Bidding or Negotiating?
Identifying potential suppliers is different from reaching a contract or agreement with suppliers. Competitive bidding and negotiation are two methods commonly used when selecting a supplier. Competitive bidding in private industry involves a request for bids from suppliers with whom the buyer is willing to do business. This process is typically initiated when the purchasing manager sends a request for quotation (RFQ) form to the supplier. The objective is to award business to the most qualified bidder. Purchasers often evaluate the bids based on price. If the lowest bidder does not receive the purchase contract, the buyer has an obligation to inform that supplier of the reason it was not chosen for the contract. Competitive bidding is effective under certain conditions:
- Volume is high enough to justify this method of business.
- The specifications or requirements are clear to the seller. The seller must know or have the ability to estimate accurately the cost of producing the item.
- The marketplace is competitive, which means it has an adequate number of qualified sellers that want the business.
- Buyers ask for bids only from technically qualified suppliers that want the contract, which in turn means they will price competitively.
- Adequate time is available for suppliers to evaluate the requests for quotation.
- The buyer does not have a preferred supplier for that item. If a preferred supplier exists, the buyer may simply choose to negotiate the final details of the purchase contract with that supplier.
Buyers use competitive bidding when price is a dominant criterion and the required item (or service) has straightforward material specifications. In addition, competitive bidding is often used in the defense industry and for large projects (e.g., construction projects and information system development). If major nonprice variables exist, then the buyer and seller usually enter into direct negotiation. Competitive bidding can also be used to narrow the list of suppliers before entering contract negotiation.
Negotiation is logical when competitive bidding is not an appropriate method for supplier selection. Face-to-face negotiation is the best approach in the following cases:
- When any of the previously mentioned criteria for competitive bidding are missing. For example, the item may be a new or technically complex item with only vague specifications.
- When the purchase requires agreement about a wide range of performance factors, such as price, quality, delivery, risk sharing, and product support
- When the buyer requires early supplier involvement
- When the supplier cannot determine risks and costs
- When the supplier requires a long period of time to develop and produce the items purchased. This often makes estimating purchase costs on the part of the supplier difficult.
As firms continue to develop closer relationships with selected suppliers, the negotiation process becomes one of reaching agreement on items in a cooperative mode. One thing is certain: the process that buyers use to select suppliers can vary widely depending on the required item and the relationship that a buyer has with its suppliers. For some items, a buyer may know which supplier to use before the development of final material specifications. For standard items, the competitive bid process will remain an efficient method to purchase relatively straightforward requirements. The bid process can also reduce the list of potential suppliers before a buyer begins time-consuming and costly negotiation. Chapter 14 discusses negotiation in detail.
After bids have been received or the negotiation has taken place, the sourcing team will select a supplier and then move on to authorize the purchase through the purchase approval process.