During a sourcing event prior to entering negotiations, it is important to benchmark suppliers against the current market. One way of doing this is through a Request for Proposal (RFP). By soliciting multiple bids through the RFP you are able to gauge competitive market rates on a line item basis. However, typically suppliers do not submit their best price in their initial proposal and have padded certain areas of their proposal to reflect a heavier profit margin. Conversely, your job is to drive the best price possible, and chip awat at the supplier's profit margins without comprising the quality of the product. This can be done by developing competitive targets that are still in line with the market.

Analyzing supplier pricing and developing targets can be done using three steps prepare, align and calculate.

Prepare

  •  Prior to reviewing suppliers' bids you must make sure that you have a clear template created to calculate savings. It is important to have an understanding of what went into the baseline cost and a deep understanding of each element that may affect unit pricing such as unit of measure (UOM).
Align

  • This goes back to preparation and the need to understand what is affecting the baseline price. When bringing in each supplier's bid it is important to ensure that all line items are an "apples to apples" comparison to the baseline.
    • This can encompass many different factors such as, is shipping included in the baseline cost and has it been included in each supplier's bid? Is the corresponding line item bid in the same unit of measure as the baseline?
    • For example, in a janitorial supplies RFP the baseline UOM for bleach is a case of 12. However, the bidder supplied pricing for a case size of 4. In order to compare the bidder's price to the baseline the pricing must be adjusted by multiplying by 3.
Calculate

  • After each supplier's bid has been brought into your savings analysis and everything is aligned in an "apples to apples" comparison to the baseline it's time to determine your savings.
    • Before developing targets it is important to see savings on a supplier level basis or which supplier prior to negotiations has the best single offer. 
  • Once savings is calculated on a supplier level basis it is time to determine the Best Alternative to a Negotiated Agreement, or BATNA.
    • What this is; is the best pricing per line item incorporating the baseline price. Essentially you are consolidating the best elements of each supplier's proposal into a single offer.
      • What this really shows you is the maximum savings the market has to offer prior to negotiations. You will find that certain suppliers are able to provide better pricing on certain products or product categories than others. This can be due to many different reasons, but commonly it is due to the supplier's relationship with the distributor or manufacturer and the current pricing agreements in place.
      • It is important not to apply the same percentage straight down for each line item. Suppliers will notice this and it will limit the adjustments of their pricing. Also if the target price is below the supplier's cost the supplier will know that the targets are unrealistic and will not provide the best price available. In order to provide accurate and competitive targets it is important to have a deep understanding of the product category that you are sourcing and the competitiveness of the current offers. One your analysis is complete develop a methodology to incorporate into your target development based off of your BATNA.
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Michael Croasdale

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