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A methodology for strategically managing procurement is “Negotiations by Phases,” which we will fully address in this document. I can tell you in advance that, if implemented correctly, you will achieve excellent results both qualitatively and quantitatively.
Negotiations by Phases 1 and 2 and Fundamental Concepts
This methodology involves conducting sequential negotiations with suppliers, where the first phase is primarily focused on a thorough market exploration. Suppliers present their various product/service options. In this initial stage, the invitation to suppliers is typically broad.
At the end of this first phase, the optimal specifications for the goods or services to be purchased are defined, and suppliers whose proposals/offers are approved are determined.
In Phase 2, offers are requested from the suppliers with the defined and, in many cases, already optimized product/service options. In this phase, sealed bids, electronic auctions, or direct negotiations (traditional, face-to-face, though to be honest, they are mostly virtual nowadays) can be used.
First, it is essential to define some fundamental concepts. A key factor for successful negotiation —which some organizations do not give the necessary importance to— is having the correct and optimal specifications sheet for what is to be purchased. Companies refer to it as “Specifications Sheet,” “Technical-Commercial Terms,” “Technical Dossier,” “Terms of Reference,” “Administrative Bases,” etc.
Whatever the name used, we will define two models of “specifications sheets”: these are the RFP (Request for Proposal) and the RFQ (Request for Quotation).
RFP (request for proposal)
It is the requirement (Request) for proposals. It is a document that contains preliminary purchase specifications, by which suppliers are asked to submit their various proposals or solution options to address the stated needs.
Practical Example:
For example, when contracting mobile phone services, suppliers are asked to propose options from their various phone ranges, consumption plan options, equipment sale and rental alternatives, additional services, value-added features, etc.
RFQ (request for quotation)
The request for offers is a document that contains clear and precise specifications of what is required. Suppliers will present their offers aimed at meeting this specific requirement.
Using the same example of contracting mobile phone services, suppliers will be asked to submit their offers for a defined type of phone, a defined type of plan, selected rental or purchase modality, and additional services, which are usually well defined.
How Phase Negotiations Are Applied
Phase negotiations are applied in two modalities:
- Option 1: First phase RFP and a second RFQ.
- Option 2: First phase RFQ and second RFQ as well.
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Option 1: First Phase RFP and Second RFQ
In the first phase (RFP), suppliers present or make proposals for various product or service options. It is common in some cases to require suppliers to present and justify their proposals to the procurement team. In fact, I have led processes where suppliers have held more than one round of presentations.
The next step, the procurement team will make the following decisions:
- Suppliers who are qualified to participate in the second phase.
- Definition of the final specifications required by the company.
In the second phase, the shortlisted suppliers will be sent the final RFQ specification document and will be informed of the method of offer selection to be used, such as sealed bids, electronic auctions, etc. The suppliers will submit their offers for the defined product/service. Finally, the team will select the winning offer.
Option 2: First Phase RFQ and Second RFQ
In the first phase, the RFQ (with specific requirements) is issued, and suppliers will submit their offers.
The next step, the team will define the approved or qualified suppliers and offers to move to the next phase.
In phase 2, a second call will be made (maintaining the initial RFQ), and improvements to the offers will be requested. As in the previous option, the methods for offer selection, such as sealed bids or electronic auctions, can be used.
We could mention that, in this option, phase 2 is used for offer improvements.
Phase 0 (Optional): Supplier Scouting
This is an optional phase carried out when the procurement team deems it necessary to conduct a preliminary supplier scouting (exploration) phase. The main reason is the possibility of finding a narrow supplier portfolio for the specific expenditure item within the company, or it may happen that the good or service has never been acquired before.
It is recommended to search for suppliers globally, if feasible, and to send an RFI (Request for Information) asking suppliers for administrative and legal company data, product portfolio, key clients, production capacity, and other types of information in line with what we are looking for.
The closure of this “0” phase is the preliminary evaluation of the suppliers to be invited to phase 1.
When to Use the Phase Negotiation Strategy
Phase negotiation strategies with Option 1 (RFP and RFQ) are primarily used in the following cases:
- When the purchasing company has not defined the specifications of the product or service to be acquired.
This is common even in construction contracts, where buyers may not have 100% finalized measurements. - When the supply markets for a product or service are dynamic and changing.
For example, in the purchase of computer equipment, if the last purchase was made two years ago, the market now offers products with different features, and the previously purchased equipment is now obsolete. - When the goal is to utilize – in the best sense of the word – the suppliers’ expertise to help optimize the optimal purchasing or contracting model.
