benefit through the adoption of these supplier management strategies.

While technology is not required to implement these principals, today’s technology make execution easier and more effective. For example, eBid eXchange provides tools that streamline the supplier prequalification process and let you build a database of potential suppliers and contractors, while the RFx management features reduce the bid management process by 50 to 70%.