1. Reducing RFP prices with
Dynamic Online RFQ’s
Alexander Volkel
ARIBA Sourcing Consultant
October 7th 2010
© 2010 Ariba, Inc., All Rights Reserved. The contents of this document are confidential and proprietary information of Ariba, Inc.
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2. AGENDA
1) Why do a Dynamic eRFQ?’
- Benefits of online events
- When to do a dynamic eRFQ
2) Best Practices to setup Successful Dynamic eRFQ’s
- Selecting the right categories
- Preparation is key: Multi-stage events
- Tips for successful online events
3) Event Parameters
- Critical Parameters
- Offline negotiations vs. Online Dynamic RFQ’s
- Incumbent behavior
4) Common misconceptions
© 2010 Ariba, Inc., All Rights Reserved. The contents of this document are confidential and proprietary information of Ariba, Inc.
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3. What is an online dynamic RFQ event?
“eSourcing” is using an automated tool across the entire strategic sourcing process.
A “online event” is simply one step in a typical eSourcing project
Research & Approve Suppliers
Gather & Validate Manage Review Proposals RFQ/ online event Supplier Selection
Item Data Category Suppliers Set Final Strategy / Negotiation &
Develop RFI/RFP Contract Award
Strategy Review
An Online Dynamic RFQ is a negotiating method that leverages competition
between interested bidders to efficiently identify the best available market price
for goods or services
But also…..
….. Suppliers bid more than once (dynamic) in few minutes ( < 1 hour ) knowing
their market position
…...It’s and effective methodology to increment savings with qualified suppliers
…..It is a DYNAMIC RFQ , because suppliers don’t always win with lowest price and
don’t see identities nor prices in most cases.
…..Only Pre-Qualified suppliers participate
© 2010 Ariba, Inc., All Rights Reserved. The contents of this document are confidential and proprietary information of Ariba, Inc.
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4. Dynamic RFQ’s drive incremental Savings
Online Dynamic RFQ’s drive incremental savings of 5-7% on avg. vs. RFP
10 years of Ariba data shows
17% eRFP that:
Our customers historically
Dynamic eRFQ average 17% savings using
$ eSourcing practices that
include online events
Dynamic RFQ’s drive
incremental savings of 3-4%
from incumbent suppliers over
RFP
Historic Post Identified
Price eSourcing Savings
Reductions in the cost of
products/ services go straight
to bottom line
*Data based on all Ariba-managed sourcing projects run on Ariba software
© 2010 Ariba, Inc., All Rights Reserved. The contents of this document are confidential and proprietary information of Ariba, Inc.
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5. Level playing field & transparent rules are key
It’s about discovering the true market price
This is a decision-support tool that provides market transparency
to both buyers AND suppliers
It’s about creating a level playing field for suppliers
Thorough technical and commercial requirements are provided
up-front to all suppliers. Participants are pre-screened to ensure
that they have the capability to support customer requirements.
Fair and equal “transparent” rules increase credibility &
participation
© 2010 Ariba, Inc., All Rights Reserved. The contents of this document are confidential and proprietary information of Ariba, Inc.
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6. When to do an online event? Examples
- To reduce price further
- Many suppliers qualified, price difference “high” (> 5% )
- > What is true market price?
- Incumbent/Current supplier’s price is higher than market
- > How do we keep their service and have best price offered?
- We understand market costs and pricing, but supplier(s) are ALL above
- > How do we make them come down ?
- No time to negotiate offline with many supplier (>3) multiple times
- > How do we negotiate with all at the same time?
- Too many “non-objective” and “relationship-based ” factors affect price
- > How do make negotiation transparent?
- We have too many suppliers qualified for final negotiation round?
- > Can we lower prices below a target to select for final audits and/or
negotiations?
- New suppliers hungry for business , still not offering lowest price
- > How do we pressure bidders to give best price?
