How Benchmarking Can Reduce Costs When You Don’t Have Time to Quote

March 02, 2022

For those of you who have done any sourcing over the years, you know the best way to determine truth in the marketplace is to develop a well-designed request for quote (RFQ) and run that quote with three to four qualified suppliers. But a quote is predicated on the notion that you know exactly what you want - specific items and or services. Instead consider reframing your strategy as benchmarking instead of seeking RFQs.

One could argue that an effective RFQ is the essence of benchmarking - comparing like items and services across other qualified suppliers to determine the best price, service and term alternatives.

RFQs vs. Benchmarking

The use of quotes or RFQs within organizations is surprisingly rare. While many managers suggest they are going out for “quote”, what that generally means is that they have asked the supplier to quote a selected group of items. A smart supplier will make that list of quoted items as small as possible to give themselves freedom to provide items to your organization outside of that quoted list as quickly as possible. That is not dishonest, but it is a reality that building effective quotes takes time and responding to large quotes take time. Both the originator and the responder are strapped for time and cut corners on the quote process..

If someone lacks the expertise to build a quote, or maybe has the expertise but lacks the time, the easy way to attempt some effort at “reducing costs” and keeping your management placated, is to renegotiate with your supplier(s).

How does one negotiate with a supplier on price and terms if they haven’t gone out for a quote and do not have some solid data? The answer is they wing it. Now, there are some folks who are probably very good at negotiating with suppliers and getting to a fair price without guidance from benchmark data. On the other hand, research tell us that year after year, organizations that do not have “centralized purchasing” functions cost their organizations 25% on average. Purchasing research bears that out and so does our experience as an organization.

If a request for quote is not available to guide pricing decisions, the best way around that situation is to obtain and utilize “price benchmarks” and combine that data with an effective supplier management strategy.

Benchmarks and Where to Find Them

Pricing benchmarks for a particular item, service or collection of items is simply a collection of pricing data related to those items that might represent the best and worst of pricing for those items in the marketplace.

Let’s use a shop towel example - obtaining benchmarks on supplier pricing might look something like this:

Supplier Item # Description Unit of Measure Price
ABC Company #123 Shop Towel – 6 x 6 Each $.16
XYZ Company #345 Shop Towel – 6  x 6 Each $.06
Johnson Uniforms #567 Shop Towel – 6 x 6 Each $.10

 

This would be a good example of benchmarking whether we are talking about a service or supply item. We see a range of prices for a “functionally equivalent” item. The range of prices is clear, and we are comparing apples to apples. Your target pricing is now $.06 for a shop towel based on these benchmarks and the high priced outlier is $.16. Negotiating a deal for $.14 for a shop towel might be a “win” to some people, but you are still paying too much for the product based on our benchmarks.

The unfortunate reality is that this situation is what happens most often, negotiated pricing that falls short of the mark without the power of benchmark data behind it.

Where to Obtain Benchmarks

So if there is no expertise or time to run an effective quote, benchmarking is the next best approach. Obtaining benchmarks may take some time too, but the approaches listed below might speed up that process.

  • Internal Benchmarking - Compare prices for services and supplies within your own dealership group to obtain “target pricing” by obtaining other supplier invoices
  • External Benchmarking – Obtain benchmarks for supplies and services from members of your 20 Groups or friends in the industry. Our only caution is to review a broad range of items rather than just a few to make the time and investment worthwhile.
  • Purchased Data – There are some sites where data can be purchased to accomplish benchmarking though that data can be difficult to find in all expense categories.
  • Supplier Websites – Some suppliers will publish discounted pricing or regular pricing with discounts on their websites and that can be a good source of benchmarks.
  • State Associations – Your state Association might be a good source of benchmarks and price offerings in expense categories, but keep in mind that their pricing usually reflects a rebate paid back to the Association which might average 5% of the purchase price.

Benchmarks is only Part of the Strategy

After you obtain your benchmarks, there’s still work to be done: 

  • Price Locks - When you obtain the right benchmarks and prepare to renegotiate with your supplier, be sure to “lock” the pricing and business terms down for 12, 24, 36 months.
  • Broad Range of Supplies – Services – As mentioned earlier, an effective strategy is to renegotiate a broad group of items that you use or might use based on your historical usage report(s).  Negotiating only 10 shop supply items when you probably use 400 different items per year is not going to have a material impact on your cost control.

Summary

Developing an effective benchmark strategy to drive your RFQs is the best method to determine “truth in the marketplace” for your cost reduction efforts. The results of an effective RFQ allow you to negotiate with confidence and solid data on your side and will embolden you to pursue strategies you might not have considered before: leaving a supplier if they are not competitive.

Benchmarking will still take time, but there are opportunities to make that process more efficient. Reducing costs in a meaningful way is not easy - it can be time consuming and akin to sausage making: ugly. The results however can be compelling: an average 25% cost reduction by centralizing and running effective quotes can be achieved. Is that cost reduction worth the effort? Running a good quote or benchmark exercise is also a time saver if the pricing is locked for 12-24 or 36 months because you won’t be in constant negotiation mode with multiple suppliers.

Benchmarking is key - try that today!

If you are planning to undertake this effort to get your spend management function set up and running correctly, you do not have to go it alone. Strategic Source’s Profit Improvement program help you identify areas for improvement long-term.

 

 

 

Strategic Source offers procurement solutions, business spend management, and tactical sourcing to help businesses reduce costs. We understand the difficulties of choosing suppliers and managing vendors. Whether your business needs self-service digital solutions or complete spend management, Strategic Source can help. We deploy a wealth of experience and support for less than the cost of maintaining a purchasing organization.

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