The Invitation for Bid, Request for Proposal or Request for Quote is just another step in the negotiation communication process. Each document must provide the Supplier with the understanding of what you want. Sometimes you may not be totally clear in what you want or can afford, so you may identify specific alternatives or options you want them to bid on or, you may allow them to provide options or alternatives of their own.
You use these bid or request for proposal documents to do several things.
1. You want to set their expectations. They may have formed their own expectations during their prospecting stage, which need to be reset and these documents are the best alternative for providing them with an understanding of what is important to you. The sooner you can begin to set their expectations or break down expectations that they may have formed from their prior discussions with people from your company, the better off you are. Having it printed in black and white provides the authority of a writing. This is your company’s formal position.
2. You also use the documents as a mean of setting the anchor or benchmark for the negotiations. When they provide a bid or proposal based on these documents you need to hold them to it. If they come in at a later date and want to make changes, you use these documents to either hold them to their initial proposal or to extract concessions from them in return for the concessions they are seeking from you.
If there is a preferred product or thing you want them to provide, one approach is to include the words “or equal”. This can work if what the specification is referring to really does have other competitors that produce equal products. If they don’t, the language is ineffective.
The best way is to write the basic specification in a manner which broadens the potential competitive base by having certain required areas of functionality which the broad base can supply and allows optional or alternative functionality with the decision criteria being based on the best value (a combination of functionality and price).
Invitation to Bid
An Invitation to Bid is mostly used for purchasing commodities or simply "goods". The bid packages consist of the specific requirements and specifications of the product that is going to be purchased along with all the required bid information. In certain circumstances a company may want to have a bid function as an offer that they can accept without additional negotiation with award being made to the lowest responsible bidder. With an Invitation to Bid, if a Supplier bids different than requested they may be considered non-responsive. If a Supplier takes exception to the terms, they may be considered non-responsive. In many situations the expectation is that the price may not be negotiated, but you can get around that by changing a requirement. Bid documents are used when the product or service being purchased is well defined. There is an art in constructing a bid document. For example when you have a number of line items included, is the bid for each and can awards be made separately, or is the bid a form of “all or none” proposal. If bids are based on a number of line items and estimated quantities what will the basis for the award be? Is it based on the sum of all the extended prices (price times estimated volumes)? If your is not fully defined and there can be additions or deletions you may include a number of unit prices to quote on, but how should those be take into account in the award. Lastly, if you have significant flexibility in a number of areas you may also want to include a number of options in it what are a form of “what if?” type of negotiation tactic to understand the individual cost and impact of potential changes. Most buyers would like to “cherry pick” bids by either awarding individual bidders only those items which they were the lowest on, or by using the low unit prices in other bids to negotiate a better price with the Supplier.
Make no mistake about it; in bid situations Suppliers will be looking for ways to improve their profit by the way the bid. If they bid “all or none” they want to protect their pricing as they may not be profitable on items they bid low on. Suppliers may also try to guess where the volume estimates are incorrect to bid high on the volumes that were underestimate and bid low on the volumes that were overestimated. They can also price options in a manner where the price difference between the options isn’t consistent with the change in their cost simply because they want to drive you to make a decision that would be more profitable for them. When possible, always keep the right to make separate awards and negotiate pricing as it cuts down on many of the pricing games Suppliers can play.
Request for quotation (RFQ) is a process where suppliers are asked to provide a quote for a product or service. The RFQ may be used for informational purposes. If the intent is to get a firm quote that the Buyer can rely upon you would normally use an Invitation for Bid or would require that the Supplier provide a firm quote that will be in effect for a specified period of time.
Request for Proposals
The request for proposal (RFP) is an approach that is frequently used when you may have general requirements for a product or service the must be met and you want to solicit competing proposals from suppliers that have different solutions that can meet your needs. For example, for a product that requires development or customization you would use a RFP to understand not just what the Supplier proposes as the solution but also all the issues, life cycle costs and risks associated with purchasing from the Supplier. While some of the information requested may seem like a duplication of effort to what the Buyer may have learned in a pre-qualification, the difference is the pre-qualification provides you with information about what the supplier can do. By including it in the RFP, it describes what they will do. That’s why many times the RFP and the Suppliers response to the RFP will be included as part of the agreement.
