Procurement is the process of acquiring goods, services, or works from an external source. There are several procurement methods that organizations can use, depending on factors like cost, complexity, and time frame. The six main procurement methods are:
Open Tendering
Open tendering, also known as open bidding, is the most common and traditional procurement method. With open tendering, the procurement is open to all qualified bidders. The buying organization publicizes an invitation to tender and interested suppliers are invited to submit a bid. The bids are evaluated against specified criteria and the most advantageous bid is selected.
Some key features of open tendering:
- All interested suppliers can submit a bid
- The process is transparent and competitive
- Tends to achieve the lowest pricing
- Can be resource intensive to administrate
- Lengthy process with strict procedures
Open tendering promotes competition among suppliers and provides equal opportunity to all vendors. It aims to get the best value for money. The open invitation reduces bias in selection and the competitive bidding leads to lower pricing. However, the process can be time-consuming and administratively burdensome. Developing comprehensive tender documents, advertising, managing bid submissions, answering supplier questions, evaluating all the proposals, and negotiating with suppliers requires considerable effort and resources.
Restricted Tendering
Restricted tendering involves direct invitations to bid sent to a limited number of suppliers. Rather than an open invitation, the buying organization hand picks a select number of vendors to submit proposals. These suppliers may be existing partners or come from a prequalified list maintained by the buyer.
Key features of restricted tendering:
- Direct invitation to preselected suppliers
- Typically 3-7 bidders are invited
- Requires less time than open tendering
- Reduces administrative burden for buyers
- Prices may be higher due to less competition
Restricted tendering reduces the procurement workload for buyers. Preselecting just a few vendors means fewer bid proposals to evaluate. The process can also be faster since requirements are sent directly to prequalified suppliers. However, pricing is unlikely to be as competitive compared to open bidding with many bidders. There is also the risk of favoritism in who is selected to bid.
Request for Quotation
A request for quotation (RFQ) is used to solicit price quotations from potential suppliers. RFQs are commonly used for standard, off-the-shelf products or services where the specifications are already known. Suppliers are asked to provide a firm price and delivery details for fulfilling the requirements stipulated in the RFQ.
Typical features of an RFQ include:
- Detailed specifications are provided
- Focus is on price
- Short time frame for response
- Quotes not sealed bids
- Simple evaluation based on price
The RFQ process is relatively simple and fast. Buyers can request quotes via email and evaluate the pricing submitted by vendors. Selection is based primarily on the lowest price meeting the RFQ requirements. However, RFQs may miss out on non-price factors important to an effective procurement decision.
Request for Proposal
A request for proposal (RFP) is a procurement method that solicits proposals from suppliers which are then evaluated based on specified criteria. RFPs are commonly used for complex or high value purchases where price alone may not determine the most advantageous option.
Key characteristics of an RFP:
- Detailed requirements provided by the buyer
- Allows suppliers flexibility in making proposals
- Based on “best value” not just price
- In-depth proposal evaluation
- Negotiations may happen before final selection
RFPs let buyers communicate their needs while giving suppliers leeway in making creative proposals. The RFP identifies important evaluation factors beyond just pricing, such as technical capability, quality, reliability, experience, and methodology. These additional factors result in a more rigorous proposal review process but supports a “best value” decision.
Request for Information
A request for information (RFI) is used in the preliminary stages of a procurement process. The RFI invites suppliers to submit information on their capabilities, experience, products, or services. It is a way for the buying organization to gather data to help define requirements and make decisions about how best to fulfill procurement needs.
Typical uses of an RFI include:
- Market research to see what solutions are available
- Developing a shortlist of qualified suppliers
- Informing the criteria for an upcoming RFP
- Gauging interest from vendors for an opportunity
The RFI process helps buyers do background research before committing to a specific procurement method. The information collected allows requirements to be refined and criteria established to meet the organization’s needs. But an RFI does not result directly in a contract award.
Single Source Procurement
Single source procurement involves purchasing from one vendor without seeking competing bids. The buyer approaches a single supplier to fulfill the procurement.
Reasons for single source procurement include:
- One vendor has unique capabilities or offerings
- Need for compatibility with existing systems
- Urgent need that precludes competitive process
- Existing vendor provides highly satisfactory service
- Cost savings compared to switching vendors
Single sourcing can reduce procurement effort by awarding a contract directly. It may also leverage existing relationships with a satisfactory supplier. However, the lack of competition means there is no assurance of getting the best value. Single sourcing should usually only be used for specialized circumstances.
Sole Source Procurement
Sole source procurement means the procurement need can only be fulfilled by one particular supplier. This is different than single sourcing, where the buyer makes a deliberate decision to approach one vendor over others. With sole sourcing, there is effectively no other choice but to use the specified supplier.
