If you're in procurement, you almost certainly already understand how critical RFQs are in your day-to-day operations. Whether you're sourcing raw materials for your machine shop or HVAC services for your plant, RFQs almost certainly sit at the heart of industry.
The process is not always straightforward, though, and a lot of the processes' rules remain unwritten. Let's break down the process step-by-step.
What is an RFQ?
An RFQ (short for Request for Quotation) is a document - oftentimes simply an email - that a buyer sends to vendors to solicit quotes on a specific set of products or services. The "specific" part is important since RFQs are generally only appropriate if you already know exactly what you need.
When a buyer sends an RFQ to a group of suppliers, the buyer is looking for two pieces of information back: price and lead time. Suppliers will, in response, send a quote back that specifies the products or services that they'd provide for each item along with the price and lead time for both.
This process allows buyers to ensure that they have direct, competitive bids any time they're making a large purchase.
Preparing & Sending an RFQ
The RFQ process is relatively straightforward but, if you've never done it before, it can be a bit intimidating. At times, buyers may feel like they're just sending emails out into the void and hoping for the best which really is essentially what is happening.
Though requirements may slightly vary depending on the type of RFQ, the process is generally the same across all industries.
Collect Requirements
Since RFQs are only for specific line items, buyers must ensure that they have collected all the requirements for each item.
If you are, for example, requesting a quote on 2x4 lumber, you'll need to specify the quantity, the type of wood, the grade, and any requirements like pressure treatment.
Similarly, if you're requesting a quote for wood screws, you'll need to specify the quantity, size, and material for the fasteners. At times, you might also want to specify the specific brand and MPN.
The goal is to be as specific as possible in your RFQ requirements. Suppliers are less likely to respond with a quote if the requirements are not clear. Having to engage in a back and forth with the suppliers to clarify the requirements is frustrating for both the buyer and seller and should be avoided whenever possible. Take the extra time to collect all of the requirements up front.
Write the RFQ
There are a few components in an RFQ that almost always need to be included. Though some are situational, most of these will be relevant in every case and should be included in the initial message to suppliers. Again, missing information is the primary source of frustration for suppliers and one of the most common reasons for low response rates.
Suppliers are busy responding to RFQs and attempting to fulfill orders. Making life easier for them by including all of the information they need to quote will necessarily raise the response rate on the RFQ. Where appropriate, include:
A list of line items. Again, be highly specific in your line items. Include any relevant attributes that remove ambiguity from your request. If you're requesting a quote for raw materials, include the exact material type, the form-factor, and any certifications or attributes that are necessary. Line items are generally in a table but, on smaller or simpler quotes, can also just be a set of bullet points in the body of the email. Avoid attaching spreadsheets to the email where possible since it increases complexity on the supplier.
The delivery address. In order to determine shipping terms and calculate shipping costs, suppliers need to know exactly where you want the items delivered. For freight deliveries, you may need to also specify that your destination address has a loading dock.
The date the items are needed. Sometimes referred to as a "needs by date", it's critical for the supplier to know the exact time frame that the buyer would like to take delivery. This is primarily used to determine whether or not the supplier could even fulfill the order within the buyer's timeframe but is also used to calculate shipping when the turnaround time is very small. In the case of services rather than goods, specify the date that the service will need to occur or begin occurring.
The date quotes must be received. Since the point of an RFQ is generally to get multiple aligned bids, a cutoff date needs to be set after which the buyer will choose one of the received quotes. This lets the supplier know how much time they have to do research on their own upstream supplier status but also gives the buyer a date on which they can evaluate all of the bids and choose a supplier.
Contact information for the buyer. Suppliers may have questions before quoting. Though a supplier can just reply to your email, it's oftentimes beneficial to include the email address, phone number, and name of the buyer contact. Not including contact information in situations where suppliers may have questions may lead to unnecessary delays in quoting or, in the worst case, suppliers not responding at all.
Reading RFQ Responses
At times, suppliers may send different options in their quote that represent potential options in attributes or volume.
For example, if you're requesting a quote on raw steel, the supplier may send you a quote that has both DFARS compliant material and non-DFARS compliant material. The point of this is to illustrate both that the supplier can fulfill either and the price difference between the two options.
Similarly, the supplier may include higher volume options that demonstrate a price break if you increase the size of your order.
In the case of simple RFQs, you can generally just open the quotes side by side to review the options. In many cases, though, you'll need to build a comparison spreadsheet in Excel that aligns the quotes for each line item.
When comparing the responses, pay specific attention to critical fields like:
Lowest Quote
Best Lead Time
Most Favorable Payment Terms
Difference in lowest and highest bid
Time since last bid
Avoiding Common Mistakes
Though it's generally in their best financial interest to do so, suppliers aren't guaranteed to respond to your RFQ. Avoiding the most common mistakes will help ensure that your RFQ response rate is high. If suppliers have to ask you questions or respond with anything other than a quote, they're far less likely to respond at all.
In every RFQ you send, ensure that:
The line item requirements are very clear. Ambiguity is the most common reason an RFQ is ignored. The more detailed and clear your specifications, the more accurate and comparable the quotes will be. If your RFQ is for raw materials, ensure you include attributes like form-factor, length, width, diameter, material, and alloy.
Your expectations are reasonable. Understand typical pricing, lead times, and available suppliers before issuing the RFQ. This helps in setting realistic expectations and identifying a strong supplier pool.
You've chosen the correct suppliers. This is not a "the more the merrier" situation - don't send RFQs to just anyone to try to get more responses. Ensure potential suppliers have the capability, capacity, and (where applicable) financial stability to deliver.
You have a standard process. When sending an RFQ to a supplier, try to use templates to ensure consistency across RFQs. This saves time and ensures no critical information is missed. Doing so also makes it simpler for the supplier since they're already familiar with your internal process.
You centralize communication. Designate a single point of contact for all supplier questions. If you do get a question from a supplier, send a followup to all bidding suppliers to ensure everyone has the same information.
RFQ vs. RFI vs. RFP
RFQs are not the only type of request you'll see in procurement. At times, it may be more appropriate to create an RFI or RFP but, as you'll see, the lines that separate these are somewhat blurry.
RFQs are used to get specific price quotes from potential suppliers for a defined set of products or services. Use them when you know exactly what you need and are focused specifically on price and lead time.
RFIs are used to gather information in general about potential suppliers. Use them when you are early on in a large project and want to better understand the landscape, potential suppliers, and to identify larger questions about your project that you have not yet answered.
RFPs are used to request detailed proposals from suppliers that outline exactly how they would fulfill the requirements of your project. Use them when you want to evaluate different potential solutions and supplier capabilities and attributes.
The difference between the three really boils down to the type of project and the complexity of your needs. In general, use RFIs to understand the market, RFQs to get specific pricing, and RFPs to get detailed solutions for complex projects.