- In general, when a thorough market analysis is required before launching a procurement or contracting process.
Option 2 (RFQ and RFQ) is used, as we mentioned earlier, for the purchase of defined products. Example: when buying raw materials, commodities, products/services that do not change over time, etc.
The use of technology in phase-based negotiations
Technology is very helpful in this strategy. First, it enables real-time connectivity with suppliers.
The teams will evaluate suppliers’ proposals online, record technical scores, and approve/disapprove suppliers and their proposals.
Technology provides us with the tools for competitive negotiations and offer improvements, such as sealed bids, online renegotiations, or electronic auctions.
Similarly, technology ensures traceability of the processes and integration of phases 1 and 2. Control teams will be able to review both phases as a single process.
Let’s talk to achieve your procurement goals!
Time Required for Executing This Methodology
Depending on the complexity of the goods or services to be acquired, an implementation time of four to six weeks is required. For this reason, its use is recommended for negotiations involving significant amounts.
A common problem I often see is that purchasing companies rush into negotiations, pressured by very tight timelines. When the needs are urgent, the company loses its negotiating power, and the priority in these cases is to solve the emergency, not to buy well.
For buyers whose standard operations involve urgent purchases, I recommend that they start planning the supply chain better, which in turn will lead to better planning and scheduling of purchases. I often hear the comment: “My business is very unique, it can’t be planned.” Almost everyone says the same, whether they work in oil, cement, weighing, banking, etc.
The solution is relatively simple: draw a line and segment what can be planned and what can’t. You’ll be surprised to find that most purchases are actually planable. Emergencies should be exceptions, not the standard way of doing things.
Common Problem Found in Organizations
Unfortunately, it is often observed that organizations go straight to bidding for goods and services without having clear specifications, and instead of starting with an exploratory phase with the RFP, they proceed directly with an incomplete RFQ or non-optimized specifications.
The result of this bad practice is that the offers presented by suppliers are not comparable, and prices often show high variability. Companies often select the lowest bid presented in this framework. The problem arises later in delivery or contract execution.
The product or service doesn’t meet the expected outcome, service levels are low, the full scope of the required service wasn’t specified, which results in additional payments, etc.
Conclusions
We have presented a methodology for Strategic Procurement Management as we typically recommend using. However, the methodology is not set in stone, and variants can be made depending on the dynamics of the supplier market and/or the complexity of the good or service demand.
It is clear from the example we provided that suppliers can present and justify their proposals. Similarly, the use of phase “0” will depend on how broad or narrow the company’s supplier portfolio is for the specific expenditure item.
In summary, dear readers, I hope I have contributed with my experience as a negotiator in organizations from various economic sectors, using this methodology of phase-based negotiations. It will greatly help you leverage – in the best sense of the word – the knowledge of suppliers to define the optimal purchasing model.
Furthermore, it will provide the opportunity to capture innovative proposals from the market, acquire them, and generate value for your companies. I reiterate that the era of the administrative buyer who bases their purchasing decision solely on asking for three offers and closing with the cheapest, or at best, asking for a discount, is behind us. The role of today’s buyer, as a manager, is to generate competitive markets.
You will be surprised by the results you will achieve. Go ahead, 21st-century Buyer.
Graph 1: Phase-based Negotiation Framework
Phase 0 (Optional)
- Scouting (exploración) del mercado de proveedores.
- Hacer la lista larga de proveedores.
- Enviar las RFI a proveedores.
- Elaborar la lista corta de proveedores.
- Posible: sostener reuniones con proveedores.
- Seleccionar a los proveedores participantes.
Phase 1
- Preparar la RFP.
- Enviar las RFP a proveedores.
- Sostener rondas de exposiciones de propuestas con proveedores.
- Seleccionar a los mejores proveedores y propuestas.
- Revisar estrategias y palancas para la negociación final (Gestión Estratégica de la Categoría).
- Definir el alcance modelo óptimo de comprar con las especificaciones del bien o servicio a adquirir.
Phase 2
- Preparar la RFQ.
- Enviar la RFQ a los proveedores selecionados para esta fase.
- Resolver consultas. Recepción de ofertas económicas y propuestas técnicas.
- Evaluación de ofertas y propuestas técnicas.
- Estrategia de coerre: Negociación con los primeros lugares.
- Subasta electrónica.
- Petición de segunda oferta con mejora de precios.
- Firma del contrato.
Winston Zavaleta Ramos
Director at itbid Peru
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