Common rationales for sole sourcing:
- The supplier has exclusive rights, such as a patent or copyright
- Only one supplier is qualified or capable of performing
- Compatibility is required with existing equipment or systems
- The product or service is unique
- An emergency situation exists
Sole sourcing may be necessary when compatibility, exclusive rights, or specialized capabilities limit procurement options. But the lack of competition means pricing and quality should be carefully vetted. Sole sourcing also risks dependence on one vendor. Approvals are usually required for sole sourcing to ensure it is justified
Conclusion
Organizations have a variety of procurement methods to choose from, each with its own strengths and weaknesses. Key factors like cost, complexity, competition, and time frame play into the decision of which approach is best. Open tendering promotes competitive bidding from all interested suppliers. Restricted tendering reduces procurement efforts by limiting bids to select vendors. RFQs focus simply on price for standard products, while RFPs allow for more flexibility and qualitative factors. RFIs help gather information to define future procurement requirements. Single sourcing and sole sourcing bypass a competitive process but may be necessary in certain situations.
The six main methods offer a spectrum of options to purchasers. Selecting the right procurement approach involves balancing factors like cost, risk, transparency, speed, and supplier access. Organizations must use the method most appropriate for each specific buying need and context.
Key Takeaways
- Open tendering is open to all interested bidders and aims for maximum competition to get the best pricing.
- Restricted tendering limits bids to a select few vendors, reducing procurement workload but potentially increasing prices.
- RFQs simply request price quotes for standard items or services with known specifications.
- RFPs allow more supplier flexibility in proposals which are evaluated on both price and other criteria.
- RFIs gather information from the supplier market to help define future procurement requirements.
- Single sourcing approaches one vendor directly without seeking other bids, while sole sourcing means there is only one possible supplier.
Frequently Asked Questions
What are the most common procurement methods?
The most common procurement methods are open tendering, restricted tendering, request for quotation (RFQ), and request for proposal (RFP). Open and restricted tendering involve a bidding process with multiple suppliers. RFQs and RFPs specify requirements with quotes or proposals solicited from vendors.
When is open tendering used?
Open tendering is commonly used for larger, higher risk purchases where maximum competition is desired. The open bidding aims to get the lowest pricing from suppliers. It provides fair opportunity to all vendors but requires more effort to administrate.
What is an RFQ?
A request for quotation (RFQ) is used for simple, low risk purchases where the requirements are already well defined. RFQs ask potential suppliers to provide price quotes to fulfill the specified items or services. Selection is based mainly on the lowest qualifying quote.
How does restricted tendering work?
With restricted tendering, the procuring organization hand picks a limited number of vendors to submit bids rather than openly inviting any supplier. This reduces procurement workload but typically has less competitive pricing since fewer bids are solicited.
When would sole sourcing be used?
Sole sourcing means there is only one possible supplier to fulfill the need. This may occur if a vendor has exclusive capabilities, compatibility is required, or the situation has urgency. Sole sourcing lacks competition, so scrutiny of pricing and justification are important.
What factors determine the choice of procurement method?
Key factors include cost, complexity, time frame, need for competition, administrative resources, and risk. Open bidding methods promote maximum competition for lower prices. More selective or direct methods reduce procurement workload but may sacrifice competitive pricing or oversight.
Comparative Table of Procurement Methods
| Method | Description | When to Use | Benefits | Drawbacks |
|---|---|---|---|---|
| Open Tendering | Public invitation to all interested suppliers to submit competitive bids | Large, complex, or high risk purchases where maximum competition is needed | Transparency, fair access, competitive pricing | Administratively burdensome |
| Restricted Tendering | Direct invitation to bid sent to a limited number of preselected suppliers | Less complex needs where a targeted group of suppliers is sufficient | Reduced procurement workload and process time | Risk of favoritism, less pricing competition |
| RFQ | Requests price quotations from vendors for goods/services with clearly defined specifications | Simple, low risk purchases of standard offerings | Fast and simple process focused on price | May lack qualitative criteria important to decision |
| RFP | Requests comprehensive proposals from suppliers based on defined requirements | Complex needs where qualitative factors matter beyond just cost | Allows supplier creativity and “best value” focus | Time-consuming proposal evaluations |
| RFI | Gathers information from suppliers to help define procurement requirements | Preliminary research before formal solicitation | Informs future strategy and criteria | Does not directly result in a contract award |
| Single Sourcing | Approaches one vendor directly without competitive bidding | Leveraging relationships with incumbent supplier or specialized situations | Simplicity, potential cost savings | Lack of competition, risk of over-dependence |
| Sole Sourcing | Only one supplier is capable of providing the required goods/services | Supplier has exclusive capabilities, rights, or compatibility requirements | May be necessary if no alternatives exist | No competition, so pricing should be controlled |
