Case 8 Rfq
Part 1 – Executive Summary
The subject materials have been selected for competitive bid, the RFQ has been issued, and responses from nine potential vendors have been collected. The variations in the bid responses are staggering, causing concern for the validity of the RFQ process. Should we decide to proceed with the lowest bidder, we would do so at our own risk, as the bidder may not have understood the requirements of fulfilling the contract. I propose that we re-evaluate the RFQ documents to ensure that the bidders have a consistent understanding of the Statement of Work. This is the best way to offer our company the value created by the competitive bid process.
Part 2 – Issue Identification
We are midway through the process of competitively bidding flap shrouds and equipment …show more content…
bay doors. Flap shrouds for both the 100 and 300A series airplanes are currently purchased from Dollard Plastics in Montreal. The flap shrouds for the Series 100 airplane are not secured under a vendor contract, while the 300A parts are secured until the end of 1993. The incumbent supplier for the equipment bay doors is Lakeside Industries in Kingston, ON. The flap shrouds were selected for competitive bid as the incumbent supplier was not willing to provide the requested cost savings in order to renew the contract.
The Bidder Selection Board developed a list of nine potential bidders for this Statement of Work and sent RFQ packages to each. Responses were received from all nine bidders. As a member of the Procurement Cost Support Group, our department has performed analysis on those bids and normalized them. At this point, our responsibility is to nominate the preferred bidder, and provide supporting information to the Supplier Selection Board to assist them in negotiating a contract to the advantage of de Havilland.
It is immediately apparent that the bid received from Marton Enterprises provides a very significant cost savings relative to the incumbent supplier, and a significant savings compared to the majority of the other bidders. The highest bidder (Dollard Plastics, the incumbent supplier for the flap shrouds) has a total cost of $2,810,174 for the entire five year project, including recurring and non-recurring costs. The lowest bidder (Marton Enterprises) has a total cost of $748,994, a savings of more than $2,000,000, or 73% of the high bid.
Marton Enterprises did not include the requested financial statements with their proposal. Based on our own research, we determined that they are wholly owned by the British conglomerate, Devon Holdings plc. We have been able to gather the financial statements of Devon Holdings via other sources. They are a public company with almost 23,000 employees worldwide and sales of 1.3 billion British pounds. Their largest market segments are Automotive, Industrial and Aviation. While the aviation segment is their smallest it has the largest growth in terms of sales and the largest profit margins. It is reasonable to assume that Devon Holdings considers the Aerospace segment to be core work and part of their long term strategy.
Part 3 – Environmental and Root Cause Analysis
The large variation between the high and low bids of the nine bidders is a cause for concern.
Typically, we would expect to see a variation of approximately 20% between the high and low bids. The fact that the low bidder offered a savings of 73% relative to the high bidder brings the entire RFQ process into question. If all of the bidders had the same understanding of the requirements, how could we have received bids so far apart? Even more concerning is the fact that the incumbent supplier is the highest bidder. We would expect that the incumbent would have the greatest understanding of the requirements for this job. If the current vendor will not reduce their price at all, it is a questionable decision at best to believe at face value that the low bidder can provide it for 73% less. It is also important to note that materials typically make up approximately 50-55% percent of the total manufacturing costs in Aerospace. Therefore the low bidder is offering us the entre job for less than the material cost from the current vendor. It becomes evident that the low bids in this RFQ do not have the same understanding of the requirements of this job that the higher bidders
have.
There are some ethical concerns that we need to consider before we proceed with this RFQ. Once we arrive at the conclusion above that the various bidders have different concepts of the requirements of this contract, we need to review the quality and completeness of the RFQ provided to the bidders. For a competitive bidding process to be equitable, all of the bidders need to be bidding on the same requirements. If our RFQ was vague and open to interpretation, we have a responsibility to ensure that we have eliminated these issues before we make a Supplier Selection. Furthermore, it is unlikely to be to our advantage to award this contract to the low bidder at an unreasonable low price. During the implementation phase of the contract, the vendor is sure to realize the true costs of producing this product. While we may be able to enforce the contract, there may be legal costs to do so, cost assertions from the vendor, and a significant lack of cooperation. These unforeseen costs could significantly erode the savings that were originally planned.
