In our last installment, I wrote about the issues and reactions that can arise between contract owners and contractors when it comes to managing cost-plus contracts.
Most, if not all of these problems can be solved through better information sharing and process transparency from both sides. What seems to be missing in most situations is a measurement and reporting layer to give comfort to procurement and the ability for contractors to demonstrate that they are able to purchase efficiently.
Smart RFQ Tools
One successful strategy addresses this challenge through technology and the use of smart RFQ tools. These are not full-blown Strategic Sourcing tendering engines, but simple, price based yes/no question quote applications. The process is simple and straightforward.
- The buyer sponsors a sourcing tool that the contractor is required to use for all spend over a set dollar figure or for a specific set of goods or sub-contracted services.
- The Buyer’s basic terms and conditions are presented as a precursor for doing business; acceptance of which is a required to bidding on the event.
- Once the T’s and C’s are accepted, the supplier then bids and the contractor chooses the product or service − as they would in any standard e-RFQ.
- The difference is that there is now a record, which can be accessed by the buyer and reported on by the contractor.
For these types of services, web-based tools work the best. They don’t require access behind each other’s firewall and allow the buyer to receive regular updates or audit the events on an ad-hoc basis. If the buyer uses a sourcing tool for their own RFQ’s, it’s that much better. The contractors will add to their knowledge library and facilitate price arbitrage across multiple sub-contractors or for purchasing agents within their own business.
Low Cost – Big Savings
Who pays for the tool can be a discussion point. If it is a new contract, suppliers can be asked to build the price into their bid, or if the contract is a mid-term, the buyer may wish to cover the cost. Either way, the cost of running e-RFQ’s through a web-based application is quite low. And better yet, there is overwhelming evidence that e-tools generate large savings multiples over their costs to operate.
Cost-improvement initiatives with suppliers or sub-contractors will always work better if there is some improvement share. Consider sharing some of the savings generated through use of the tool. This will increase the adoption rate and show you are serious about helping them improve their business.
Modern supply chain techniques encourage buyers to delve into their supplier’s value chains. It is procurement’s responsibility to assist suppliers in reducing their operating costs to our businesses, not just beat them up on price. Sponsored access to e-sourcing tools is one such way that buyers can assist their sub-contractors in achieving better prices, without having to take control of the process.