© 2010 Ariba, Inc., All Rights Reserved. The contents of this document are confidential and proprietary information of Ariba, Inc.
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7. AGENDA
1) Why do a Dynamic eRFQ?’
- Benefits of online events
- When to do a dynamic eRFQ
2) Best Practices to setup Successful Dynamic eRFQ’s
- Selecting the right categories
- Preparation is key: Multi-stage events
- Tips for successful online events
3) Event Parameters
- Critical Parameters
- Offline negotiations vs. Online Dynamic RFQ’s
- Incumbent behavior
4) Common misconceptions
© 2010 Ariba, Inc., All Rights Reserved. The contents of this document are confidential and proprietary information of Ariba, Inc.
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8. Dynamic eRFQ Strategy : The “Six C’s” of successful online event
Spend Characteristic
Opportunity for Project
Contractual Availability No contractual or supplier restrictions during the
proposed supply period.
Commercially Attractive Large enough spend to attract attention of
Avoid doing online events on low Spend categories, exploit in the applicable industry. $500k Spend
suppliers “online event potential” on >
Competitive Supply Base Enough suppliers to create competitive online
Invite >3 suppliers to online event, aim at 10+ bidders….. Use ARIBA DISCOVERY online
dynamic markets.
Clearly Defined Requirements Buyer requirements can be clearly defined and
easily conveyed to suppliers. A tight scope of
work will give suppliers greater confidence in
bidding.
Compressible Margin Inherent opportunity for cost compression and/or
savings. Cost avoidance also a consideration.
Commitment Buyer supports the project in all internal and
external communication.
© 2010 Ariba, Inc., All Rights Reserved. The contents of this document are confidential and proprietary information of Ariba, Inc.
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9. The Power of Multi-Stage Events
Definition & Benefits When to Use
Definition True Market “transparent” pricing is required
Combination of several RFx events into a Aggressive Savings target
single sourcing project: RFI, RFP, RFQ or online Limited knowledge of supply base / market
event
Emulates the natural sourcing process Uncertain of supplier qualifications and/or
capabilities
Template creation helps pass requirements
and data from one stage to the next Requirements are not well-defined
Category market pricing is not well
understood
Benefits
Overcapacity in the marketplace
You gain deeper market intelligence with
each stage of the process Cost structure is unknown
Methodically and objectively narrow list of
potential suppliers
Allows for online event to be executed with Challenges
fully qualified suppliers -> apples to apples
comparison Process is more time consuming
Keep suppliers engaged and communicate
regularly
© 2010 Ariba, Inc., All Rights Reserved. The contents of this document are confidential and proprietary information of Ariba, Inc.
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10. TIPS for a good online event?
• Plan ahead of time all phase - 4-6 weeks to execute Multi-stage online
event
• The less “open doors” are left after RFP phase the less savings achieved:
• Try to negotiate nothing or very little after online event (non-price factors)
• Avoid price negotiation after online event
• >>Suppliers must feel the pressure during online event<<
• Invest time in searching for new suppliers – learn market
• Keep close communication with Incumbents – they are important
• Inform ALL rules – Transparency is essential
• Do not interfere with Market: TRUE market price is revealed as all
“possible qualified” suppliers have a chance to submit their “BEST” bid
• Use for real business only. Suppliers give their best, don’t want to be
betrayed
© 2010 Ariba, Inc., All Rights Reserved. The contents of this document are confidential and proprietary information of Ariba, Inc.
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11. Online Event Types – depends on Market & Strategy
Market visibility strategies influences supplier behavior and competitiveness
a) FULL DISCLOSURE
• All bids can be viewed by all suppliers during open bidding, not their identities.
• Used typically in commodities or with large supply base .
• Used when bids are not compressed in same value range (bids are spread)
b) RANK ONLY
• Suppliers will see only their position and the one of their competitors, not their values neither identities.
