The Key Dynamics of the Procurement RFQ Process
And what they mean to you
We have lost count of the number of times friends and business leaders have complained about how much harder business is today ‘because of Procurement’ – profits from cosy and long-established relationships have diminished. Procurement get involved earlier in the deal, are better trained, have more authority in their organisations, and see ‘the price of everything and value of nothing’.
We spoke to Jonas Olsson of global engineering group Trelleborg. He has been a procurement leader in the multinational industrial business for over 15 years, and has been at the forefront of modernising their procurement practices. Jonas provided us with some great ideas and insights for helping salespeople and businesses deal more successfully with procurement departments.
Here we look at three aspects of what procurement teams are looking to achieve in a RFQ/Tender process and what this means to suppliers. By the very fact that we are in this process, we are typically now in the leverage corner of the Kraljic Matrix (see the earlier blog How To Stay On The Right Side Of Procurement).
1. Procurement teams want to keep as much competition for as long as possible. Intense competition from quality providers leads to the best deals. As a result, they try and keep contenders in the process as long as possible.
What does this mean for you? If you are a strong contender, you have more influence than you may think. You can hold your line on price, the need to speak to stakeholders, or refuse to give details you consider commercially sensitive without being thrown out of the process. Procurement teams are looking at the entire package, and if you have understood and responded to their buying criteria you may still get to the final stages and be able to make your case, without having destroyed your margin in the process.
2. Procurement teams want to get the ‘best of the best’ price. To do this they will ask their supplier to break down their product or service offer into multiple cost elements. For example, if you happen to be supplying bottled water, the customer might ask you to quote for the cap, the bottle, the raw materials for the glass, the water, the labelling and any implementation and delivery services separately. On receipt of the tender documents they will end up with a table something like this:
|Unit Cost per 100 bottles $0.01||Supplier 1||Supplier 2||Supplier 3||Supplier 4||Supplier 5||Best Price|
|Implementation and Delivery||20||28||15||10||40||10|
The negotiation that follows is not (as the supplier might expect) based on the best overall price, in this example Supplier 2 at 82 cents. In fact, the procurement team will inform the suppliers how far they are from the best price – in each line item. This pushes the supplier to respond with discounts where their pricing is significantly away from the best price. What this process deliberately does not take into account is the variation in total pricing within each supplier. Here all the suppliers end up within a reasonably tight range of 85–96 cents in total costs, about 13%. However, the differences in each line item are considerable – the price for bottles for example has a range of 30–60 cents, or 100%. By asking suppliers to pitch against the best price for each line item, procurement teams are aiming to get ‘the best of the best’ in their pricing (in this case, 54 cents).
What does this mean for you? You should resist breaking your pricing down into too many constituent parts. If you are close to the best price, or have clear value that allows your pricing to remain reasonable, you can expect to remain in the tender. Remember procurement teams want to keep as many suppliers in the game for as long as possible. Also if you know this is happening you can resist dramatic changes in line items, knowing that your overall total cost may still be the one of the most competitive.
3. Procurement care about more than price, so unless you are selling a truly commoditised product, sell on value. Modern procurement departments know that to buy cheap is often to buy twice, and that any quality deterioration in the supply chain will lead to product failure, unhappy customers, brand damage and lower sales. However, you can only use this to your advantage if your product or service offers clear differentiation to those you can compete against. You need to be able to clearly communicate and provide evidence for your quality differentiation, throughout the whole buying process. For example, in our business our clients always have a range of buying criteria. A modern procurement team will rank (and may weight) the performance of each supplier against these criteria. They might end up with these results:
|International delivery capability (weight *)||Quality of Trainers||Evidence of success with methodology||Price||Experience in our industry||Cultural Fit||Total*||Ranking|
|Supplier 1||4 (8)||3||3||2||5||4||25||2|
|Supplier 2||5 (10)||4||5||1||4||5||29||1|
|Supplier 3||3 (6)||5||4||3||2||1||18||3|
|Supplier 4||2 (4)||2||1||4||3||2||16||4|
|Supplier 5||1 (2)||1||2||5||1||3||13||5|
*Scores – 5 the best, 1 the weakest
In this example it is clear that the procurement team would be foolish to go for the cheapest option. Indeed against their criteria the most expensive option may well be the best (particularly if they negotiate the price down to the same level as the second or third options).
What does this mean for you? Getting into an account before an RFP is issued can mean you have the opportunity to influence these criteria in your favour. In the early stages of an RFP these criteria may not have been articulated, or they will have put undue importance on something you can demonstrate to be less critical. If you know the likely buying criteria for a company, or even sector, your product and marketing teams should be building and communicating their value and differentiation against these criteria. Even if you did not get in early, if you believe you are hitting their value criteria, you don’t need to discount heavily against the lowest cost options to win the business.
How can we help? Our Creating Client Value consultative sales programme provides sales teams with the skills to communicate value, and identify and sell to client needs. Our 3D Negotiations programme helps salespeople create and capture value throughout the customer’s buying process.