Sourcing is a key task and capability in Procurement. It is at the core of what the profession is about and has a tremendous influence on directing the spend of organizations. The vocabulary and terminology surrounding it, especially the use of abbreviations, can make it difficult for stakeholders and suppliers to fully understand this process. And even within Procurement, there is a healthy debate around the correct application of key terminology.
RFI – I know that I have a problem but do not know who can solve it.
RFP - I know who might be able to solve my problem but am not clear on how they can do it.
RFQ – I know who can solve my problem and how I want it to be solved.
With the release of our Archlet Sourcing App, we want to provide an explanation of the different terms used and what sets them apart. This way, all parties invovled can gain a clear understanding of each step in the process, why they are important, and what is expected in each of them.
Sourcing refers to the activities needed for the identification, assessment, and evaluation of suppliers in a structured tender process. The sourcing process can be divided into four different steps:
Each of these steps describes an activity that allows Procurement to gain more knowledge on the products and services offered by suppliers, the way they address problems, and their commercial proposals. They all sit in the wider context of the Source-to-Contract (S2C) process, which we have explained in our Procurement terminology glossary. Typically, Procurement starts out with an extensive list of suppliers for the RFI and shortlists appropriate suppliers at each step of the process.
The Request for Information is often the first step of a (strategic) sourcing event. Procurement uses an RFI when they are aware of a problem but not sure who is in the market to solve it. The aim is to screen the market for potential suppliers and their capabilities. It consists mostly of screening questions that allow Sourcing Managers to evaluate which suppliers provide the goods or services they look for, and which suppliers fulfil the organization’s requirements.
RFIs can range from a handful to hundreds. The design depends on the nature and complexity of the problem Procurement is trying to solve and the familiarity with the supply base. Once Procurement has a good understanding of the supply market, the next step is to obtain a proposal.
With a Request for Proposal, Procurement engages the identified supply base to obtain ideas for how they could meet the needs and requirements of the organization for a described problem or challenge. The RFP is used when the solution to a problem is still undefined. It allows organizations to collect different viewpoints on how the challenge can be solved.
RFPs require a description of the problem and background information that allow suppliers to provide meaningful ideas and approaches. As part of the RFP, a commercial model and proposal are requested to assess the commercial viability of the approach against the available budget of the organization. For this reason, the RFP is sometimes called Request for Price. As supplier inputs are rarely comparable at this stage of the process, this definition falls short of the actual objective of the request.
The Request for Quotation refers to the process of collecting a legally binding commercial offer from suppliers. At this stage of the sourcing process, the required goods or services are clearly specified, including the conditions of supplying them.
Suppliers are requested to provide their commercial offer in a predefined format or structure. It often contains detailed price breakdowns and cost components that enable Procurement to compare inputs on a like-for-like and detailed basis. This granular input is used to assess the competitiveness of the supplier and to negotiate the final terms and conditions.
Negotiations are the final stage of the sourcing process. They come in multiple shapes and forms. Some are conducted in person, over the phone, or via electronic tools in the form of auctions. They cover the commercial offer as well as the terms and conditions surrounding the project. Once an agreement is reached, the sourcing process is concluded, and the project moves into the contracting, implementation, or delivery phase.
This process is not without its challenges, especially when conducted over email and Excel. At each step of the process, Procurement needs to analyze and review the supplier inputs and conduct a fair evaluation.
While sourcing software often supports the collection of inputs, it rarely supports the analysis of supplier inputs. Let alone data harmonization, data cleansing, outlier detection, competitive analysis, opportunity identification, scenario modeling, and reporting. These common challenges force Procurement to reduce the number of suppliers at each step of the sourcing process, thereby reducing the available data points and competition.
There is a different path forward. By simplifying and automating sourcing analytics and scenario optimization, Procurement can increase the efficiency and impact of the sourcing process. Rather than cutting suppliers at each stage of the process, advanced sourcing analytics enable Procurement to use all collected information and perform scenario-based analysis.
Leveraging RFI inputs this way increases the competition across suppliers and ensures Procurement generates valuable insights for their internal and external negotiations. The Archlet Sourcing Optimization App provides intuitive and flexible capabilities to manage and execute the end-to-end sourcing process from RFI to supplier negotiations.