The request for proposal (RFP) is an approach that is frequently used when you may have general requirements for a product or service the must be met and you want to solicit competing proposals from suppliers that have different solutions that can meet your needs. For example, for a product that requires development or customization you would use a RFP to understand not just what the Supplier proposes as the solution but also all the issues, life cycle costs and risks associated with purchasing from the Supplier. While some of the information requested may seem like a duplication of effort to what the Buyer may have learned in a pre-qualification, the difference is the pre-qualification provides you with information about what the supplier can do. By including it in the RFP, it describes what they will do. That’s why many times the RFP and the Suppliers response to the RFP will be included as part of the agreement.
The following information would normally be requested as part of and RFQ that involved the development of a new product. Many of the same questions would apply to services or Software. Many of the responses requested involve discovering what the total life cycle cost will be if you select that supplier.
- Proposal must be based upon the information and specifications provided by the Buyer. You want them to provide a proposal on what you need, not what they want to sell.
- If the supplier feels that any conflicts exist within the documents they must identify any trade-off and assumptions made in their response. The time to discover conflicts and assumptions is prior to making the award, not after where it can cost more money or where your sourcing decision would have been different.
- Their ability to meet the proposed schedule for the development milestones. Proposal of alternative schedules. Alternatives may help identify just how confident the Supplier is about meeting the schedule and what you may be able to plan on.
- A description of how the product will be developed by the Supplier. This is more of understanding their thought process to see if they really understand what you need.
- The team that will be used. Where they will be located. Their experience and skills. The development will only be as good as the team assigned. This and restrictions on transfers to the team avoids bait and switch tactics.
- How the Supplier will provide project management, engineering control process, engineering skills. This will give you an indication of how professional the management process will be.
- What design tools will be used? This helps clarify what automation they will be using in the process to design it.
- Any pre-existing materials to tools used (for Software development). This identifies any things in the development that they will continue to own and for which you may need to negotiate licenses to make derivative works to support future needs.
- Other information that demonstrates the supplier’s capability to develop the product. This leaves it open for the supplier to submit proof of their qualifications, which could include references.
- Any non-recurring expenses related to developing or testing the product. This is part of understanding the total cost of doing business with them.
- The costs for samples, prototypes, production units, spare parts, out of warranty repairs, maintenance or service contracts. This is part of understanding the total cost of doing business with them.
- What commitments the supplier will make to reduce cost over time and with increased volumes. This helps identify what the potential life cycle cost of the relationship will be.
- Cost and lead-time for any required tooling or equipment. This is part of understanding the total cost of doing business with them.
- Product lead-time and flexibility. This is part of understanding the total cost of doing business with them. Lead-time drives investment in safety stock; Lack of flexibility increases inventory levels.
- Items to be included in the unit cost (such as packaging). This is part of understanding the total cost of doing business with them.
- Any objections, exceptions to the Buyer Terms and Conditions provided. This identifies the costs and risks the Supplier is willing to assume and what they expect the Buyer to assume as part of determining the total cost of doing business with them
- Country of Origin and manufacturing location. This helps identify what the landed cost of the product will be as part of the total cost
- Willingness to participate sourcing or logistics programs described in the RFP. This helps identify what the landed cost of the product will be as part of the total cost
- Any proposed alternatives with cost impact identified. This allows them to propose alternatives that may provide increased value or reduced cost to consider. Supplier can be smarter than your own people in knowing what works or what’s the trend in the market.
- Due date for Proposals and how long the proposal will be firm.
If you were buying a standard product your RFP list would be much shorter:
- If the supplier feels that any conflicts exist within the documents they identify any trade-off and assumptions made in their response.
- The costs for production units spare parts, out of warranty repairs, maintenance or service contracts.
- What commitments the supplier will make to reduce cost over time and with increased volumes.
- Product lead time
- Items to be included in the unit cost (such as packaging)
- Any objections, exceptions to the Buyer Terms and Conditions provided.
- Country of Origin and manufacturing location.
- Willingness to participate sourcing or logistics programs described in the RFP.
- Due date for Proposals and how long the proposal will be firm.
If you were soliciting a proposal on a service you would probably ask many of the same questions with a heavier focus on the team that will be providing the services.
- Proposal must be based upon the information and specifications provided by the Buyer. You want them to provide a proposal on what you need, not what they want to sell.
- If the supplier feels that any conflicts exist within the documents they must identify any trade-off and assumptions made in their response. The time to discover conflicts and assumptions is prior to making the award, not after where it can cost more money or where your sourcing decision would have been different.
- Their ability to meet the proposed schedule for delivery of the service. Proposal of alternative schedules. Alternatives may help identify just how confident the Supplier is about meeting the schedule and what you may be able to plan on.