The lack of financial reporting provided with the RFQ is a serious concern. Anytime we put a Request for Quotation out to the market, we expect the bidders to fully comply with the requirements. For Marton Enterprises not to provide this information is a glaring omission. While we may know from our own research that the parent company of Marton Enterprises is a stable and growing concern, we can not be sure of the same for Marton Enterprises themselves. The lack of financial statements could be due to the concerns that the information could raise. Perhaps this particular division has had year over year losses, or decreases in sales that they do not want us to be aware of. While the parent company may be strong, they may not be interested in keeping Marton Enterprises open if it is not a profitable division. This would force us to scramble in order to find an alternate source for these products.
Part 4 – Alternatives and Options
In short, there are two alternates to be considered. One is to proceed with the low cost bidder toward the eventual goal of a contract to secure these items for the five year period, although we should proceed cautiously. The second alternative is to clarify the requirements of the RFQ, and competitively bid the statement of work again, with a smaller group of the lower bidders from the original RFQ.
1. Proceed with Marton Enterprises. We would send a cross-functional team to their facility to review their proposal, including Procurement, Finance, Quality and Engineering. We would expend considerable effort in auditing all of the components of their bid, to ensure that their understanding of the SOW is in line with our requirements. An onsite visit at Marton Enterprises would consist of a review of all the material requirements that the vendor would need to order, ensuring that they are buying to the stated specifications, from qualified vendors, and the material meets all of the testing requirements. We would audit all of their quality systems to ensure that the proper procedures are being followed. Also, we would audit the labour requirements to ensure compliance with their RFQ response. In advance, we would review all of the same information from the incumbent supplier. A detailed review should point to any significant misunderstandings that Marton Enterprises had at the time of their original RFQ response. We would recognize in advance that this review would likely lead to higher costs for ourselves, but this will prevent any contract compliance issues in the future. We would also be given the opportunity to review the financial statements of the low bidder, as the RFQ response indicated they would be available on site. This would give us a clear picture regarding their financial stability.
Provided that the on site audit meets our requirements, we would continue to the negotiation phase. During the negotiation phase, we would currently hold the balance of power, due to the fact that we have significant inventory on hand, and eight other competitive bids to choose from. Our on hand inventory means that we are not in a compromised position where we need to rapidly proceed with the current negotiations. We have the luxury of time to walk away from this negotiation and proceed with one of the other bidders. It is important to note though, that as time progresses; the power will shift to the bidder, as we cannot afford to risk interruption to our supply. Therefore it is in our best interests to keep this process moving along. Because we have eight other competitive bids on hand, it would not be difficult for us to begin the negotiation phase with another supplier. For us, the Best Alternative to a Negotiated Agreement (BATNA) is to commence negotiations with another potential supplier.
From the standpoint of the bidder, winning this bid would aid them in several of their corporate goals. It would help them in their plans to increase sales, and also in their goal to increase their percentage of sales to Boeing from 15% to 17% in the face of rising sales. The BATNA for the bidder would be to find another RFQ to bid on, that meets their profit expectations, and the customer would need to be another Boeing Company. This would not be accomplished easily.
2. Clarify the RFQ requirements and put the work back up for competitive bid. Given the large variation in the bid responses from the nine bidders, it is difficult to believe that our RFQ provided a clear definition of the requirements of this contract. We could perform an analysis between the various bid responses, including the low bidder, the incumbent and selected others to determine how their quotations varied. Variations in the materials and labour requirements will be the largest drivers in the variations of cost across the bids. We would then perform a gap analysis to determine how this compared to our actual requirements. This would allow us to determine if we have over engineered the requirements provided to our incumbent supplier, meaning that we would be able to enjoy the savings provided by the lower bidders. Or, we might determine that our RFQ did not clearly explain the requirements of the statement of work, and the low bidders will not be able to satisfy our requirements. Dependant on the results of this gap analysis, we would select a short list of three or four bidders for a best and final offer to the RFQ. We would eliminate any opportunity for misunderstanding of the requirements in the RFQ documents. Due to the high levels of inventory on hand, we have the luxury of the additional time this would require, and would have the benefit of being assured that our final selection would be able to satisfy our requirements, while enjoying a modest profit for themselves, thereby ensuring their continued interest in the program.
