What is an RFP?
A Request for Proposal (RFP) represents a document or a sourcing stage where proposals are solicited from suppliers or solution providers.
The RFP is used by the Buyer to specify the requirements of the goods or service being procured, the terms and conditions of the engagement, the vendor evaluation criteria, and most importantly the bidding sheet. This bid sheet outlines the quantum of goods or services and suppliers need to quote the price for the same.
All spend categories – indirect, direct, and capex – are subject to RFPs. An RFP is a necessary component of every sourcing process, varying in complexity depending on the type of goods being sourced.
3 key aspects of an RFP that underline its importance
1. RFPs precede the ‘negotiate & award’ stage and hence need to be managed from that perspective
An RFP is followed by a negotiation process, after which the business is usually awarded to the supplier with the best price, capability and service.
In an online eSourcing scenario, RFPs precede auctions and hence set the basis for the starting price for every supplier. If multiple suppliers have responded within a narrow price range, the chances of a successful auction are high. Note that If prices are high, it is not advisable to rush into an auction without understanding the reasons behind high pricing received from the suppliers.
In addition, negotiation happens with qualified suppliers only. Hence the RFP must solicit all kinds of information for buying teams to achieve that.
2. Once RFPs are issued, Supplier Management is critical
Supplier responses to an RFP are the initial indicators of the supplier interest and eventual success of the sourcing project. While the buyer may think the business is exciting for every supplier, it may not be the case. A large steel furniture company put out a bid for USD 30M worth of fabricated steel. While this seemed a phenomenal business for any new vendor, it required many of them to invest significantly to meet this demand. The terms & conditions didn’t address this aspect and hence the RFP received a lukewarm response.
Supplier participation is key. 2 vendors responding to an RFP sent to 15 vendors is a cause for concern. Either the specs are wrong or over-designed or the suppliers have misunderstood certain aspects of the RFP. Reaching out to them proactively and addressing their concerns is vital.
3. Standardization of RFPs helps to lower cycle times
Studies show that companies spend 30% of their sourcing cycle time in drafting RFPs. Many times, sourcing teams tend to recreate RFP content rather than reusing content from previous RFPs.
In addition, standardization helps in reducing time-to-publish and also allows teams to proceed with greater clarity.
Standardization of pricing bid sheets (computation of activity costs or landed costs), terms and conditions, qualifying questions, etc. help a great deal in speeding up the process.
What are the benefits of digitalizing RFPs?
It is common for many sourcing teams to only adopt online auctions as part of an eSourcing initiative. RFIs and RFPs continue to be manual though. We at Krinati think this is a less-than-ideal strategy and that digitized, online RFP execution would be more valuable.
Online RFPs help sourcing teams achieve the below.
1. Reduced time to create and publish RFPs
Templates help in creating and publishing RFPs in minutes.
Say there is a qualifying questionnaire used to purchase chairs for a new office. This questionnaire can be saved as a template and reused for the next sourcing event. Let’s assume that the team made some omissions in the previous sourcing cycle – they forgot to ask for after-sales support for the chairs and the time for resolution. Since questionnaire templates can be modified on-the-fly, the event content remains updated and available at the time of publishing the sourcing event.
2. Improved supplier management and collaboration
Bids from suppliers should be reviewed as soon as they are submitted online. How does one supplier fare vs the others? Have suppliers responded to all the line items? Are there any line items that haven’t received any response? It is critical to evaluate the RFP when it is still live because all the analysis done post the response due date does not serve the same purpose.
3. Greater Savings
Suppliers tend to trust a system more than the words of a buyer. Competitive RFPs display the rank and/or leading bid to suppliers as soon as they submit their response. As a result, competition ensues, and suppliers submit several bids while the RFP is live.
This is particularly useful when purchasing items for the first time or when there is an auction to follow. RFP bids tend to fall within a narrow range which perfectly sets up an auction.
4. Compliance and audit-friendliness
We can all agree that this is one of the most thoroughly scrutinised processes in any organization. Auditors must know if three bids were solicited. Which suppliers did not take part? Why did they refuse? Who decided on the award? Who qualified the supplier (based on the evaluation scores)?
Online RFPs provide this critical compliance, keeping the internal audit team happy!