- If not a standard service, a description of how the Service will be developed by the Supplier. This is more of understanding their thought process to see if they really understand what you need.
- The team that will be used to provide the service. Where they will be located. Their experience and skills. The development will only be as good as the team assigned. This and restrictions on transfers to the team avoids bait and switch tactics.
- How the Supplier will provide management, and control over performance of the Service. This will give you an indication of how professional the management process will be.
- What tools will be used to perform the service. This helps clarify what automation they will be using in the process to design it.
- Other information that demonstrates the supplier’s capability to perform the service. This leaves it open for the supplier to submit proof of their qualifications that could include references.
- Any non-recurring expenses related to developing the service. Any recurring expenses in providing the service. This is part of understanding the total cost of doing business with them.
- What commitments the supplier will make to reduce cost of the service over time. This helps identify what the potential life cycle cost of the relationship will be.
- Service scheduling lead-time and flexibility. This is part of understanding the total cost of doing business with them.
- Any objections, exceptions to the Buyer Terms and Conditions provided. This identifies the costs and risks the Supplier is willing to assume and what they expect the Buyer to assume as part of determining the total cost of doing business with them
- Any proposed alternatives with cost impact identified. This allows them to propose alternatives that may provide increased value or reduced cost to consider. Supplier can be smarter than your own people in knowing what works or what’s the trend in the market.
- Due date for Proposals and how long the proposal will be firm.
Option Bidding
As a part of negotiation of the total cost of an item, you may consider using an approach called option bidding. The same type of activity can occur in a negotiation through the use of "what if" tactics, where you solicit the cost of different alternatives. The use of option bidding or "what if" is done to understand the potential variables of cost in the relationship from a number of different perspectives. It can help identify where requirements are adding costs to the relationships. It can also provide you with a greater understanding about the supplier or the way they operate. For example, one supplier may want to limit the amount of change that occurs by either limiting the amount of change or charging premiums for change, whereas another supplier may be more flexible in nature and be willing to accept such changes with minimal limitations and no premiums. One supplier may be willing to offer a substantial discount for a longer delivery schedule (either because of other work they have or their lack of confidence in the schedules) whereas, another supplier may not be willing to offer anything because they want the work in that period or they have solid confidence in meeting the dates. One supplier may be willing to charge minimal costs for extending warranties because they have high degrees of confidence in the reliability of their product, whereas another may want to charge substantially for extended warranties because either they don’t have the same confidence in the reliability of their product, or their business model wants them to sell items with short warranties so they can sell on-going maintenance and repair agreements sooner.
As each supplier's capabilities, motivations and business models may be completely different, the doing of some amount of option bidding or "what if" also allows you to flush out a better understanding of what's important to them and how they operate. Once you understand what is important to them, you have the ability to change you negotiating tactics for you can use what is important to them in negotiating or trading off certain items under negotiation
Attached is a sample long form of option bid which gives a flavor of some of the types of things that could be asked. I doubt I would ask all of them in any one bid. For many activities this would be overkill. What you ask for should vary with each activity. However, even the simplest bidding activity can have a form of option bidding, such as asking a supplier what happens to their price if we were to give them more or less time to do the work or what if we agree to pay them sooner. Many times you may be paying a premium to have work done on a planned, but not critical, schedule which the requisitioner might be willing to change if they were aware of what they could save by making modifications to the schedule.
As you will see, the option bid sets the assumptions to be used for the bid and then asks for options for changes against that baseline. The key in doing that is it allows you a more disciplined set of responses for evaluation. Everyone must bid against the baseline and options are evaluated against the baseline.
Sample Option Bid
BID PROPOSAL
INSTRUCTIONS:
Supplier shall answer all items set forth in the Bid Proposal and in the format provided. Supplier shall set forth all objections to the documents in the space provided or by attachment to the Bid Proposal AT THE TIME THE BID IS SUBMITTED. BASE BID pricing must be based on the following assumptions, however supplier will have the opportunity to provide alternative pricing where the supplier either has objections to the documents or wishes to offer alternative proposals.
BID PROPOSAL MUST BE BASED ON THE FOLLOWING ASSUMPTIONS (BASE BID):
1. Pricing is F.O.B. ORIGIN for U.S. manufacture or; for non-U.S. manufacture, pricing is quoted F.O.B. PORT OF ENTRY duty paid.
