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Tendering Is the Only Way of Supply Chain Business

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Tendering Is the Only Way of Supply Chain Business

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A serious look at Tendering by Stuart Emmett . Stuart Emmett co-operated with our very own Vivek Sood to co-write the book GREEN SUPPLY CHAINS – AN ACTION MANIFESTO. This book was one of the first books in the world on the topic of Green Supply Chains, and as such is used in Universities around the world for executive training and research purposes.”] 

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One of the key activities of procurement is to obtain acceptable agreements with suppliers by using the tendering and the negotiating processes.

However, which of these two processes is best and why do some organisations use only tendering, whereas other organisations, will only negotiate?

Let’s therefore briefly consider the negotiating and tendering processes further in the following sections:

5 section of Supply Chain Business

What is Tendering?

Tendering is defined as: “The procedure, by which potential suppliers are invited to make a firm unequivocal offer of the price and term which, on acceptance, shall be the basis of the subsequent contract” Tendering is a formal process involving the following steps:

4 Tendering steps of Supply Chain Business

Those tenders received by the nominated date/time, will then be assessed, both technically and commercially, against the required criteria that has been specified in the ITT and at this stage; any offers that do not meet these criteria are eliminated. The objective of the tender assessment is therefore for the purchaser to establish which the best offer is. These assessments will normally cover the following aspects:

Technical/Commercial Assignment of Supply Chain Business

Technical assessment

Commercial assessment

Compliance with the specification (either a conformance specification or a performance specification)

Price

The required output parameters will be met

Any other commercial qualifications such as terms of payment

Product/service quality

Perceived risks such as supply lead times

For equipments, the maintenance/ repair over the operating life

Value for money

If price is the only selection criterion, then the tender with the lowest price will be awarded the contract; however where price is only one criterion among several others, such as service, lead time, quality etc; then the purchasing organisation will need to decide the most economically advantageous tender (MEAT) or, which one represents the best value for money (VFM). The result of the assessment is therefore to rank the tenders either by price, or in accordance with assessment criteria and these which could be specified in the ITT.

This establishes the lowest assessed tender, which is then recommended for the award of contract. The tender specification in the ITT must therefore be clear, unambiguous and allows suppliers to make an appropriate offer.

In summary, tendering aims in a single round of tendering to obtain compliant tenders from qualified tenderers by allowing for open competition and fairness. What then are the perceived disadvantages of tenders?

Tendering may not always give the intended open competition and fairness; yet these are the major reasons for its use.

Indeed tendering may be merely “going through the motions” as tendering processes can be influenced by those who have power and influence over the eventual selection process.

Tenders may also be selectively issued with suppliers’ responses then being clearly influenced. Additionally I am also reminded of a procurement manager who once said to me, “we are always able to pre-cook the tender board.”

The private sector, for example, will usually disregard tendering completely and after selecting suppliers, moves straight to negotiating. They see the following disadvantages of the tendering process:

5 Tendering process of Supply Chain Business

We will further consider the above aspects later; meanwhile let us explore the negotiation process. What is Negotiation? Negotiation can be defined as “the resolution of conflict through the exchange of concessions”.

This will mean trading concessions, not donating them, and can also only be undertaken with people who have the power to vary the initial terms and are able to give something in return. In other words, all the players have to be prepared to negotiate.

The advantages of negotiations can be seen as follows:

Disadvantages of negotiations are seen as below:

Conducting negotiations is a skilled process and whilst there are available some ideal guidelines, it cannot be thought as a strict procedural process; indeed some observers observe there are really few rules involved.

As it is a process conducted by people, then, personality and cultural aspects are also involved where for example, negotiating with Koreans is different to negotiating with Germans.

Negotiating is a skill that needs to be learnt and developed. Whilst it is commonly found that supplier’s sales people are trained in selling and negotiating, perversely and regrettably, buyers are often not trained to negotiate.

Suppliers are one side of the buying process In the buying of products/services, the position of the supplier in the marketplace should be considered; this often being something that is not systematically considered by all buyers.

There will often be other buyers for products and this may mean the supplier takes a view of how “attractive” the buyer could be as a customer. Indeed, there may be several reasons why the buyers appear unattractive to suppliers including:

Additionally, the number of available suppliers may be large or small, for example, markets may be expanding or contracting and buyers therefore need to be aware of the expansion or contraction of the supply market from which they are procuring.

It should therefore never be assumed by buyers that every supplier is “desperate” to supply them with products or service.

Suppliers have a view of their market and this will affect a suppliers positioning towards buyers; for example the suppliers view maybe one of the following:

Clearly not every purchase has a supplier who views the buyers business as being a key account for the supplier.

In view of these differences then all buyers can usefully consider: Question 1, just how does my supplier view me? They may be surprised by the answer and that they are not, universally, going to be seen as being a key account; indeed, they may be seen as a nuisance.