Part 5- Recommendations and Implementation
I recommend that we take a step backwards and go through the competitive bid process again. The perils of proceeding under the current RFQ are too great. We could spend the five years of the agreement forcing a vendor to comply with a contract where they are losing money and not interested in cooperating with us. We currently have the luxury of time to do our due diligence and ensure that we have clearly communicated our needs to the potential suppliers. Doing so will create a level playing field where the bidders can compete against each other and we can determine how to create the best value though our vendor selection.
Part 6 – Monitor and Control
Providing a clearer RFQ document will reduce the variation from the high to low bids from the current 73% to an approximate 20% gap between the high and low. This will confirm that the vendors clearly understood the requirements and are bidding against each other on their own capabilities.
The long term benefits to our company of this strategy will be evident from the value created through the bidding process. We will be able to make a supplier selection that offers us value, as well as can be a sustainable long term partner for our business.
Part 7 – Conclusion and Management Plan
In conclusion, we need to ensure that the RFQ documents that we use to competitively bid products provide a clear understanding of the requirements to our vendors. This will provide us the benefits of the competitive bidding process without the additional effort of going through the process a second time.
The subject materials have been selected for competitive bid, the RFQ has been issued, and responses from nine potential vendors have been collected. The variations in the bid responses are staggering, causing concern for the validity of the RFQ process. Should we decide to proceed with the lowest bidder, we would do so at our own risk, as the bidder may not have understood the requirements of fulfilling the contract. I propose that we re-evaluate the RFQ documents to ensure that the bidders have a consistent understanding of the Statement of Work. This is the best way to offer our company the value created by the competitive bid process.
Part 2 – Issue Identification
We are midway through the process of competitively bidding flap shrouds and equipment …show more content…
bay doors. Flap shrouds for both the 100 and 300A series airplanes are currently purchased from Dollard Plastics in Montreal. The flap shrouds for the Series 100 airplane are not secured under a vendor contract, while the 300A parts are secured until the end of 1993. The incumbent supplier for the equipment bay doors is Lakeside Industries in Kingston, ON. The flap shrouds were selected for competitive bid as the incumbent supplier was not willing to provide the requested cost savings in order to renew the contract.
The Bidder Selection Board developed a list of nine potential bidders for this Statement of Work and sent RFQ packages to each. Responses were received from all nine bidders. As a member of the Procurement Cost Support Group, our department has performed analysis on those bids and normalized them. At this point, our responsibility is to nominate the preferred bidder, and provide supporting information to the Supplier Selection Board to assist them in negotiating a contract to the advantage of de Havilland.
It is immediately apparent that the bid received from Marton Enterprises provides a very significant cost savings relative to the incumbent supplier, and a significant savings compared to the majority of the other bidders. The highest bidder (Dollard Plastics, the incumbent supplier for the flap shrouds) has a total cost of $2,810,174 for the entire five year project, including recurring and non-recurring costs. The lowest bidder (Marton Enterprises) has a total cost of $748,994, a savings of more than $2,000,000, or 73% of the high bid.
Marton Enterprises did not include the requested financial statements with their proposal. Based on our own research, we determined that they are wholly owned by the British conglomerate, Devon Holdings plc. We have been able to gather the financial statements of Devon Holdings via other sources. They are a public company with almost 23,000 employees worldwide and sales of 1.3 billion British pounds. Their largest market segments are Automotive, Industrial and Aviation. While the aviation segment is their smallest it has the largest growth in terms of sales and the largest profit margins. It is reasonable to assume that Devon Holdings considers the Aerospace segment to be core work and part of their long term strategy.
Part 3 – Environmental and Root Cause Analysis
The large variation between the high and low bids of the nine bidders is a cause for concern.
Typically, we would expect to see a variation of approximately 20% between the high and low bids. The fact that the low bidder offered a savings of 73% relative to the high bidder brings the entire RFQ process into question. If all of the bidders had the same understanding of the requirements, how could we have received bids so far apart? Even more concerning is the fact that the incumbent supplier is the highest bidder. We would expect that the incumbent would have the greatest understanding of the requirements for this job. If the current vendor will not reduce their price at all, it is a questionable decision at best to believe at face value that the low bidder can provide it for 73% less. It is also important to note that materials typically make up approximately 50-55% percent of the total manufacturing costs in Aerospace. Therefore the low bidder is offering us the entre job for less than the material cost from the current vendor. It becomes evident that the low bids in this RFQ do not have the same understanding of the requirements of this job that the higher bidders
have.