2. Payment is NET 30 days after receipt of conforming goods and invoice.
3. Prices quoted and payment is in U.S. DOLLARS.
4. Prices exclude all one time costs such as N.R.E., tooling, test equipment, set-up costs, etc.
5. The product will carry a ONE-YEAR WARRANTY from date of acceptance.
6. Quality and Reliability Exhibit requirements will be met.
7. Service Exhibit requirements will be met.
8. Agreement requirements will be met.
9. Pricing quoted is fixed for TWO YEARS.
10. Prices are inclusive of all taxes.
11. Prices include the cost of disposable "BULK PACKAGING".
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BID PROPOSAL
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For: [PROGRAM NAME]
We have read the Request for Proposal in detail and submit the following Bid Proposal.
1. PRICING
(Note: SUPPLIER IS REQUIRED TO BID 24 MONTH FIXED PRICING, "BASE BID".)
| Yearly Quantity (Volume / year) | 24 month fixed price (base bid) | 18 Month fixed price | 12 Month fixed price | 12 Month step price |
| Under 1,000 | | | | |
| 1,000 to 5,000 | | | | |
| 5,001 to 9,999 | | | | |
| 10,000 to 24,999 | | | | |
| 25,000 up | | | | |
1B. If the above quantities do not define where your real price/quantity breaks occur, the following space is provided to identify alternatives:
1C. Identify below what commitments will be required from to achieve additional cost breaks (Example; hard tooling, quarterly forecasts, master purchase orders, etc.) and the respective savings/cost for any such commitment.
| Commitment | Savings | Costs |
| | | |
| | | |
| | | |
| | | |
1D. In order to assist the Buyer in calculating estimated cost over the life of the program please provide your estimate, by percentage, of cost fluctuations (+ or -) projected for years 2-5.
| Category | Year 2 | Year 3 | Year 4 | Year 5 |
| Labor | | | | |
| Materials | | | | |
| Overhead | | | | |
| G&A | | | | |
| Other | | | | |
1E. Are you willing to enter into a contract for longer than two years based on your estimates set forth above? _____YES, for _____ (#) year(s) ______NO
2. PAYMENT
Supplier offers the following Payment options
| Payment terms | Percent adjustment to base bid |
| COD | |
| Letter of credit – sight | |
| Letter of credit - 30 days | |
| Letter of credit - 60 days | |
| Net 10 | |
| Net 30 | Base Bid |
| Net 60 | |
| Net 90 | |
| Other (define) | |
3. WARRANTY
Supplier offers the following Warranty options
| Warranty period | Percent adjustment to Base bid |
| No warranty | |
| 6 months | |
| 12 months | Base bid |
| 18 months | |
| 24 months | |
| Other (specify) | |
4. TRANSPORTATION/PASSAGE OF TITLE
| Delivery term | Premium |
| Ex Works Supplier Dock at _________ | None, base bid |
| CIF to Port of Export | |
| DDU to Port of Import | |
| DDP to Buyer Dock at ___________ | |
5. Cancellations:
Supplier offers the ability to cancel orders with cancellation charges as follows: (NOTE; The "No Cost Period" should not exceed your proposed lead time in Section 6A.)
| Days prior to scheduled delivery | Cancellation charges |
| _____ days | No cost |
| Greater than 120 | |
| 91 to 120 | |
| 61 to 90 | |
| 30 to 60 | |
| Thirty or less | |
6. OUT OF WARRANTY REPAIRS
| Out of warranty repair cost | $ |
| Out of warranty repair lead-time after receipt of the material. | ______ Calendar Days |
| Repair Locations | |
7. PROTOTYPES
| Type | Cost per unit | Lead-time from Issuance of order |
| Engineering (complies with requirements for form, fit, function) | | |
| Pre-production (complies with specifications) | | |
8. ONE-TIME COSTS
Per Bid Instructions, the following one time costs have been excluded from the base bid:
| Item | Amount |
| Non recurring engineering expenses | |
| Set-up costs | |
| Tooling costs | |
| Other (specify) | |
9. TEST EQUIPMENT
Supplier shall describe below, the test equipment which will be required to duplicate supplier's testing. For any test equipment of the above that is produced by the supplier, supplier offers to provide such equipment at the following cost:
| Test Equipment | Cost |
| | |
| | |
| | |
| | |
| | |
10. TECHNICAL ASSISTANCE
| 1. Describe the technical assistance that will be provided during the program at no cost. | |
| 2. For technical assistance not included above, list your fee schedule and describe the nature of such assistance | |
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