Additionally, related to this, is the power of each party has, for example: Where the buyer is dominant there is:

Where the seller is dominant there is:

All buyers can therefore usefully consider;

Question 2: what power relationship is there with my supplier? The following gives one possible summary from asking and answering the above two questions of the supplier base

Suppliers name

Q1) Suppliers view of us

Q2) Power relationship

Supplier a

Key account

Independent

Supplier b

Exploit

Supplier dominant

Supplier c

Nuisance

Interdependence

Supplier d

Development

Buyer dominant

Supplier etc

Etc

Etc

This matrix shows there will be varied responses and whilst some will “match” (e.g. b), others will not (e.g. c).

We can ask:

Question 3: What are the implications of these two views?

Simply here, the answer will reveal that there are varied requirements from buyers and suppliers, some will align, and some may not.

We can explore this further by looking at the 5 rights of purchasing related to the well known Kraljic item portfolio. With Kraljic we can see that buyers have a hierarchy of requirements and this is shown below:

The Right

Bottleneck and Critical items Aim: Secure supply and therefore , lower the risk of non supply

Routine and Leverage items Aim: Reduce price by playing the market, possible outsourcing etc.

Quality

Secondary

Secondary

Quality

Secondary

Secondary

Time

Number one requirement

Secondary

Place

Secondary

Secondary

Cost

Secondary , maybe last

Number one requirement

From the buyers / customers and demand perspective on the cost / service and the supply balance, then the following ideals are indicated:

The ideal matching response from the suppliers and supply perspective, related to Kraljic, is then going to be as follows: This can be amplified further into an ideal typical perspective, as follows:

Service winner

Buyers Strategy

Matching Supplier Behaviour

Suppliers Market position

Responsive

Leverage items with Supplier Sourcing “Plays the market”

React rationally with price cuts

Certainty of competition in the short and long term

Innovative

Bottleneck items with Supplier Development “Secures supply and attempts to diversify”

Reactive positions when maintaining the monopoly, or, Proactive entrepreneurial behaviour with new product designs

Uncertainties of being able to innovate, high R&D costs, followed by possible monopolistic position

Empathetic

Critical items with Supplier Collaboration “Work collaboratively with suppliers”

Proactive team work and problem solving

Uncertainty initially (forming-storming) followed by norming and long term performing

The question to be asked now is as follows:

Question 4: Will the above mentioned supplier behaviours line up with the buyer’s strategy?

Where there is congruence, there is agreement and progress forward will be easier, as both buyer and supplier will have their needs met.

If there is no congruence, then there are possible negotiations options and whilst positions may be then changed, the outcome could be an eventual “no deal.”

Where however, no negotiation is allowed, then there is really no hope of having a satisfactory relationship and any progress will always be problematic; for example the supplier wants to be innovative and service driven but the buyer is price playing the market and is cost driven. Indeed with tendering, then it is unlikely the supplier is procedurally able to offer innovative alternatives.

May be here therefore, the suppliers only hope of winning a tender is to submit a low price that will “fit the tender” and hope that their alternative can be offered at some later time, once they “in”.

Clearly here, it will be the appropriate behaviours by either party that are therefore affecting and driving the supplier/buyer relationship.

This should be readily easy to accept with for example, the well know scenarios of “you get what you give” or, “what you give you get”, and “what you sow, you will reap”.

However as we will see with our next question, acceptance of this, does not systematically lead to changing behaviour towards making more optimum buying / supplier selections.

So our final question for buyers is as follows:

Question 5: if the buyer’s strategy is using tendering 100%, will this give them 100% effective results?

Which is then going to be the best to use, a tendering or a negotiation process? It would seem so far that leverage and routine items may well find a better fit using competitive tendering, whereas bottleneck and critical items are more likely to get better results from with negotiating.

What fundamentally do Suppliers & Customers want? So now we have seen what fundamentally tendering and negotiations involve and how they relate and vary with each other in a practical way.

If we were now to simply view what the supplier and the customer wants, then we can see the following positions: Source: “The Relationship driven supply chain” Emmett and Crocker (2006)

Criteria

Suppliers want:

Customers want:

Orders

The “business”

Delivered/available goods/services that satisfy a requirement

Information

Clear requirements

Wants clear status information

Performance

Feedback (KPI’s that are jointly measured and, benchmarked with other suppliers)

“Feed-forward” (Pre-advice and proactive status/alerts)

Relationship approach

“Fairness” Involvement/“Part of”

Relationships may be a reflection of the procurement portfolio and power positions

Price/Cost

A “fair” to a high price

The “best” total acquisition cost, total cost of ownership, life cycle cost, whole life cost (TAC/ TCO/ LCC/ WLC)

Quality

Clarity on what quality means and what is “valued” by the customer

“Fit for purpose”

Delivery

On time, in full (OTIF)

On time, in full (OTIF)

Quantity

Large regular orders

Smaller, frequent deliveries

Time

Acceptable supplier lead time

Shortest supply lead time

Place

Ex Works (International) or Factory Gate Pricing (Domestic trade)

Delivered domicile duty paid, or Delivered/Carriage paid

Payment time

Prompt

To negotiate

This indicates that there are some very common “wants.”

