When undertaking a holistic spend review in order to identify opportunities for cost reduction it is important to deploy all the tools in your toolbox in the right way. If you don’t deploy the correct tools or strategies you may be selling yourself short or investing too much time and effort into an area that is not warranted. Everything should always be looked at from a time to value perspective. Today I’d like to discuss when it makes sense to conduct Request for Proposals (RFPs), Request for Quotes (RFQs), Direct Negotiations and Group Purchasing Organization (GPO) implementation. Or in a nutshell building a strategic roadmap.
Generally speaking, RFPs should be utilized for categories that are more strategic to the organization and are more than just price focused. You want to identify additional elements and value adds that may be available in the market plus validate that the supplier meets your minimum criteria. There needs to be a wide enough supply base to ensure an element of competition and perceived threat.
But when do you decide that the category should be strategically sourced vs. working to implement a GPO solution? Do you have enough spend to leverage within the category? Often times, you may feel like you have a lot of spend in a given category, but how much does it actually mean to the supplier? The advantage of a GPO is that they are leveraging all of their members spend to drive lower pricing. Also how much time are you going to invest in the sourcing process and how much additional value do you think you may achieve if you are to conduct a full scale sourcing process? These are things that should be considered prior to blindly just applying a strategic sourcing strategy since strategic sourcing requires the highest level of engagement and utilizes the highest level of resource time.
RFQs are a modified version of a RFP where you are still soliciting responses from the market. However, RFQs are 100% price focused and are generally applied to more tactical categories where the suppliers are providing very similar to exact same products or services across the market. There isn’t much to it as far as service levels and value adds go and you are purely interested in reducing cost. But again you need to consider that although not as labor intensive as a RFP, RFQs still have very similar touchpoints. You also need to ask yourself, are you confident that you have enough spend to leverage to beat what you could have gotten going through a GPO program?
Unlike traditional RFP and RFQ categories, direct negotiation type strategies are typically applied in the following situations; there is an extremely limited supply base, the business has no incentive to move from the incumbent supplier and they highly value the relationship, you have a high level of market intelligence and do not need to solicit the market. Negotiating is a skill but having market intelligence is extremely helpful although not necessary.
So when should you assess a GPO and what are the benefits? The most obvious benefit is that the GPO program leverages all the spend across the entirety of their member base to ensure they are providing continuous cost savings and value for all their members. The GPO also manages the supplier relationship and overarching contract for you. But what does that really mean? It means that on an ongoing basis they are ensuring the supplier is meeting performance objectives, hitting KPIs, maintaining SLAs and of course modifying their pricing according the changing environment of purchases made by their member base. That being said if it is very important to you that you are managing the contract and maintaining the entirety of the end to end supply relationship management, utilizing a GPO is most likely not for you for the given category. However, if it’s a category that in the grand scheme of things is a lower to mid-level spend category and you are looking for low touch, immediate savings, it 100% make sense to look towards a GPO solution.
Corcentric applies a multifaceted approach, making the appropriate recommendations for the given category situation. We recognize there is no one size fits all approach. Thing should be looked at strategically and holistically in order to ensure that the right approach is being applied to a given category. In today’s environment not only is finding cost savings paramount but the speed to realizing savings is just as important.
