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Ariba Knowledge Nuggets - Reducing RFP prices with Dynamic Online RFQs
 

Ariba Knowledge Nuggets - Reducing RFP prices with Dynamic Online RFQs

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    Ariba Knowledge Nuggets - Reducing RFP prices with Dynamic Online RFQs Ariba Knowledge Nuggets - Reducing RFP prices with Dynamic Online RFQs Presentation Transcript

    • 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.1
    • 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.2
    • 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.3
    • 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.4
    • 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.5
    • 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.6
    • 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.7
    • 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.8
    • 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.9
    • 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.10
    • 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.11
    • 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.12
    • 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.13
    • 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.14
    • 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.15
    • 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.16
    • 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.17
    • 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.18
    • 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
    • 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.20
    • 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.21