The procuring department is responsible for acquiring goods and services for a business. This may involve shopping for goods at competitive prices, handling all legal procedures associated with obtaining a contract, budgeting costs for the goods and studying financial trends to ensure that company money is being spent wisely.
Learn accounting to Understand Business is a course that can help you better analyze company financial trends. Choosing which suppliers a business will use isn’t as easy as it sounds. A good sounding product and a good price doesn’t necessarily mean it’s a green light for signing on a new supply customer. So what methods does a procurement team member use during the selection process?
Generally speaking, there are six procurement methods used by the procurement team in a company. The actual names of these could vary depending on your company and industry, but the process remains the same. The six times of procurement are open tendering, restricted tendering, request for proposal, two-stage tendering, request for quotations and single-source procurement.
Open tendering is shorthand for competitive bidding. It allows companies to bid on goods in an open competition or open solicitation manner. Open tendering requirements call for the company to:
- Advertise locally
- Have unbiased and coherent technical specifications
- Have objective evaluation measures
- Be open to all qualified bidders
- Be granted to the least cost provider sans contract negotiations
Arguably, the open tendering method of procurement encourages effective competition to obtain goods with an emphasis on the value for money. However, considering this is a procedures based method a lot of procurement experts feel that this method is not very suitable for large or complex acquisitions due to the intense focus on the output process instead of stringent obedience to standards. In this Quality Management course learn about the ways to evaluate quality products on incoming orders, and to create quality products for sale.
There are course also disadvantages to this kind of procurement method including:
- Complex requirements are typically not suited for this method
- The timeline for needing the goods
- Complications in defining the exact needs of the requirement by the procuring company
Unlike open tendering, restricted tendering only places a limit on the amount of request for tenders that can be sent by a supplier or service provider. Because of this selective process, restricted tendering is also sometimes referred to as selective tendering. Like open tendering, restricted tendering is considered a competitive procurement method, however, the competition is limited to agencies that are invited by the procuring team. The procuring entity should establish a set of guidelines to use when selecting the suppliers and service providers that will be on the invitation list. Randomized selections will not bode well for procuring. This method is selective to find the best-suited and most qualified agencies to procure goods and services from. It’s also employed as a way for the procuring team to save time and money during the selection process.
Request for Proposals (RFP)
Request for Proposal is a term that is used all across the business world. Social media managers receive RFP’s from potential clients all the time when a client is seeking a new manager of their venture. This kind of proposal is a compelling and unique document stating why the business is the best fit for the type of project at and. Similarly, in the procurement world, a RFP is a method used when suppliers or service providers are proposing their good or service to a procurement team for review. If you’re a supplier, understanding the in’s and out’s of quality service management is key to winning your bid. Read more about this in service quality management.
Procurement teams are often on the hunt for the best valued, most marketable items to bring into circulation. A client may feel they have all of the qualifications to fit the needs of fulfilling a specific requirement of a procurement team – but they have to prove it. The agencies writing the RFP’s should submit a two-envelope proposal to the procurement manager. The two-envelope process allows the procurers’ to review the proposal through and through without knowing the financial component. The financial proposal is sealed in the second envelope and should only be opened after the content of the first-envelope proposal is approved or rejected. This eliminates any persuasion by cost and allows an objective lens to look through when analyzing a good fit. The proposal with the best fit qualifications and best price will be selected. If a lesser qualified (yet still qualified) selection has a lesser price, no contract should be negotiated. The most qualified and appropriate proposal, regardless of price, should be selected. Are you a supplier? Learn how to price your goods based on value in the course Value Centric Selling.
Two Stage Tendering
There are two procedures that are used under the two stage tendering method. Each one of the procedures has a two stage process. This can be disadvantageous for some procurement teams if there is a time limit on securing a contract. In the same vein, this option is more flexible for both parties, allowing more room for discussion to meet mutual needs.
The first procedure is very similar to the RFP method as discussed above. The procurement team receives a proposal with two envelopes – one with the proposal itself and one with the associated financial information. The difference is the bidder is required to submit a technical proposal that highlights their solutions to fulfilling the requirements as specified by the procuring department. This proposal is scored according to the relevance of the solution to the needs of the procurer. The highest scored proposal is invited for further discussion in an attempt to reach an agreement. After the final agreement for the technical proposal is reached, the bidder is invited to submit their financial proposal and then further discussions ensue to negotiate a contract.
The second procedure is much like the above, however, instead of the bidder submitting a fully-completed technical proposal, a partial proposal is submitted. The methodology and technical specifications will be included but not to the fullest extent. This allows room for even more customization and discussion. Once the highest qualified bidder is selected, they will be invited to submit a thorough technical proposal along with a financial proposal. The technical proposal will be evaluated and only then will the financial proposal be opened. The combined score of both the technical proposal and the financial proposal are the grounds on which a bidder is contracted.
Request for Quotations
This procurement method is used for small-valued goods or services. Request for quotation is by far the least complex procurement method available. If you have the option, use this method to ensure a fast procurement process and not a lot of paperwork. There is no formal proposal drafted from either party in this method. Essentially, the procurement entity selects a minimum of three suppliers or service providers that they wish to get quotes from. A comparison of quotes is analyzed and the best selection determined by requirement compliance is chosen.
Single source procurement is a non-competitive method that should only be used under specific circumstances. Single source procurement occurs when the procuring entity intends to acquire goods or services from a sole provider. This method should undergo a strict approval process from management before being used. The circumstances which call for this method are:
- If only one supplier is available and qualified to fulfill the requirements
- If the advantages of using a certain supplier are abundantly clear
- If the procurer requires a certain product or service that is only available from one supplier
- For the continuation of work that cannot be reproduced by another supplier
In the end, the type of procurement method you choose to use is highly relative to the conditions of the procurement effort and the type of good or service being acquired. All procurement methods follow tight legal frameworks to ensure all standards are being met and quality in the selection process exists. Learn more about procurement and other business methods in the course an Introduction to Business.