The preparation of solicitations for competitive bids, quotations and proposals is one of the first, and most important, steps in the sourcing process. At this stage, specifications and Ts & Cs are developed and defined, which provide a crucial foundation for communications with suppliers. The content of the solicitations should be as precise and clear as possible to avoid any misunderstanding in terms of expectations. This section introduces some of the major forms of solicitations and their components.
Methods of Communicating Attributes of a Product or Service in competitive bids and noncompetitive bids
As defined in the ISM Glossary 6th edition, a specification is a description of the technical requirements for a material, product or service. A specification for service to be performed is called a statement of work (SOW). The definition of specifications includes two components:
- The first component defines what the product must look like or do. Descriptions differ by the type of product or service bought, and may include items such as blueprints, materials specifications, performance specifications, and statements of work.
- The second component is quantitative with specific metrics that differ with the type of product or service being purchased. Examples include quality metrics such as parts-per-million or parts-per-billion for electronic components, mean-time-between-failures (MTBF) for equipment, CpK (process capability) for custom production and allowable frequency of defaults in performance of a service.
Acceptance criteria define the specifications the product or service must meet upon delivery to be accepted and paid for by the buying organization. For products, these include the measurements to be taken during incoming inspection and the allowable results. For equipment, acceptance criteria include a level of operating performance and length of time it must operate at that level before it is deemed acceptable. For services, acceptance criteria include the definition of the finished “deliverable,” which may be a result, a look, a report, a product or the performance of equipment.
- Performance and design specifications — Performance specifications define what the product or service must do. They are often used to define the acceptability of capital equipment and of many types of services. The supply management professional is interested in outcome.
Typically, the details of how the performance will be achieved are not specified and are determined by the supplier. When performance specifications are used, the supplier has flexibility to determine how to go about satisfying the requirement. The supplier also assumes the risk for proper performance of the product or service.
Design specifications provide a complete and detailed description of what the product or service must look like. They often define the process by which a product will be made, specify the materials to be used, and give step-by-step instructions to carry out the process. Design specifications give the buying organization maximum control over outcomes, but it also assumes the risk for performance.
- Internal vs. external specifications — Internal specifications are adopted for use within the organization. Internal specifications that are the same as external specifications set by industry or government are most desirable. If internal and external specifications are not the same, the product will usually cost more. It is a good practice to correlate quality measurements between the organization and supplier so that both organizations know what is wanted and agree on how quality will be measured.
- Supplier samples — A physical sample serves as a specification. When the sample meets the supply management professional’s needs, the specification will reference the sample and state that any other items should be produced just like it.
- Statement or Scope of Work (SOW) — A statement containing the specific services and work activities a supplier is expected to perform is a statement of work (ISM Glossary 6th edition). The SOW also usually includes the type, nature, extent, level and quality of service that is expected, as well as a timeline for the tasks and deliverables. Other common components include the conditions under which the work is to be performed. An SOW is an important governance tool, and is commonly used when purchasing services.
- Non-disclosure agreement (NDA) — To restrict disclosure of proprietary or other key information, non-disclosure agreements (NDAs) are used. These can be part of the Ts & Cs or a freestanding agreement (ISM Glossary 6th edition). NDAs should be included in the solicitation packets sent to suppliers.
Competitive bids vs non-competitive bids
The second step of the sourcing cycle is to develop the detailed specifications that will be communicated to potential suppliers during the Competitive bids vs non-competitive bids. A specification “is a description of the technical requirements for a material, product, or service” (ISM Glossary 6th edition). Specifications must clearly communicate what the product or service must do or look like. Five types of communication methods are used most often: 1) performance specifications, 2) design specifications, 3) statements of work, 4) external specifications, and 5) supplier samples. Descriptions of these methods are shown in Figure 4-1.
Figure 4-1: Types of Communication Methods in Competitive bids vs non-competitive bids
|Performance Specifications||Performance specifications define the characteristics of an acceptable product or service but not its details or how it should be made.|
|Design Specifications||Design specifications provide the details of how the product should be made or how the service needs to be carried out.|
|Statements of Work (SOW)||An SOW is a document used in services procurement to define exactly the nature of the work and the conditions under which it will be performed, such as the type, level, and quality of service, as well as the time schedule required.|
|External Specifications||External specifications are specifications set by the industry or government.|
|Supplier Samples||A physical sample can be used to communicate specifications. When the sample meets the buying organization’s requirements, the sample then is typically referenced as “specifications.”|
Performance and Design Specifications. Performance specifications define what the product or service must do but not its design. When performance specifications are used, the process is commonly referred to as black box sourcing, and the supplier has maximum latitude to determine how to achieve the required performance. The buyer focuses on results as captured by the performance specifications, leaving the details of how to attain these results up to the supplier. For example, an auto assembler such as General Motors uses performance specifications for the navigation systems in its vehicles. Performance specifications also are often used for capital equipment. When performance specifications are used, the supplier assumes all responsibility for the product’s or service’s performance.
Design specifications provide a complete and detailed description of what the product or service must look like. They often define the process by which a product will be made, specify the materials to be used, and give step-by-step instructions to carry out the process. Design specifications give the buying organization maximum control over the process through which an outcome is achieved. This approach typically is referred to as white box sourcing and is used in situations where the buying organization has stronger design capabilities than its suppliers, the interface with other suppliers’ parts and components is critical for quality and performance, or when strict control is needed (for example, to ensure product safety). When using design specifications, the buying organization assumes the risk for proper performance. For example, a pharmaceutical product is likely to be sourced using design specifications.
Statement (or Scope) of Work (SOW). For services, a statement (or scope) of work (SOW) document is used to communicate needs to suppliers. An SOW “describes the nature and extent of the work to be performed and outlines the conditions under which the work is to be performed” (ISM Glossary 6th edition). An SOW should include a definition of the work to be done, the time frame, the boundaries of the work, the expected results, and how the supplier’s performance will be evaluated. For more complex projects, such as an ERP implementation or human resources outsourcing, an SOW should also include a work breakdown structure, which breaks the project into smaller subsegments to facilitate project management.
When a large service contract is broken down into smaller segments, the continuation of the overall contract may be contingent upon the successful completion of each segment. After the completion of a segment, a quality assessment may take place to explicitly acknowledge that the SOW has been met to that point. When several dependent segments merge to one point in the progression of a service project, it is called a hold point or a milestone. Approval must be granted before the work proceeds. The hold points or milestones are put in place to control deviations that occur during the project.
Other Types of Specifications. Internal specifications are developed by an organization for its own use. External specifications are developed by industry associations or governmental agencies. For example, ASTM International is a source of standards for metals, plastics, textiles, and a wide range of other materials and processes. Internal and external specifications should overlap as closely as possible. Using specifications based on industry standards generally means that there will be more qualified suppliers for products or services, which increases competition and lowers prices.4 External standards simplify communication with suppliers. Both the buyer and supplier organizations should mutually understand what is desired as well as how performance against the specifications will be measured.
In some cases, when characteristics such as color, texture, flavor, or aroma are needed, a sample is the best way to communicate the requirements. For example, think about sourcing a textured, floral fabric to be used for upholstered furniture. It would be much easier to provide a sample than to try to develop written specifications describing the fabric. When a physical sample is used to communicate specifications, the contract terms state that other products should be produced just like the sample. Often, services also can be sampled. Once the buying organization samples a service process, such as a training class or a catering operation, it may document the key characteristics of the sample and request that subsequent services duplicate it.