Far too many companies still issue requests for quotes (RFQs) when procuring new automation equipment. How can you shop the market without comparing costs?
As global competition heats up and manufacturers increasingly outsource everything but core competencies, the time-honored tradition of RFQs is looking more and more outdated. In this blog, we examine nine reasons to think more about strategic procurement and less about RFQs to optimize the CAPEX process.
1. RFQs only tell you about purchase cost, not all the other costs
RFQs are great for getting exact prices for a given piece of equipment (typically less than 50% of TC0), but not very helpful for understanding total costs of ownership (TCO). You need to think of installation, maintenance, training, ease of modifying equipment or expanding production, and all the rest, too.
Procurement typically strives to reduce investment with the consequence that maintenance costs grow and the potential for efficiency is reduced. Too rarely do purchasing departments consider future equipment upgrades to obtain better quality and higher throughput.
Both purchasing and the vendor need to understand costs and cost drivers – as well as value and value drivers – then de-bundle them, for example by considering:
· Time from idea to installation
· Costs from cradle to grave
· Quality and how this is affected or not
· Throughput and production efficiency upgrades – including what might be possible in the future
· Software and other updates
· HR implications
- Qualifications and number of people to run and maintain
- Training – time, money
· Service intervals, maintenance costs, etc.
· Changeover delays from batch to batch and over time
2. RFQs make the scope of decision too small
RFQs make it too easy to put all the focus on one thing only (the purchase price), which the Excel boys can easily understand, and to overlook not just TCO and activity-based costing, but other important factors that may be affected by the purchase of the equipment, including:
· Flexibility regarding future changes
A broader partnership includes other parts of the organization, in addition to procurement, to ensure that the purchase decision is based on as much information as possible.
3. RFQs are slow
RFQs slow down the procurement process: they take too long to write if they’re going to be useful, then you wait for the quotes. The installation process is often overlooked in terms of time.
Often, 6-12 months could have been used smarter – and made a difference to the bottom line far more quickly.
4. RFQs limit innovation
If you’re lucky, a good RFQ process will give you exactly what you ask for.
But how can you ask for something you’ve never even imagined?
Companies that issue RFQs essentially believe that they always know best. They risk ending up with solutions that satisfy their own narrow criteria, but don’t allow any opening for a vendor’s broader experience, creativity and innovation processes.
By setting your partner’s imagination and creativity free, without demanding that they hit nothing but bull’s-eyes in their first proposal, you open the door for more innovative solutions – and just might come up with a game changer.
5. RFQs don’t distribute risk between purchaser and supplier
RFQs put all the risk on the purchaser rather than share it with the supplier. As long as the supplier delivers what’s in the scope of work, then he has done his job and has no motivation or incentive to do more.
· Obvious risks include delay and budget creep
· Not so obvious risks include the risk of sub optimization, extra costs due to future changes, training, maintenance, etc.
6. RFQs look backward, not forward
RFQs are based on what you’ve already done, not on things you haven’t done yet.
RFQs rarely lead to future-proof thinking. They focus on immediate, short-term goals and criteria, but don’t explore alternative scenarios that might occur later.
7. RFQs encourage silo thinking
Strategic procurement with a trusted specialist, rather than a standard RFQ process, gives you access to far more than a piece of equipment and its price. You get more brainpower and perspective, including
· The partner’s entire team working on your project (10 heads are better than 1)
· A broad understanding of the market and current best practices
· A key account approach: You’ll also get attention from the supplier’s top management, finance, IT people, etc.
8. RFQs also raise IP and confidentiality issues – just not in ways that are easy to spot and manage
Manufacturers sometimes worry about developing a vendor’s capabilities, knowing that other customers in the industry will benefit from that.
RFQ relationships aren’t as transparent as strategic partner relations, but they do entail sharing lots of information – just not upfront. Yes, strategic procurement means more transparency and sharing of confidential information. But so does installation and maintenance of equipment purchased through an old-fashioned RFQ.
With a strategic partnership approach, both sides have many reasons to respect confidentiality – also to maintain the relationship.
9. Your purchase price might be the same or lower, anyway
Strategic partnership should definitely give you better TCO than an RFQ. But you might end up with a similar purchase price and capital expenditure post anyway, without getting any of the other advantages.