Is Collecting Three Bids Your Best Option?

The concept of collecting a minimum of three bids to procure goods has been a traditional staple of many procurement departments for years. This is a system that I have found primarily to be corporate mandated through corporate guidelines for procurement, and more specifically buyers. Often times, it is then utilized as a key metric to evaluate buyer performance. For example, number of times three bids were collected and evaluated prior to purchasing, or on the flip-side number of times three bids were not collected. At face value this may seem like a good system to ensure you are purchasing a product or service at a competitive price. However, in most cases repeatedly collecting three bids doesn't make sense and ultimately you are shooting yourself in the foot. Let me explain.

Because this is used as a key performance indicator (KPI) the buyer is measured against, he or she will "shop" as many items as possible. This leads to a rash of problems.

• Buyers waste time shopping low dollar items that make a negligible impact on the bottom line.
• Buyers cannot dedicate time to working with suppliers on holistic cost savings, process improvement, value creation or operational efficiencies. For example, the buyer may be purchasing florescent bulbs when ultimately there is a substantial cost savings for the plant through the transition to LED.
• Suppliers become annoyed with the continuous quoting process and eventually disengaged.
• Suppliers are often asked to quote the same product again and again. 
• Supplier account managers and representatives become tactically focused and cannot dedicate the time to service, support, low cost alternate product recommendations, site level cost improvement, etc.
• Supplier relationships become purely tactical, no strategic relationships are developed.
• Suppliers are unable to see the "big picture" only item by item.
• Suppliers are unable to leverage overall volume either by item, by category, by manufacture or some combination of the three. 
• Pricing is only competitive for that single purchase not overall. 

This is why purchasing guidelines need to be viewed more strategically. Ideally what should be done is the execution of a strategic sourcing event which encompasses a relative sample of a year's worth of purchasing activity for that category.  This is then presented to the supply base to gather a holistic understanding of the market. In turn, it allows the suppliers a view of the "big picture" and gives them the opportunity to provide a competitive overall bid as well as other incentives. Then the savings can be analyzed on a scenario perspective and awards will be determined appropriately. Buyers should then be measured against how often they are purchasing on contract. If a large outlier purchase is to be made then three bid and buy and purchase level type negotiations make sense. This way you are maximizing both operational efficiencies and cost savings. you also will be developing strategic relationships with your awarded or preferred suppliers which will lead to further cost reduction. The suppliers will now be able to dedicate the time to various value added services and the exploration of cost effective innovations and lower cost alternatives within the industry.