• Used when few suppliers participate , or buyer wants to give suppliers impression or larger market
• Used when one or few bids have a big spread compared with most bid received.
c) RANK ONLY WITH LOWEST BID VISIBILITY
• Same as Ranking, but showing only lowest bid.
• Used when buyer does not want to communicate reserve price
• Used when buyer knows there are very competitive bids but possible to match buy other bidders
> 80% of Industrial online events are “Ranking” , more in non-commodity markets (i.e. Services)
© 2010 Ariba, Inc., All Rights Reserved. The contents of this document are confidential and proprietary information of Ariba, Inc.
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12. AGENDA
1) Why do a Dynamic eRFQ?’
- Benefits of online events
- When to do a dynamic eRFQ
2) Best Practices to setup Successful Dynamic eRFQ’s
- Selecting the right categories
- Preparation is key: Multi-stage events
- Tips for successful online events
3) Event Parameters
- Critical Parameters
- Offline negotiations vs. Online Dynamic RFQ’s
- Incumbent behavior
4) Common misconceptions
© 2010 Ariba, Inc., All Rights Reserved. The contents of this document are confidential and proprietary information of Ariba, Inc.
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13. Critical Setup Parameters
Lotting / Spend Aggregation …….increase volume
Suppliers confirmed participation …competition
Confirm only pre-qualified suppliers participate
Align pricing strategy with online bidding rules
Timing must allow for Pre-Bid & Supplier training
Transparent & Comprehensive Rules:
Secure that Award rules exist, are clear, and award will happen
Reference to previous phases (RFP,RFI)
No questionnaires in Dynamic RFQ’s, focus on price
© 2010 Ariba, Inc., All Rights Reserved. The contents of this document are confidential and proprietary information of Ariba, Inc.
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14. Pricing strategy must be aligned with rules
Reserve price is Optional: used when supplier must be pushed below a certain price line
due to low competition or due to price not only parameter for award so low bid suppliers go to Audit phase
Example
$ 100 $6
8%
$2 Use Reserve Price : > 1 supplier goes to
$ 92 final round of negotiations
• Reserve Price: Price at which buyer is willing to
switch business from current supplier
• Reflects known switching costs and
implementation risks
• “Target Price” % can be added
Historic Est. Est. Target Reserve
cost Transition extension price
Cost cost
© 2010 Ariba, Inc., All Rights Reserved. The contents of this document are confidential and proprietary information of Ariba, Inc.
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15. Value of Pre-Bids
Add Qualify Dynamic
Suppliers Suppliers
RFP Pre-Bid Audit Award
eRFQ
A pre-bid is a bid placed by a supplier during the preview stage.
Shared bid information is not visible to other suppliers until the online event
opens.
Forces suppliers to prepare early
Validates supplier has ability and understand how to place a bid
Eliminates need for common Initial Price to all suppliers, which can “pull” Prices up
Helps to predict level of participation before bid day
Can and often produces guaranteed savings before event even opens for bidding
Jump starts the competition by having multiple bids populate event immediately
Helps suppliers concentrate on the competition during event, ask questions before.
© 2010 Ariba, Inc., All Rights Reserved. The contents of this document are confidential and proprietary information of Ariba, Inc.
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16. Understanding why Dynamic RFQ’s drive incremental savings
is easy when you list online event advantages versus
traditional manual negotiations
Manual Negotiations Online Dynamic RFQ -
Advantages
• Liquidity: Private, 1-1 price discussions
without any direct liquidity among market • Liquidity: Price transparency drives
alternatives interactive competition, much like the
• Efficiency: Negotiate with one supplier at most efficient markets in the world
a time, making it important to short list • Efficiency: Negotiate with many
early, to control workload suppliers at once, increasing the
• Effectiveness: The outcome is highly chances that the most competitive
dependent on the skill of the person suppliers are still included in the
leading the project. Even buyers who process at the end when it matters most
should have great leverage, can leave • Effectiveness: A well constructed
significant money on the table event leaves each supplier no choice
• Opportunity for Human errors: but to do what is rational – put your best
Negotiators often have little experience offer on the table in order to win the
negotiating, less market knowledge than business
supplier opponents, internal deadlines • Opportunity for human errors:
limiting time for negotiating, and difficulty Eliminate guessing margins, deadline
knowing when to stop asking for more pressures, etc.
from a supplier.