By exploring the above common wants, then this facilitates potential mutual benefits and gains. The point here is, will these benefits and gains, come from a tendering, or from, a negotiating process?

Summary Let us now summarise the relative advantages and disadvantages of tendering and negotiating Advantages of tendering

Aspect

Tendering

Whereas Negotiations

Openness

Open to all suppliers (in theory) and often with some visibility of results

Open to those approached only and this is usually confidential

Supplier Competition

Competitive between those suppliers invited / submitted

Competitive between those suppliers negotiated with

Auditable

Auditable

Not easy to audit

Procedures

Procedural and routine , therefore it is more of a rational process

Non procedural and needs skilled trained people.It is an emotional process with some rational judgements

Outcomes

The lowest price or best value for money, and this is “fixed” for the prescribed specification

Easily allows for joint working on solutions for the best deal possible, (for both parties)

Kraljic best fit

Leverage and routine items

Bottleneck and critical items

Power relationship

Buyer is dominant or is independent from supplier

Supplier may be dominant or there is interdependency of buyer and suppliers

Cost/service balance

Cost is usually the prime requirement with possible “value for money” service aspects, (providing these are in included in the specification)

Service supply is prime but allows for cost/service trade offs in the negotiation

Disadvantages of tendering

Aspect

Tendering

Whereas Negotiations

Clarifications

Cannot always clarify technical points

Can more easily clarify technical points

Specifications

Fixed specification is given, therefore the supplier cannot easily suggest any better alternatives

Supplier can give better alternatives and jointly work on solutions with buyers

Limited usage

No use at all with a “monopoly”

Can use with a monopoly

Cost and time

Slow and expensive

Expedient and cheap

Approach

Conflicts with “newer” collaboration approaches as is a prescriptive approach

Skilled and varied approach can be used

Suppliers invited

In theory is open but can be “fixed” e.g. only certain suppliers are invited. Additionally, suppliers may refuse to be involved in tendering

Can also be “fixed” but most suppliers are prepared to talk/negotiate

Suppliers view

Supplier has “one shot” to get it right

Many opportunities and meetings are possible

Conclusion This raises the final question for all buyers to consider: Which is best, tendering or negotiating?

The answer will be found in the above discussion; it will depend on the circumstances, however it will be seen that the “one size fits all” approach of tendering is just not going to be the most effective.

Whilst the advantages of tendering, in theory, do seem to be rational; tendering remains questionable in practice, for example:

Conclusion This raises the final question for all buyers to consider: Which is best, tendering or negotiating?

The answer will be found in the above discussion; it will depend on the circumstances, however it will be seen that the “one size fits all” approach of tendering is just not going to be the most effective.

Whilst the advantages of tendering, in theory, do seem to be rational; tendering remains questionable in practice, for example:

Of course, mixed tendering and negotiating may be used, for example some organisations use tender procedures to cover the technical assessment/compliance, and they will then negotiate on the commercial aspects.

However, if we can assume that we will be using honest and ethical negotiators, then it seems very clear that it is negotiating that will offer the overall best approach.

This is further supported by observing, interestingly, that it is the public/ government organisations that generally will only tender whereas, the private commercial sector rarely tender and systematically use negotiating. Which of these two sectors is the most commercially efficient?

For those who choose to believe it is the public/government organisations then please consider that we have seen Government, successively, move the utilities into the private sector in recent decades and more recently, place much of the NHS procurement into the private sector; (all this being done of course whilst retaining some regulation).

One assumes this is done so that they can become more commercially competitive and also benefit, for example from, better procurement practices?

This is not to say that we cannot use both negotiating with some tendering as for example, tendering may be useful for the purchase of leverage standard items.

However even here, tendering has been replaced by reverse e-auctions in some leading edge organisations; reverse auctions being a classic application for leverage items and also simplify the award process for the benefit of both parties.

In conclusion, given a free choice between tendering and negotiating, then tendering, overall, is just not going to be the best practice. As far the UK is concerned, the sooner the government realise this and release the talent of procurement people, the better for the tax payer.

Indeed in the words of Sir John Egan in “Rethinking Construction” (1998); “Industry must replace competitive tendering with long-term relationships based on clear measurement of performance and sustained improvements in quality and efficiency.”

Clearly this involves replacing tendering with sitting down and talking and negotiating. It has to be the right thing to do.

All written by Stuart Emmett, after spending over 30 years in commercial private sector service industries, working in the UK and in Nigeria, I then moved into Training. This was associated with the, then, Institute of Logistics and Distribution Management (now the Chartered Institute of Logistics and Transport). After being a Director of Training for nine years, I then chose to become a freelance independant mentor/coach, trainer, and consultant. This built on my past operational and strategic experience and my particular interest in the “people issues” of management processes. Link for the bloghttp://www.learnandchange.com/freestuff_23.html

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