The Solicitation Process in Procurement and Supply Chain Management
In some cases, such as for low-volume commodity items, the sourcing process may be simple: Items can be selected from suppliers’ catalogs or websites, often by the internal customer, at prices that have been negotiated in advance by supply management professionals. In other cases, with low-value items below a defined monetary limit, informal quotations may be requested by email or phone. For larger-value purchases a formal solicitation process is used. To determine the appropriate type of solicitation, supply managers must decide if negotiation or competitive bidding will be used to select the suppliers.
After potential suppliers are identified, the next step is to develop the appropriate type of solicitations. A solicitation is a “request to suppliers to submit submissions to a procurement organization” (ISM Glossary 6th edition). Suppliers respond to the buying organization’s solicitation with an offer to sell. The buying organization then can decide if it will accept the offer. Valid contracts require an offer and an acceptance.
Types of Formal Solicitations and Process
Solicitation of information may take many forms. The most frequently used are the following:
- Offer to buy vs. offer to sell — A contract, to be enforceable, must have an offer and an acceptance. A purchase order may be either an offer to the supplier to buy the specified goods or an acceptance of a supplier’s offer to sell the specified goods. It is usually advantageous for organizations to solicit suppliers’ offers to sell. This permits the organization to retain the power of acceptance. Otherwise, an offer to buy may be sent to a supplier that fails to respond. Without the supplier’s acceptance, there is no contract, and no supply of products or services.
- Informal bid/quotations — Informal bids are generally manifested in one of two ways. First, informal bids refer to telephone, written or electronic quotations whose dollar values are less than a pre-established monetary limit. Second, informal quotations may be used to solicit budgetary information from suppliers for estimating purposes. In the latter instance, it is critical that the supplier mark the bid to indicate that the submitted proposal is for budgetary purposes and is subject to change.
- Electronic solicitations (RFx) and e-auctions — As a general rule, documents transmitted electronically are considered to be as valid as the original documents. It is important that both parties establish in advance their acknowledgment and acceptance of the sourcing organization’s Ts & Cs as a part of business transactions conducted via fax or email. Supply management is responsible for establishing a process to ensure that Ts & Cs are sent to potential suppliers.
Electronic or e-auctions have become a popular way to source products and services. The reverse auction is the predominant tool in supply management today. The buying company usually initiates a reverse auction by sending out an e-RFQ, and suppliers quote their prices via an online system. All suppliers are logged into the system at the same time, and often can view the competing suppliers’ bids (although their identity is not visible to other bidders). This enables a competitive environment, since suppliers can submit multiple bids, eventually, in an ideal setting, yielding the true market price for the buyer (Schoenherr and Mabert 2007).
- Lotting strategies (online bidding) — Lotting strategies are techniques used in reverse auctions and online bidding when a large number of items or services are to be bid. Lotting strategies can be used in conjunction with both traditional and e-commerce applications. Lots are structured to increase cost-reduction opportunities (ISM Glossary 6th edition). The supply management professional can develop lot-bidding rules requiring suppliers to bid on all lots, permitting them to bid on only the lots that the supplier can provide, or even allowing suppliers to structure their own lots to maximize their efficiencies.
- 4. Competitive proposals — The competitive proposal: (1) is initiated by an RFP, setting out the organization’s requirements and criteria for proposal evaluation; (2) contemplates the submission of timely proposals by the maximum number of possible suppliers; (3) usually provides for discussion with those suppliers found to be within the competitive range; and (4) concludes with the award of a contract to the one supplier whose proposal is most advantageous to the organization, considering price and the other factors included in the solicitation. To ensure that competitive bidding is handled effectively and fairly, most organizations have specific policies addressing the procedures to be followed before and after issuing RFPs.
- 5. Sealed bids — A sealed bid is a bid that has been submitted in a sealed envelope to prevent its contents from being revealed or known before the deadline for the submission and opening of all bids (ISM Glossary 6th edition).
- 6. Formal advertising of solicitation process to suppliers — Formal advertising is frequently used for the procurement of services such as building or maintenance contracts, construction and equipment, but it also may be appropriate for selling scrap and surplus.
- 7. Restricted competition — In some instances, restricted competition may prohibit the organization from obtaining more than one proposal. Reasons for restricted competition include specialization of the resources required to deliver the product or service, lack of competition in a specific geographic region, and regulatory restrictions. A bid submitted under restricted competition should be carefully analyzed by a multifunctional team, using benchmark data with comparable requirements, to ensure the bid is competitive based on available information.
