It’s important to follow best practice when tendering for the indirect category of supplies for Maintenance, Repair & Operations (MRO). But one size does not fit all businesses and it’s vital to make sure that your tender process reflects your real-life day-to-day needs.
Tendering is about the future, not the past − and we live in an era of rapid change. The tender process is also a highly effective way of market testing prices and the quality of service you receive from your MRO suppliers.
But drawing up an invitation to tender (ITT) is a complex process which some find daunting. You don’t want to make it so prescriptive that tenderers are put off. Equally, you need to make clear what you expect and what is important for your business.
A quarter of companies use online marketplaces to tender for MRO supplies, according to the 2020 Indirect Procurement Report, commissioned by RS Components with members of the Chartered Institute of Procurement & Supply (CIPS).
But whether you tender directly or through an online marketplace, it is vitally important to leave the door open for suppliers to innovate and offer new ways of meeting your MRO needs.
“What is the customer trying to achieve by putting the tender out in the first place?” asks Chris Lett, UK Sales Director for RS Components. “If a tender is solely, based around line-item price reduction, over last price paid, then that’s a race to the bottom for suppliers.
“But if it’s about a company encouraging suppliers to engage with their organisation to understand what they are going to need in the future, then that’s a very different approach. It’s about suppliers being progressive in their thinking as well.”
“You have got to be very clear about what outcome you want from the tender process”Helen Alder, Head of Knowledge at the Chartered Institute of Procurement & Supply
Getting the basics right
Before you start, you need to have a clear picture of all the MRO needs across the business and to have captured all the purchasing processes being used. It’s an opportunity for process improvement − for example, by using digital solutions like e-procurement.
“You have got to be very clear about what outcome you want from the tender process,” says Helen Alder, Head of Knowledge at CIPS, “and there are several ways of approaching it.
“One is called the technical specification where you say, I know what I want – I want a washing machine. Then there’s the output specification where you say, I want clean clothes. The outcome depends very much on the question you ask.”
Engagement with all stakeholders across the business is also fundamental. The 80:20 rule applies – time spent understanding your internal needs will pay dividends when you start to evaluate suppliers. And you must have all-round buy-in if you are to successfully onboard a new supplier.
“Tendering is a great opportunity for process improvement,” says Alder. “Procurement is not there to tell people what they should be having, but to ensure that the process is fair and transparent.
“It’s about asking stakeholders the right questions. Procurement is there to challenge stakeholders, to get all the stakeholders in a room and say: ‘Is there an opportunity to do this differently?’.”
“The question to ask a supplier is not only, what are you going to do with my information, but what recommendations are you going to make based on my consumption?”Chris Lett, UK Sales Director, RS Components
Know your data
It’s vital for organisations to know what they are doing today if they are to effectively tender for future requirements, says Lett. “It’s all about the quality of your management information.
“There’s a saying that data is queen, but analytics is king,” he says. “So, the question to ask a supplier is not only, what are you going to do with my information, but, what recommendations are you going to make based on my consumption?”
But what if you don’t have all the data you need to put into the tender document? You might have a list of unit prices from your existing supplier, but what about details such as brand and quality?
This is where time spent drilling down into what is actually being purchased can pay dividends. Analysis by RS Components of a tender issued by a utility business came up with some facts that surprised even the customer.
The company based its tender on a basket of 4,000 items, the prices for half of which were unknown to the customer. But when RS analysed the previous three years’ consumption data, it found that only 80 of the 2,000 lines had actually been purchased in that time.
However, 10,603 other lines, that were not listed, had been bought during the three-year period, of which over 6,000 had been purchased only once and 92% had been bought five times or fewer.
What’s in your basket?
Across all industries, it’s been estimated that 80% of MRO purchases are one-offs, many of them unlikely to be repeated. By their very nature, purchasing of maintenance consumables tends to be reactive and random.
So why not create a sample of random items to price test? And you need to go further and ask suppliers what they would do if you requested items they don’t hold in stock. The challenge is to work out which products should be in the basket of items you are looking to price test.
As the utility company example illustrates, simply looking back over what your records show about the recent past may not give you the whole picture. When it comes to the one-offs, a more nuanced approach is needed.
“A basket of products can be used to determine supplier price competitiveness on planned, volume-type consumption, typically that used in stores; so long as the second part of the tender assesses supplier capability and service,” says Chris Cruise, RS Components Industry Sector Manager.
“A basket of products can also be used for unplanned or reactive needs. However, it needs to use random samples of your own data, and most importantly have additional columns that assess, for each product, additional parameters, and be subject to a physical ‘purchase’ test during the tender process.”
If this approach is followed, real savings can be made across all types of MRO purchases, he adds. Of course, not all organisations are able to tender in the same way.
Open to innovation
“The approach to tendering is very different between the public and private sectors,” says Alder. “The public sector is heavily regulated and there is a legal requirement to tender. Private sector companies who have their own internal rules do tenders really well, but there are other industries that don’t even bother going to tender.”
“If you don’t tender you are not going to open up the opportunity for potential improvement. Tenders are ideal for supplier innovation, if using an output specification”Helen Alder, Head of Knowledge at the Chartered Institute of Procurement & Supply
It’s not an approach she would advocate. “If a company knows a supplier and has built a relationship, they tend not to want to tender. But when you take all that emotion away, you realise they will never find out what they could have gained from the process.
“If you don’t tender you are not going to open up the opportunity for potential improvement. Tenders are ideal for supplier innovation, if using an output specification.”
Lett agrees. He says companies should encourage suppliers to engage with their organisation about what they are going to need in the future. Suppliers need to be progressive in their thinking as well, he says.
“It’s about suppliers having not only strong digital capabilities and strong stock and supply chain, but also ongoing integrity in their own brand products and quality assurance in their business. Organisations should be looking for suppliers who are at the forefront of the next generation of products and services.”
Alder advises that buyers should focus on total cost of ownership (TCO). “What’s the overall life cost of this thing that we want to buy?” she says. “And also think about the award criteria. That’s almost always a bit overlooked because it’s not always just done on price alone.
“You’ve got to make it clear what the winning criteria is, whether it’s breakdown of price, quality or, as more companies are doing, issues like sustainability.”
Transparency is key throughout the tender process, says Lett. “Customers are looking for a partner that’s going to be very open and transparent with them around all areas to do with their spend.
“Customers are starting to see huge value in data and in a supplier’s ability to help them cleanse their existing data. We have developed tools that can take data from customers and then overlay to cross-reference against our own brand products quickly to show customers savings.”
This approach pays dividends next time a company wants to test the market. “If customers adopt our platforms, whether they be e-procurement or vending, we are able to support them with data when they come to tender again in the future – there’s massive value in that,” says Lett.
Sharing data builds what he calls “a rich working relationship” between customer and supplier. And the pandemic has allowed customers to reflect on just how good their existing suppliers are and how robust their supply chains are, Lett adds. They need to know that their suppliers have the right digital platforms to work with the right analytics − and a full suite of capabilities.
“People want confidence, process stability and the reassurance that you’re going to be there, month after month, year after year,” says Lett.
Tendering can be difficult. But, by working with a trusted partner like RS Components, it becomes an opportunity to make not just your procurement but your whole business more efficient and effective.