Requirements Identification and Request for Proposal (RFP) Development

Third of five steps for a successful strategic sourcing project

Simultaneous to the development of supplier base for the bidding, Project Managers should also determine the details of the requirements for the spend category being sourced. The company will only get the best prices from the suppliers if they will be able to specify the features (technical, physical, etc) of the goods and services that they intend to buy. This further allows them to level the playing field across suppliers and minimize incidences of under- or overqualified technical and pricing proposals. Thus, the more specific the requirements are, the more comparable and precise the bids would be.

It is advised for any Sourcing Project Manager to come up with a Request for Proposal (or “RFP”) document for each project. The RFP should detail all technical requirements for the spend category based on the scope in the baseline development exercise and additional inputs from other stakeholders for the category. For example, if the company plans to source Temporary Labor, the Project Managers can coordinate with Human Resources for the provision of the list of positions that they wish to contract from a third-party service provider and the corresponding job descriptions, technical qualifications and estimated volume for each position. Or if they intend to open up their Packaging Carton requirements for bidding, they must be able to specific the dimensions, material, strength and other technical specifications of each model. It also allows vendors to manage their pricing proposals if the company would initially inform them about their estimated budget for each sourced item or category.

Moreover, the RFP must also inform any participating supplier about other commercial, quality and service terms that the corporation expects from them to ensure that the proposals received from the vendors have already incorporated the terms that would be soon indicated in the future contracts. For example, if the company will state the expected delivery locations of the goods that will be purchased, suppliers can already estimate the appropriate amount of delivery costs that would have to be imputed to the unit pricing. Or if the company identifies that its preferred payment terms is semi-annually, the vendors will be able to offer pricing that could support their business given the expected schedule of cash inflows. Providing these information allows suppliers to provide their best prices and protects the corporation from any potential issues with the vendor bids or with the execution of the contract with the winning vendor.

Lastly, the RFP must clearly inquire for the qualitative and quantitative (e.g., pricing) components of the supplier’s proposal. This is best captured in a form that suppliers need to fill up. The more detailed and well thought-out this form is, the more sufficient information will be received and the more comparable the proposals could be. Towards the end of the sourcing initiative, the corporation must come up with the awarding decision and to achieve this, they must be able to qualify proposals fairly. The ability to conduct an “apples-to-apples” comparison is largely affected by the availability of comparable response measurement structures in place. Hence, especially for pricing proposals, it is best to already provide the structure that vendors will just have to fill up in order to roll up comparable total costs in the end.

Supplier Outreach and Assessment

Second of five steps for a successful strategic sourcing project.

After the identifying the categories that will be sourced and the baseline and scope of the projects, Project Managers will now need to develop the supplier base. Depending on the size of the incumbent supplier base and on the availability of other alternative suppliers in the market, companies may opt to settle only with the current suppliers or introduce new suppliers that are equally capable. Regardless, it is advised to develop a standard supplier qualification process to select the correct suppliers that will be invited for the bidding. The Project Manager’s ability to achieve such feat would facilitate to the successful implementation of any bidding event and ultimately, to provide the company with competent vendors that could provide the goods and services required at the best market price.

Companies must be then clear on what they look for from each potential supplier, be it in the scale of facilities and capabilities, diversity of customer base, financial success, etc. These considerations must be completely captured from each interested supplier and it helps to develop standardized forms that suppliers could fill out. Project Managers could also establish company-wide system of scoring supplier responses in order to maintain objectivity during evaluation and reduce bias from other stakeholders in the organization. Generally, the more qualified suppliers there are, the more competitive the bidding would be. However, there are certain categories that would have limited supplier base, such as coal and petroleum, and in such incidences, the company should focus its efforts in managing the risks entailed in these categories.

Towards the end of this process, the Project Managers should be able to arrive at the list of vendors that will be formally invited to the bidding. They must also be able to sufficiently defend to any internal sponsor or external party (i.e., suppliers who have not passed the screening) the basis of their qualifications.

- Jules Falzado, Senior Process Consultant, ECCI

Opportunity Assessment and Baseline Development

First of five steps for a successful strategic sourcing project.

Before doing any strategic sourcing project, it is wise for the company to identify and select the projects that should be undertaken. After all, the process would require a lot of effort and time and it is just appropriate to determine whether the company can maximize the bottom-line benefits in spend reduction from the project. Hence, it is advised to start any strategic sourcing initiative with a comprehensive opportunity assessment and baseline development.

During Opportunity Assessment, the project sponsors must investigation and quantify the potential to achieve cost savings on the various spend categories of the company. It might require deep-dive of the historical data and determine which third-party goods and services comprise substantial requirements to the firm in terms of costs and risks. The analysis could further facilitate to painting the current supplier base picture for the spend category and the opportunity to consolidate requirements to optimize the awarding of business. Project Managers must also take into consideration the bargaining power of suppliers in the industry and the business risks that would have to be managed during the sourcing execution. With these information, the firm will be able to identify the spend category/ies that could be pursued based on feasibility and business impact (i.e., cost savings).

Once the categories have been identified, Project Managers should proceed to Baseline Development and determine and quantify the project’s coverage in terms of requirements. For example, if the company identified opportunities to achieve cost savings from their incumbent Temporary Labor requirements, they must identify which of these Temporary Labor service items should be covered. Aside from this, they must also translate these requirements into actual numbers – i.e., in terms of volumes and prices – that would be used as basis for measuring the success of the initiative. The resulting “baseline spend” for the category would be the amount that the company would aim to reduce through strategic sourcing.

- Jules Falzado, Senior Process Consultant, ECCI

Introduction to Strategic Sourcing

Effective spend management begins with effective strategic sourcing. Strategic sourcing, simply put, is an institutionalized process where companies continuously improve their third-party purchases by reevaluating the specifications of their requirements and conducting a competitive bidding to achieve the best market prices for the goods and services that they buy. Aside from the internal process efficiencies that corporations could achieve by standardizing their requirements, strategic sourcing also facilitates to developing the overall spend structure of the category being sourced and identifying potential savings that could be realized once the contracts have been established and monitored.

A lot of companies all over the globe have employed (and benefited from) various strategic sourcing initiatives to manage their spend across a diverse array of categories such Raw Materials, Travel and Entertainment, Third-Party Services, Packaging Materials, etc. While each spend category would present varying strategies depending on the scope and opportunity, any company can run successful strategic sourcing projects by implementing the following steps:

1. Opportunity Assessment and Baseline Development

2. Supplier Outreach and Assessment

3. Requirements Identification and Request for Proposal (RFP) Development

4. Competitive Bidding

5. Awarding of Business

The success of any cost or spend management initiative begins with the correct execution of a strategic sourcing . We will go into each of the steps in the following articles.

- Jules Falzado, Senior Process Consultant, ECCI