The Raw Power of the RFQ Process

Way back before there was software for generating request-for-quotes (RFQs), there were blank ledger forms. These were multiple row and columnar pages in a paper binding that could be used for almost anything, from inventory records to purchasing logs. Filling in these paper sheets was very time-consuming, but it was the only option for early buyers.

Now, with distributors offering online products and services, life has gotten unbelievably easier for procurement professionals. Companies like Avnet, Dig-Key, and others have turnkey, Internet-based solutions that allow for entire BOMs to be uploaded for immediate price and availability quotations. Ordering then becomes a simple follow-up operation that consists of selecting the items in the BOM that reflect the best buying options, negotiating (if required), providing a purchase order number, stipulating a shipping method, and waiting for the order to arrive.

This computer-aided process provides huge savings in time and effort over the early paper ledger days. Today, best practices involve having the required internet access, a reliable parts-management system, and screening filled orders to assure accuracy and part authenticity before inventory control takes over the physical parts management.

In the absence of the ability to upload entire BOMs for distributor RFQs, spreadsheets are commonly used and discretely submitted to each supplier to review and enter the relevant data into the blank cells designated for pricing, minimum buy quantity, and availability. The completed spreadsheet is then emailed back to the requestor of the RFQ. Most companies have their Item Master and BOMs on company ERP/MRP systems, which provide Excel or CSV export capability. With a few macros and tweaks here and there, the spreadsheet RFQ can be prepared in short order.

I just completed an 87 item RFQ today, which, from start to finish, took only an hour.

Managing the RFQ data from several suppliers that sell the same products can be as easy as amending the original spreadsheet to allow for side-by-side comparison on cost and availability. One key consideration that I must mention: Purchasing history should be referenced to make sure that the new pricing is in line with what has been paid on previous orders. Many MRP systems have preset fields that will show at least three cost options, Last PO Cost, Standard Cost, or Average Cost.

Remember, the last purchase may have had expedited costs, or other unusual cost factors, so using last cost as a comparison factor could be misleading. Average cost picks up several purchases and better reflects something closer to reality, but if you want a solid comparison, use standard cost. Be sure to amend this field at least twice a year to keep up with market fluctuations.

Many Purchasing modules have preset percentages for allowable cost deviations that permit a reasonable cost variance from buy to buy. Accounting will set the percentage and be able to catch excessive deviations in a “Purchase Price Variation Report.” You can set the MRP display options to show, in real time, any variance exceeding the preset value before placing the order.

Always archive these spreadsheets, so you have a means of quickly retrieving budgetary cost for same-assembly builds, but at higher volumes. In order to allow this contingency, always include quote quantities in excess for which you plan to buy at the time of the RFQ. That way, you can quickly decide if the next volume price break may be worth considering for your present order. You can always use the next column pricing as a negotiating tool to see if the distributor is willing to give you the higher volume discount without increasing your buy quantity.

Today, I placed an RFQ for bare PCB boards. I know I'm building 40 for sure, but I asked pricing on 50, 100, 200, 250, and 500. The reality is that I may end up buying more boards than I need right now because if the price breaks at higher quantities are really aggressive, I can afford to keep some unstuffed boards in inventory.

I only have to pay for setup fees and SMT solder screens once, and the lead time effectively disappears on subsequent build requirements because I already have the bare boards in inventory.

The process comes down to two major considerations: One is cash flow, and the other is how confident you are in the finality of the board design. You don't want to throw away a bunch of bare boards because another change has come from Engineering that has rendered the current board unusable.

In subsequent articles, I would like to discuss the purchasing processes and tools that make the procurement professional’s job labor-efficient and cost-effective. After Design, the greatest savings to a company can be realized through front-end cost management and procedures. Procurement plays a major role. The savvier the buyers are, the more the company can add to their bottom line.

5 comments on “The Raw Power of the RFQ Process

  1. Barbara Jorgensen
    October 5, 2012

    Many of the tools I've tested from distributors have the “history” feature and it is a great service for buyers. The pricing check is one good aspect, and there's the fact that part numbers are a dozen or more digits long and really cumbersome to have to key in and check. Of course there's a benefit for the distributor: if a customer buys it once, maybe they'll buy it again; or, if there's a newer version, the distributor has an opportunity to bring the customer up to date. Tracking buying history also helps in future forecasting–at least, in theory. At any rate, more information is better than no information at all.

    October 6, 2012

    I agree that the procurement process is key to success.  We also sometimes end up buying more PCBs than strictly required due to bulk buying discounts.  However we always seem to find decent uses for them.

  3. bolaji ojo
    October 7, 2012

    Douglas, Procurement is the key area many manufacturers use to cut costs. How have companies been doing this and what are the best ways of doing this without hurting operations?

  4. dalexander
    October 8, 2012

    @Bolaji, If no long-term contracts for quareterly or yearly quantities are in place already, then the buyer has the open ended options to buy from any approved supplier. In that event, negotiations can easily take cost down by 20% at the component level. Consolidation of buys increasing the component count or mix for a single supplier is often an incentive to the supplier to offer better pricing. There is always a savings by consolidating shipping operations as much as possible such that only a single shipment for all goods is required. This is often a result of telling the supplier to not ship anything on the order until the order is completely filled. There are fewer Customs transactions and overhead, and if the goods are going overland, LTL (less than truckload) truck freight can be a lot more cost effective than UPS or Fed-Ex etc. These are just a few of the basic strategies for cutting cost but there are many others including revisiting contract pricing if the volumes have gone up considerably, and re-examining competitor's new offerings to see if what may have begun has a sole source, high cost item, is no longer a sole source and readily available at lower cost. Packaging materials alone can add to cost so the OEM may want to provide the packaging at cost to avoid 2nd party mark-ups. THis is especially true when outer packaging includes wood cases with liners as in the case of shipping 19″ rack mounted equipment in the racks. A seven foot rack may require $500 packaging when supllied by a packaging house, but when contracted separately in lots of 12, the wood cases can be purchased for $200 or less. 

  5. Mr. Roques
    October 9, 2012

    Does this only work when the products requested are very specific and no matter who is the supplier, will be same?

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