E-Auctions or RFPs? What MSMEs should choose for Efficient Procurement and Why
It won’t be an overstatement to say that the performance of your business is closely tied to the efficiency of your procurement process. After all, procurement represents the single highest cost of business — at least 30% of the total revenue for service companies, and about 50% for manufacturing companies. As a result, vendor selection plays a vital role in the profitability of your operations. There are several ways in which your business can select vendors for procuring raw materials or finished products. Two of the most used ones are e-auctions and Requests for Proposals (RFPs). Now, while both auction and the RFPs have their own positives and negatives, the former is a superior option to optimise your supply chain management and make procurement more cost-effective in the long run. Here are a few reasons why:
E-Auctions speed up procurement; RFPs can slow it down
An e-auction, also known as reverse auction or reverse bidding, typically lasts anywhere from a few minutes to a couple of hours. On the other hand, selecting vendors through RFPs can take up to 3 years to complete. In other words, supplier selection through an RFP can be a long and drawn-out process. There are multiple reasons for this — firstly, you need at least a few days to a few weeks to draft your RFP document, review it and approve it internally, before releasing it to your suppliers. Secondly, the time taken for vendors to respond to your RFP can be indefinite. So, you may end up waiting for several weeks before the responses begin to come in.
The excessive paperwork and delayed communication, via emails, phone calls, texts, fax, or other channels, normally associated with dated modes of negotiations are absent in e-auctions. Here, you can close supplier deals in a few clicks and start replenishing your inventory within a few hours after you have finalised and listed your requirements.
E-Auction aids long-term strategies; RFP traps you in the short-term
You need two resources in abundance for devising and implementing any long-term strategy successfully: time and data. Building a long-term procurement strategy is no different. E-auctions are typically a feature of heavily data-driven, SaaS-based digital vendor management. In digital vendor management, you have constant access to large amounts of data. This data pertains to factors such as material delivery schedules, payments or refunds history, and inventory status in warehouses, among others. Massive amounts of such information are not only critical to creating long-term eProcurement strategies but can also be instrumental in creating optimal production and shipping plans.
More importantly, since e-auctions are executed swiftly, you also get the time to use the data generated to keep optimising your internal procurement and inventory management strategies, leading to more assured handling of stock and personnel for other operations. Additionally, digital vendor management platforms function as tools for collaboration between you and your vendors, enabling you to forge strong partnerships with them.
RFPs largely involve manual operations which do not sync with digital and cloud-driven systems. As a result, unlike e-auctions and digital vendor management, RFP-based supplier selection does not offer enough dynamic data for you to create procurement strategies. Even the data that is generated often exists in siloes. This makes it extremely difficult to aggregate and analyse to derive meaningful insights.
Additionally, RFPs takes up a lot of your time as you wait for suppliers’ responses and engage in negotiations with them. This keeps you away from building long-term relationships with suppliers.
E-Auction gives more options; RFP limits them
An RFP process often attracts significantly fewer vendors than e-auctions, thereby offering you fewer options to choose from. As a result, you may find it difficult to get a vendor who meets your requirements in terms of both cost and quality. Therefore, you may have to settle for a higher cost or compromise on other terms as part of the deal.
During an e-auction, on the other hand, your terms and requirements are almost ironclad, and potential vendors compete on price to meet your requirements. You have a wide range of vendors offering you the goods or services of comparable quality at your terms, ensuring that you get the best price every time. This abundance of options also means that you are not dependent on a single or a small number of suppliers, making your supply chain more resilient and ensuring business continuity.
E-Auction reduces overall costs; RFP raises them
By increasing the number of options in terms of suppliers available to businesses, as mentioned above, e-auctions automatically reduce overall procurement costs. E-auctions also minimise the need for unnecessary paperwork and one-on-one communications, thereby reducing administrative costs, which are generally high in RFP-based procurement.
While RFPs may help you find the lowest prices during bidding, you may end up getting raw materials of lower quality in the process too. Apart from the quality, this approach also makes your business select inexperienced, error-prone suppliers who have underbid better suppliers to win your contract. Over a period of time, this causes the quality of your deliverables to go down and, eventually, increases procurement costs and other losses.
E-Auction is transparent; RFP leaves room for communication gaps
Owing to digital tracking technology, e-auctions lets you monitor all the bids from suppliers, making the vendor selection process much more visible for you and your business partners. This speeds up the process as there are no hidden variables at any point. Speaking of speeding up, the SaaS platform on which e-auctions are conducted, allow you to get answers and resolutions to your queries about the process without spending much time. Unlike e-auctions, which use the digital medium to maintain high levels of transparency and communication, RFPs are likely to cause gaps in communication between your business and the vendors involved. For example, it is easy to imagine incumbent suppliers responding to RFPs with doctored information about their numbers to retain your business contract. Unnecessary communication gaps and a lack of transparency are sad possibilities in RFP-based supplier selection.
Recent years have seen a rise in the number of MSMEs using eProcurement due to provisions such as the eCommerce portal Government eMarketplace (GeM). Trade analysts believe that this will point towards greater adoption of e-auctions among MSMEs, despite their general apprehensions about affecting their ROI. There are several reasons why MSMEs will find e-auctions more appealing than RFPs. An e-auction represents a much more transparent supplier selection method, a process that reduces the cost of material purchases, and a convenient way to procure materials for your business.
E-Auctions also boost your overall productivity by saving your time and costs, thereby making them preferable to RFPs, as price discovery and vendor selection are that much faster and simpler with them.
Bizongo provides the resources to carry out digital vendor management and e-auctions for your procurement costs. You can contact us to learn how our digital vendor management and e-auction services can add value to your supply chain.