- 8. Noncompetitive negotiations — In situations where specifications are not yet clear or complete, it may be advantageous to negotiate with a supplier. Similarly, if a performance specification has been developed, negotiation may be appropriate. In either of these cases, or in other situations where one supplier is clearly superior, it may be appropriate to negotiate with only one firm. Such situations may arise when only one supplier can offer critical skills, capabilities or technologies.
- 9. Two-step bidding — Two-step bidding is used when inadequate specifications preclude the initial use of competitive bidding. In the first step, bids are requested only for technical proposals, without any prices. In the second step, invitations for bids (IFBs) are sent only to those suppliers that submitted acceptable technical proposals, asking those suppliers to submit an updated bid with pricing (ISM Glossary 6th edition).
- 10. Pre-qualified bidding — In pre-qualified bidding, bids are solicited only from those organizations that have already been shown to meet the minimum requirements of the organization. The bidding process is not open to others in the supply base.
- 11. Alternative or innovative proposals — There is no single best way to write an RFx (request for quote, information or proposal). The structure, content and method of managing the information before, during and after submission of the bid by the supplier should be guided by the principles of ethical and fair sourcing practice, and organizational policy. Understand the business culture in the applicable country or industry, and be aware that some forms of bidding may not be appropriate in all places. In some forms of solicitation, such as invitation for bids (IFBs), alternate proposals may not be allowed and may disqualify the bid. This should be specifically pointed out in the bid document. Alternate proposals are generally accepted in RFPs.
- 12. Pricing models — The price of a product or service may be set in a variety of ways. In general, the seller defines a fair price either as a price that covers the full cost to produce the product or service (including overhead costs and a reasonable profit) or as a price that compensates the seller based on the value of the product or service to the purchaser (and that also covers all relevant costs). A “reasonable” profit is defined as a profit that rewards the seller for the risk involved in providing the product or service. The supply management professional usually defines the “fair” price as the lowest price required to obtain the desired product or service. The supply management professional’s perspective is normally focused on the cost of the product or service.
- 13. Market structure — One factor that clearly affects price is the level of competition. The various types or degrees of competition range from one seller with many buyers (a monopoly) to many sellers with one buyer (a monopsony), as explained below.
- A monopoly is characterized by the presence of one provider of a product or service with many buyers. Monopolies are illegal in the United States under antitrust laws. With no competition, the seller could set any price it desired.
- Monopolistic competition is characterized by few sellers and many buyers. The few sellers create the illusion of many sellers through product differentiation. An example is the breakfast cereal industry, in which a few organizations control the market. These organizations offer a wide variety of products that compete for market share not only with other organizations’ products but also with the organization’s own brands.
- Oligopolistic competition is characterized by few sellers and many buyers. Price is controlled by either an industry leader or a cartel. The steel industry was traditionally an oligopoly: One organization would propose a price, and the rest of the industry would often quickly adopt that price. An example of a cartel is the petroleum industry, where OPEC establishes the price for all its members.
- Perfect competition is characterized by many buyers and sellers. In a perfect market, all buyers and sellers have equal importance. Most markets function effectively like a perfectly competitive market, although in reality the markets are not “perfect.” Price is established based on supply and demand.
- Oligopsonistic competition is characterized by many sellers and few buyers. In this type of market, buyers have a major effect on pricing because all the sellers must compete for their business.
- Monopsony is characterized by the presence of several sellers and one buyer. This is the reverse situation of a monopoly. In a monopsony, the buyer controls the pricing; this is historically true for government monopolies such as nationalized railroads or telephone ministries. An example is the market for military fighter aircraft, where the U.S. government controls sales by domestic producers.
- 14. Market basket approach — The combination of goods and services that are used to calculate U.S. government reported indices such as consumer price index (CPI) or producer price index (PPI) are called market baskets (ISM Glossary 6th edition). Prices are compared to indices to assess if they are reasonable.
- 15. Invitation for bid (IFB) — An invitation for bid involves a request made to potential suppliers to submit a bid for products or services desired to be purchased. Alternate proposals may not be allowed and may disqualify the bid. In government procurement, an IFB also refers to the solicitation document used in sealed bidding, and in the second step of the bidding process (ISM Glossary 6th edition).
- 16. Request for proposal (RFP) — A document soliciting offers of price and proposed method of project execution (ISM Glossary 6th edition).
- 17. Request for quotation (RFQ) — A request for quotation (RFQ) is used when the specifications are known and clear, and price is the most important factor that will be used to select suppliers.
