The Purchasing and Spend Management profession is filled with acronyms and my own business has even added to that list. We forget sometimes when we are talking with others that they may not know what we are talking about. Just the other day I was speaking about how we determine cost reduction opportunities in the dealership space referring to “RFQ’s” and a Dealer principal asked me ….” what is an RFQ anyway?”
Seemed like a great topic for an article because the RFQ is an invaluable tool to a Purchasing Group, and to for profit and non-profits organizations the world over. Because the RFQ is such a fundamental and important tool in an organizations’ tool box in managing expenses…let’s dig into that a bit deeper because a Dealership that learns how to develop and execute a RFQ will begin a path to sustainable cost reductions across the business.
Organizational Benefit of a RFQ
The Request for Quote (RFQ) is a simple little tool that is rarely used by auto dealerships, but when it is used and used consistently, it can deliver significant bottom line profits to an organization…often times of 10-20% of total spend. How do I know that? Real time experience and research. Research says that if you centralize purchasing activities you can generate up to 25% cost savings. Our own business has verified that metric in our quote activity year after year. Dealers do not have the expertise to build RFQ’s, lack the time to execute RFQ’s across their business or are dis-interested in the opportunity because most will not take the time to build a good quote. They negotiate instead based on little market information and usually lose.
Request for Quote(RFQ)
The request for quote is an essential tool in any organization. When the RFQ is used to obtain pricing options and terms in the marketplace, and executed correctly, the RFQ will help determine “truth” in the marketplace. By truth I mean that you should see the floor and the ceiling in terms of pricing, business terms and other elements of interest to the buyers if the RFQ is distributed to qualified and interested suppliers. The primary benefit of an “RFQ’ process in my view is that you can solicit quotes from multiple suppliers, do some price and term comparisons, then negotiate with a supplier to achieve the best solution for your business. In the case of an RFQ, a low-quoter may or may not earn or win the business…the buyer will typically make a fair comparison, but he/she is not obligated to award business to the low quoter.
Bids – Difference from an RFQ
Bids are typically used in the public sector. Many people outside of the sourcing profession mistakenly refer to the process of obtaining quotes as “getting bids”. Traditionally, a bid process is very different from a quote process…in that the bid itself is often published in a public setting, has rigid bid and response requirements, and the significant implication is that the low bidder, if qualified, will win the business.
“The primary benefit of an “RFQ’ process in my view is that you can solicit quotes from multiple suppliers, do some price and term comparisons, then negotiate with a supplier to achieve the best solution for your business.”
Where to Use an RFQ
RFQ’s are an ideal tool to utilize in an auto dealership because there are upwards of 140 expense categories that need to be purchased and shopped periodically. RFQ’s can and should be used for any purchase over a certain dollar amount ($1,000), where there are multiple sources or suppliers to fulfill that need. If the item or service you are purchasing is fairly new or innovative an RFQ might not work since there might be limited competition or suppliers capable of meeting that need. RFQ’s are ideal for the following:
- Most services and supplies
- Repetitive purchases of services and supplies
- Capital items over a certain dollar amount
- Services and supplies where you are reasonably certain of what you want to buy, what you want to achieve with the purchase,
An effective RFQ should usually be sent with a brief cover letter, thanking the participant, reminding the supplier of the due date and the preferred methods of responding.
The secret sauce of any effective sourcing group is the data they gather in the RFQ process. RFQ’s not only help dealerships achieve improved pricing for themselves, but begin to gather data that serves a benchmarks for future work as well. Organizations that employ the use of RFQ’s methodically and systematically across an organization will decrease costs by as much as 20% across their spend for services and supplies. Now is the time to build your sourcing plan and begin quoting your services and supply categories with a RFQ to drive out cost and bring back efficiency.
Author: Doug Austin
Doug Austin is the founder and President of StrategicSource, Inc., the leading provider of Spend Management Services (strategy, spend mapping, sourcing, process improvement and audit) for the automotive and truck dealerships, and various other vertical markets. Doug is a veteran of the U.S. Marine Corps, a graduate of the University of St. Thomas, and a speaker at various conferences and 20 Groups. Doug has acquired over 30 years of line, staff and executive experience in Spend Management and Supply Chain Management in various vertical markets. Doug is also a trainer, speaker and consultant on the Spend Management, Supply Chain and Procurement disciplines.