Easy Negotiation Techniques

Purchasing – What to Do When Competitive Tendering is Not Enough

Purchasing teams make good use of competitive tendering approaches when sourcing products and services. The idea is that market forces will drive suppliers to “sharpen their pencils” and bid their best price. Choosing the lowest (subject to other factors such as technical and quality) then gives the best value for money. However, supplier behaviour isn’t always this straightforward so you need more than just competitive bidding.

For example, suppose that you put out a tender and receive five bids. All five suppliers have the same cost structure and use the same price estimating software. You would expect that all five bids submit identical prices – yet you get two bids at that expected amount, one that is significantly less, one that is slightly less and one that is significantly more. What’s going on?

Here’s how each supplier might view their bid.

The two suppliers who bid what you expected are finding that their business is what they usually experience and so there is no need to alter their prices.

The one that is slightly below what you expected may be experiencing some shortfall in their level of business generally and so have put in a bid that covers their marginal costs but not their fixed costs.

The one that bids significantly less than you expected may have a strategy of winning your business by bidding lower than anyone else and recovering the lost profit later by sticking to the letter of the contract and charging for everything that isn’t in it.

The supplier who bid significantly more may be in the position of having more than enough work to meet their profit targets and so are putting in a price that makes them a “super profit” if they win it.

What you need to do to supplement your competitive bidding approach is to understand supplier’s costs and their behaviours. Here are some top tips:-

<p>�Have a system in place for collecting data on the cost components of the product or service you buy and your suppliers’ costs;

�Use analytical techniques to calculate a “should cost” amount for the product or service in the bid – you can build very useful models in MS Excel for example;

�Share the results with your colleagues in Technical and Marketing – they may have further insights;

�Meet regularly with your suppliers to understand their business model (how they make money) and their current circumstances so that you can predict their behaviour when it comes to the ITT stage;

�Use all of this information to build a strategy for each supplier so that you can “position” what you need them to do when they make a bid so that all your bids are truly comparable.

Want to know more? A copy of “The 5 Keys to Breakthrough Sourcing Strategies” can be downloaded free from http://www.SourcingStrategyWizard.com. Steve Carter is a procurement professional and published author specialising in category management, strategic sourcing and supplier relationship management.