- 18. Request for qualifications — To identify qualified suppliers that should receive an RFP, a request for qualifications is used. Suppliers do not submit a bid, but provide information about their qualifications and capabilities. Those suppliers that meet the qualifications are then included in the actual bidding process.
Competitive Bidding Process and Negotiation in Procurement and Supply Chain Management
In competitive bidding, solicitations are sent to qualified suppliers to get the maximum number of supplier proposals. In the public sector, supplier selection is normally based on the lowest price. In the private sector, price and other important factors are typically considered when selecting the supplier. If specifications are not fully developed, a two-step bidding process can be used. Technical proposals are requested in the first step, followed by a request for an updated bid with pricing from suppliers with acceptable technical proposals. According to the ISM Glossary (6th edition) negotiation is “an exploratory and communication process (identifying interests, walk-away alternatives, and options) internally and externally to reach a mutually satisfactory agreement.”
Supply market conditions, the type of contract desired, industry standards, and the time available influence the choice of competitive bidding or negotiation. When the market consists of many willing, qualified suppliers that can provide the same quality, delivery, and service, competitive bidding is often preferred. If there are few suppliers that can provide a product or service, if the specifications are not clear or may change, or if early supplier involvement in product development is needed, typically negotiation is used. The type of contract desired is another determinant of whether to solicit bids or negotiate. For example, fixed-price contracts are based on a price that will not differ from that agreed upon at the time of the ordering. This type of contract is a good candidate for competitive bidding. Cost-reimbursable and indefinite delivery quantity contracts, also called blanket contracts, are better candidates for negotiation, as the costs are more uncertain and often the terms need to be changed after the contract is created.
Industry norms and standards are other important considerations. Products that are manufactured to the same general specifications by all producers are commonly referred to as “industry-standard products.” Because of the competitive nature of the markets for these products, competitive bidding rather than negotiation is ordinarily used for acquisition. Custom-made products and especially services, by contrast, may not have sharply defined specifications or many capable suppliers. In these situations, negotiation is preferred.
The time available to obtain the product or service must allow for competitive bidding. This includes time for supply management professionals to develop and send or formally advertise solicitations, as well as time for suppliers to respond to them, and time for bids to be evaluated. If adequate time is not available, negotiation should be used. If the dollar value of the item is relatively low, the time and expense of competitive bidding is probably unjustified for both the buyer and supplier. A product or service that is purchased frequently is generally a poor candidate for competitive bidding because of the time requirements. Blanket orders, systems contracts, or procurement cards are alternatives for frequent purchases. The choice of competitive bidding or negotiation affects the type of solicitation method that is used.
Developing an RFI, RFQ, RFP, or IFB in Procurement and Supply Chain Management
An important part of the sourcing process is to gather information using requests for information (RFI) and writing and issuing formal solicitations that inform suppliers of the opportunity to sell products or services to the buying organization. Three types of formal solicitation documents are used: 1) request for proposal (RFP), 2) a request for quotation (RFQ), and 3) an invitation for bid (IFB). A comparison of when to use each method, potential benefits, and potential problems are shown in Figure 4-2.
Figure 4-2: Information and Solicitation Methods
|METHOD||WHEN TO USE||POTENTIAL BENEFITS||POTENTIAL PROBLEMS|
|RFI||Before developing specifications when market information is needed||Gathers new ideas and supply market understanding||Not a solicitation, thus is not binding on either party|
Suppliers do not respond if used too frequently
|RFP||When specifications are not clear or are uncertain, or when several solutions may be feasible||Leverages supplier’s expertise to generate new ideas and solutions||Difficult to clearly communicate needs|
Challenging to compare supplier responses
|RFQ||When specifications are clear and unambiguous and price is the only selection criterion||Efficient||Specifications are not clear or can be misunderstood|
There may be differences in suppliers’ offerings other than price
|IFB||In government procurement with sealed bidding when specifications are clear and unambiguous and price is the only selection criterion||Efficient||Specifications are not clear or can be misunderstood|
There may be differences in suppliers’ offerings other than price
In some sourcing situations, the buying organization needs more information about products, services, and supplier capabilities prior to finalizing the purchase specifications or determining which suppliers to include in a solicitation. In this case, an RFI is used to gather information about potential suppliers, products, or services. Typically, RFIs are quick surveys asking high-level questions. An RFI is not a solicitation and thus is not binding on either the supplier or the buying organization (ISM Glossary 6th edition). The responses to an RFI can also improve budgeting, assess supply chain risk, and identify alternate processes or products. After evaluating the information received in the RFI supply managers may decide to negotiate with one or more of the responding suppliers or submit formal solicitation documents to suppliers. Using RFIs too frequently can be a problem. When this happens, suppliers may decide not to participate and thus the buying organization does not gain useful information.
