Part I: Effective Supplier Evaluation – The Price is Right… How about the Supplier?

By Ben Werner, Consultant, The Hackett Group and Auri Ghatak, Manager, The Hackett Group Most companies today are trying to move towards a more competitive and efficient bidding process when it comes to procurement. Some of these companies have policies that require buyers to solicit a specific number of bids when procuring certain items, and often times that selection process may be entirely centered around price. Some buyers might simply ask three suppliers to send in a price for a certain item. Others may take the next step and send out a formal RFP (Request For Proposal) with several qualitative and quantitative criteria for the suppliers to fill out. A common issue is that despite sending out a formal RFP, the buyers still select the supplier based solely on price while ignoring other critical qualitative factors. This occurs for three key reasons: –          The RFP is full of criteria that is irrelevant or of low importance, so price remains the determining factor –          The client buyers/procurement staff do not know how or do not have the time to process and evaluate all of the qualitative and quantitative information they receive from the suppliers in the RFP; so, price is still the only true determining factor –          The RFP does not communicate the evaluation criteria accurately so the suppliers are not incented to offer competitive proposals around service levels, lead times, etc. It is important that RFPs are comprehensive and well-structured with the potential savings, award scenarios, and necessary analyses in mind instead of simply using an old template from another company or just compiling a laundry list of criteria from a few different sources. If price and maybe some subjective public perception are the only deciding factors, the buyers subject their company to a variety of risks (buying the incorrect type of product or service, poor quality, poor customer service, excessive costs of logistics, etc.) and likely forego supplier relationships that bring significant added value. Essential Components for a Comprehensive RFP Every RFP will be different depending on the category, geography, the buying company (size, industry), current market conditions, etc., but every comprehensive and well-structured RFP should contain most if not all of the following elements:
  • Company Background – Description of what the buying company does and the company’s accomplishments. It is important to convince the suppliers that the buying company is a stable, credible, and attractive company to do business with.
  • Scope of Procurement – Description of what products/services are in scope, which geographies are in scope and the magnitude of the expected usage volumes.
  • Intent to Respond – Form asking suppliers to provide response with indication of intent to participate (or not). Due back within 48 hours of solicitation to gauge supplier interest ahead of responses. This provides the supplier with an easy first step to engage in the RFP process,  and it quickly eliminates certain suppliers from consideration, which helps not to waste any of the buyers’ time.
  • Specifications – Description of products/services and required service levels, in enough detail to make it distinguishable from any other product/service to ensure accurate bids. If the specifications are not accurate enough, it will result in excessive questions from suppliers, delays, and incomplete/inaccurate bids.
  • Qualitative Information – Questions related to non-price factors such as service, warranty, delivery, quality, etc.; questions related to suppliers background and experience in other similar accounts/sectors along with references; overview of the supplier-proposed implementation process; and other category specific relevant qualitative information. These types of questions can return a whole slew of information that may be difficult to process, so it is important that only relevant questions are included and a methodology to process the qualitative information has already been developed.
  • Pricing – Typically detailed pricing grids in Excel spreadsheet requesting pricing for the various goods/services and ancillary costs under procurement. The pricing grid should reflect the needs of the category, which may require one or a number of different types of pricing such as Market Basket Pricing, volume pricing tiers, % discount off of a list price, etc.