• Strategy: Online event can support a
• Strategy: Bluffing, table pounding, variety of negotiating strategies inherent
walking away are common “strategies” in various bid formats
© 2010 Ariba, Inc., All Rights Reserved. The contents of this document are confidential and proprietary information of Ariba, Inc.
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17. Historical Incumbent Experiences
When suppliers receive a strong, consistent and credible message of commitment to
the process, they logically participate
86 %
Participate
Incumbents have chosen to participate in Ariba’s
Competitive Bidding Events 86% of the time.
TIPS:
• Current suppliers deserve special attention, as they have more at risk than other
suppliers and as a result, are more cautious of the project.
• Contact current suppliers before contacting other suppliers and before publication of
any RFX to incumbents do not hear of the project from another source.
© 2010 Ariba, Inc., All Rights Reserved. The contents of this document are confidential and proprietary information of Ariba, Inc.
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18. Examples of Bidding
Typical behavior of incumbent bidder
Bid Graph
© 2010 Ariba, Inc., All Rights Reserved. The contents of this document are confidential and proprietary information of Ariba, Inc.
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19. AGENDA
1) Why do a Dynamic eRFQ?’
- Benefits of online events
- When to do a dynamic eRFQ
2) Best Practices to setup Successful Dynamic eRFQ’s
- Selecting the right categories
- Preparation is key: Multi-stage events
- Tips for successful online events
3) Event Parameters
- Critical Parameters
- Offline negotiations vs. Online Dynamic RFQ’s
- Incumbent behavior
4) Common misconceptions
© 2010 Ariba, Inc., All Rights Reserved. The contents of this document are confidential and proprietary information of Ariba, Inc.
19

20. Common misconceptions
- Lowest price supplier automatically wins
- > Not always. Post event qualification can happen (visit site, audits, discuss
commercial and/or service terms), if not qualified second best price takes
award
- Only price is negotiated in Dynamic eRFQ’s
- > No. By qualifying suppliers on quality, service and other critical parameters
during RFI and/or RFP non-price factors were considered.
- > When doing Online Events only pre-Qualified bidders participate: aim for
apples to apples competition
- Only Apples-to-Apples products or services can be included
- > In most cases yes, but it could happen that Customer is satisfied with selection
criteria: any suppliers that complies qualifies (i.e. Carpets, Facilities , etc..).
- > As long as quality & service parameters are met in qualifying Round
- eRFQ’s only succeed in markets with high number of suppliers (>10)
- > As long as there is hunger for business and willingness to change vendors
there is a possibility for a successful Event (i.e. even 3 suppliers can bid)
© 2010 Ariba, Inc., All Rights Reserved. The contents of this document are confidential and proprietary information of Ariba, Inc.
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21. Common misconceptions
- Dynamic RFQ’s are not sustainable or fully implementable
> Only qualified suppliers participate
> Post Event site visits and meetings reconfirm “implementable” savings
- Online events ruin supplier relationships?
> Multi-phase Transparent / comprehensive RFP-eRFQ replicates process
> If you don’t know requirements, get them from incumbents
> In most cases current suppliers keep business when being challenged
- Price negotiation can’t happen after online event
> It can happen, but eRFQ savings will be low if supplier expects offline
negotiation
> Can have Online Event to filter larger base of suppliers & lower sourcing cycle
- I know requirements & suppliers - we can go straight to Dynamic RFQ
> Suppliers must be sure competitors bid on same rules: transparency.
© 2010 Ariba, Inc., All Rights Reserved. The contents of this document are confidential and proprietary information of Ariba, Inc.
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