The ISM Glossary (6th edition) defines an RFP as “a solicitation document used to obtain offers of price and a proposed method of executing a project.” When specifications cannot be described objectively because the product or service is not yet fully developed or specified, the supply management organization is interested in getting the supplier’s ideas, and/or some uncertainties exist surrounding technology or materials used or needed, an RFP can be issued. In this case, negotiation between the buyer and supplier typically takes place to determine the scope of the product or service purchased, as well as the price. In some situations, several suppliers may be brought together to develop a joint proposal; these suppliers work with the buying organization, with the understanding that their knowledge of the proposal will have an impact on how well they can respond to the bidding process that results.6 In the end, one or more suppliers can be chosen for negotiation.
Writing and organizing RFPs can be challenging. It is important to clearly communicate the problem that suppliers need to address without focusing on a single solution that may restrict suppliers’ ideas. Generally, suppliers also may submit alternative proposals in response to an RFP. Further, the RFP should be organized and structured such that proposals from different suppliers can be easily compared.
The ISM Glossary (6th edition) defines an RFQ as “a solicitation document used to obtain price quotes for a specified product or service. These are often a follow-up to an earlier request for information.” An RFQ is focused solely on price and is used for standard purchases in which the only relevant difference among suppliers is price. If the specifications for a purchase can be described clearly and unambiguously, an RFQ can be developed and issued to potential suppliers. When the specified time has passed, the bidding process is closed and the quotations are studied, compared, and clarified. Thus, RFQs are an efficient way to make sourcing decisions.
An IFB requests potential suppliers to submit a bid for products or services desired to be purchased. Specifications must be clear and unambiguous so that all suppliers will interpret them in the same ways. Alternate proposals may not be allowed and may disqualify the bid. In government procurement, an IFB also refers to the solicitation document used in sealed bidding and in the second step of the bidding process (ISM Glossary 6th edition). In sealed bidding, all bids are opened or revealed at the same time (ISM Glossary 6th edition).
There is no single best way to write a solicitation, but typically, the following should be included:
- Instructions explaining how to submit responses, key deliverables, and if required, the format that respondents are expected to use.
- Timeline for the solicitation process including release date, bidder’s conference if planned, due date, and planned contract award date.
- Criteria that will be used to evaluate bids or proposals including weights if used.
- A complete specification of the item or an SOW of the service to be quoted.
- The quantity to be quoted.
- Where and when the items are to be shipped or installed, or where and when the services are to be performed.
- The due date for the quotation.
- The due date for the product or service.
- Proposed contract terms and conditions (Ts & Cs).
- Non-disclosure agreements (NDA) to restrict the disclosure of proprietary or confidential information by the supplier.
Ethical and fair sourcing practice and organizational policy should guide the process of structuring and managing information before, during, and after supplier submissions. Some forms of solicitation may not be appropriate based on industry, regulations, or business culture. Depending on the country the supply management professional is working with, variations in cultural norms may require altering the way business is accomplished. For example, when dealing with Asian suppliers that value personal relationships, a visit to the supplier may be a prerequisite and the establishment of a relationship will need to occur before issuing an RFQ and obtaining a valid quotation. In fact, only when a common understanding has been reached with the supplier can specifications be accurately interpreted and integrated into the process.7
E-Sourcing Tools in Procurement and Supply Chain Management
IT applications are used extensively in sourcing, and in most Organizations the entire sourcing cycle process flow is digital. Most firms have adopted eRFx — “x” refers to information (eRFI), proposal (eRFP), or quote (eRFQ). These tools streamline the solicitation process and reduce errors by providing:
- Proposal templates that leverage information, questions, and standards from previously completed sourcing efforts.
- Automated response compilation and analysis with user-stipulated criteria and weightings.
- Messaging systems and communication boards.
- Access to supplier login and response status.
- The ability for respondents to share completion responsibility across multiple resources.
