All manufacturers, distributors and retailers rely on vendors for products and services to support their operations. The relationships are typically governed by long-term agreements and when those contracts are up for renewal, the common reaction is to sign an extension with the incumbent. Assuming service levels have been acceptable, switching costs – especially for anything involving raw materials – tend to be so onerous (testing, certifications, regulatory compliance, etc.) that there’s rarely any appetite for the expense and resource diversion that accompanies a change.
Nonetheless, manufacturing companies would be remiss to overlook the benefits of a competitive bid process. One obvious factor is price – in our experience, companies can expect to realize additional savings of 10-20 percent when they seek the assistance of strategic sourcing partners to solicit bids, simply by neutralizing some of the incumbent advantage inherent to the process.
It’s a Learning Process
Cost savings are only the tip of the iceberg, however. The bid process can double as a much-needed educational exercise to take the pulse of the marketplace, learn about technology trends and take a glimpse into the future direction of various vendors. It’s also an inroad to discovering what you don’t know – it’s surprising how often an incumbent provider’s sales rep can become complacent by not keeping existing clients informed on the vendor’s latest innovations. At minimum, you stand to learn more about what your incumbent has to offer.
Bidding doesn’t have to be synonymous with undertaking a Request for Proposal (RFP). Such exercises are quite time consuming for both the client and prospective vendors. On the plus side, RFPs afford the best opportunity for information gathering and to pose questions tailored to your situation.
A less onerous option is a Request for Quote or (RFQ). In this scenario, the manufacturing company lays out its specific situation and invites prospective vendors to submit pricing, without much of the additional legwork that accompanies a full RFP. The level of desired detail is a matter of company preference, although less detail also means less of a learning opportunity. SRM advises that if a manufacturing company feels a full RFP process is preferable, then the corporation must be willing to consider switching vendors. Suppliers can become understandably frustrated if dragged through an unwinnable exercise, and may be less responsive in the future when their participation is more keenly needed.
The More the Merrier
An effective bid process typically includes roughly five solid candidates. That number can go as high as 12, however – particularly for direct materials, where a wealth of distributors serving as resellers greatly increases the field of alternatives. It’s also wise to include any vendor already serving the manufacturing company in adjacent areas. In our experience, such players will eventually catch wind of the exercise and ask to participate, thus, prolonging the process. Besides, their existing knowledge of the company will likely lead to worthwhile perspectives.
It’s More Than Just Price
At the end of the day, a decision to change vendors is more often driven by service or quality issues that the manufacturing company has concluded cannot be fixed, not by price. Often service problems are rooted in poor communications – an independent sourcing partner can serve as an informal mediator in such cases, helping to resolve the issue. A sourcing partner can also make sure you’re asking the right questions of prospective vendors and help optimize the price/service equation that best suits your company’s needs.