An electronic method for obtaining competitive bids in common use today is a reverse auction. A reverse auction is “a fixed-duration bidding event hosted by a single buying organization, in which multiple prequalified and invited suppliers compete for business. Potential suppliers review the requirements, choose to bid, and enter their selling prices. Suppliers’ prices are often visible to competitors, typically resulting in successively lower prices” (ISM Glossary 6th edition). In an ordinary auction (also known as a forward auction), buyers compete to obtain a good or service; this is similar to eBay bidding. In a reverse auction, sellers compete to obtain business. Reverse auctions are generally used when:
- There is sufficient competition in the market (at least three to five suppliers with comparable cost structures).
- Specifications are defined, clear, and easy to communicate.
- Switching suppliers is realistic; switching costs and current contract arrangements should be considered.
- Quotes received will be technically and economically comparable.
- Goods or services and the associated incumbent suppliers are not highly strategic to the business.
- Lotting can be used to streamline subcategories with more than 25 SKUs.
- Expected savings are higher than the cost of running the auction.
If the purchase is appropriate for a reverse auction, preparation includes recognition of need, specification of need, and the search for potential sources, as is done with any sourcing process. In addition, the event must then be set up in the e-sourcing application. If many items or services are to be bid they are combined into lots that are structured to increase cost-reduction opportunities (ISM Glossary 6th edition). Bidding rules can require suppliers to bid on all lots, permit them to bid on only some lots, or allow them to develop their own lots. The suppliers will need training if they have not used the e-sourcing tool before.
After the event, the supply manager may decide to award the contract to the supplier that bids the lowest price or offers the best combination of predetermined performance attributes. Sometimes contracts are awarded to suppliers that bid higher prices depending on the buyer’s specific needs for quality, lead time, capacity, or other value-adding capabilities. Often contracts are awarded to incumbent suppliers, even if prices are higher than the lowest bids, because the switching costs to move work to a new supplier are higher than the potential savings realized by the switch. When used in the correct sourcing situations, the following benefits can be obtained from reverse auctions:
- Lower purchase prices — Suppliers have knowledge of price levels and can instantly change pricing during an event.
- Increased productivity and reduced bid cycle time — Online events are usually two to three hours in length. The preparation before and after the event is similar to traditional competitive bidding except that additional training of suppliers may be required.
- Expand suppliers’ participation — The online aspect of reverse auctions enables suppliers from anywhere in the world to participate in the bidding event, increasing competition.
- Real-time supplier evaluation — Supplier evaluation and analysis can be done during the event, as all supplier responses are evaluated electronically at the same time.
Other Types of Solicitation Process Considerations in Procurement and Supply Chain Management
If a purchasing situation is complex due to issues such as highly technical specifications, a large spend, or the critical nature of a contract, if time allows, a pre-bid or pre-proposal conference (either in person, using video conferencing, or teleconferencing) may be helpful. All potential suppliers that the buying organization would consider using should be invited to participate. Suppliers should receive the solicitation package well in advance of the conference so they have time to review it prior to the meeting.
The conference provides the opportunity for two-way communication about blueprints and specifications, SOWs, quotation due dates, terms and conditions, proposal evaluation criteria, delivery schedules and materials, releasing procedures, invoicing procedures and documentation (including incentives), requirements if awarded business (such as reporting, insurance, background checks, security clearances, and permits), and other requirements established by the buying organization and supplier. If a conference results in changes to the solicitation, a written amendment to the solicitation should be issued. However, some suppliers may not be able to attend because of time, cost, or concerns about sharing information with competitors.
11 Best Practices of Solicitation in Procurement and Supply Chain Management.
There are several best practices to ensure the solicitation process is fair and ethical. These include:
- Only qualified suppliers that the buying organization would consider awarding business to should be included in the solicitation process. To include suppliers that are not qualified is a waste of their time and resources.
- All suppliers must receive the same information as part of the solicitation and during the solicitation process. For example, if a supplier asks for clarification, all suppliers should receive the explanation.
- The suppliers should have adequate time to respond to the solicitation. The time allowed should consider the complexity of the process, the buying organization’s needs, and other solicitations that the suppliers may be addressing from the buying organization.
- Time extensions, if given, must apply to all suppliers.
- If a solicitation is cancelled by the buying organization, all suppliers should be notified immediately.
- All supplier proposals or quotations are confidential and should not be shared unless it is required by law to be public information.
- Record the time and date each submission was received.
- Review each submission for completeness, ensuring that all documents referenced by the supplier or requested by the organization are included.
- Retain all submitted documents from each respondent in the original bid package.
- Evaluation criteria should be consistently applied to all suppliers.
- All suppliers that submit quotations should be notified whether they received the award or not.