There are some ethical concerns that we need to consider before we proceed with this RFQ. Once we arrive at the conclusion above that the various bidders have different concepts of the requirements of this contract, we need to review the quality and completeness of the RFQ provided to the bidders. For a competitive bidding process to be equitable, all of the bidders need to be bidding on the same requirements. If our RFQ was vague and open to interpretation, we have a responsibility to ensure that we have eliminated these issues before we make a Supplier Selection. Furthermore, it is unlikely to be to our advantage to award this contract to the low bidder at an unreasonable low price. During the implementation phase of the contract, the vendor is sure to realize the true costs of producing this product. While we may be able to enforce the contract, there may be legal costs to do so, cost assertions from the vendor, and a significant lack of cooperation. These unforeseen costs could significantly erode the savings that were originally planned.
The lack of financial reporting provided with the RFQ is a serious concern. Anytime we put a Request for Quotation out to the market, we expect the bidders to fully comply with the requirements. For Marton Enterprises not to provide this information is a glaring omission. While we may know from our own research that the parent company of Marton Enterprises is a stable and growing concern, we can not be sure of the same for Marton Enterprises themselves. The lack of financial statements could be due to the concerns that the information could raise. Perhaps this particular division has had year over year losses, or decreases in sales that they do not want us to be aware of. While the parent company may be strong, they may not be interested in keeping Marton Enterprises open if it is not a profitable division. This would force us to scramble in order to find an alternate source for these products.
Part 4 – Alternatives and Options
In short, there are two alternates to be considered. One is to proceed with the low cost bidder toward the eventual goal of a contract to secure these items for the five year period, although we should proceed cautiously. The second alternative is to clarify the requirements of the RFQ, and competitively bid the statement of work again, with a smaller group of the lower bidders from the original RFQ.
1. Proceed with Marton Enterprises. We would send a cross-functional team to their facility to review their proposal, including Procurement, Finance, Quality and Engineering. We would expend considerable effort in auditing all of the components of their bid, to ensure that their understanding of the SOW is in line with our requirements. An onsite visit at Marton Enterprises would consist of a review of all the material requirements that the vendor would need to order, ensuring that they are buying to the stated specifications, from qualified vendors, and the material meets all of the testing requirements. We would audit all of their quality systems to ensure that the proper procedures are being followed. Also, we would audit the labour requirements to ensure compliance with their RFQ response. In advance, we would review all of the same information from the incumbent supplier. A detailed review should point to any significant misunderstandings that Marton Enterprises had at the time of their original RFQ response. We would recognize in advance that this review would likely lead to higher costs for ourselves, but this will prevent any contract compliance issues in the future. We would also be given the opportunity to review the financial statements of the low bidder, as the RFQ response indicated they would be available on site. This would give us a clear picture regarding their financial stability.
Provided that the on site audit meets our requirements, we would continue to the negotiation phase. During the negotiation phase, we would currently hold the balance of power, due to the fact that we have significant inventory on hand, and eight other competitive bids to choose from. Our on hand inventory means that we are not in a compromised position where we need to rapidly proceed with the current negotiations. We have the luxury of time to walk away from this negotiation and proceed with one of the other bidders. It is important to note though, that as time progresses; the power will shift to the bidder, as we cannot afford to risk interruption to our supply. Therefore it is in our best interests to keep this process moving along. Because we have eight other competitive bids on hand, it would not be difficult for us to begin the negotiation phase with another supplier. For us, the Best Alternative to a Negotiated Agreement (BATNA) is to commence negotiations with another potential supplier.
From the standpoint of the bidder, winning this bid would aid them in several of their corporate goals. It would help them in their plans to increase sales, and also in their goal to increase their percentage of sales to Boeing from 15% to 17% in the face of rising sales. The BATNA for the bidder would be to find another RFQ to bid on, that meets their profit expectations, and the customer would need to be another Boeing Company. This would not be accomplished easily.
2. Clarify the RFQ requirements and put the work back up for competitive bid. Given the large variation in the bid responses from the nine bidders, it is difficult to believe that our RFQ provided a clear definition of the requirements of this contract. We could perform an analysis between the various bid responses, including the low bidder, the incumbent and selected others to determine how their quotations varied. Variations in the materials and labour requirements will be the largest drivers in the variations of cost across the bids. We would then perform a gap analysis to determine how this compared to our actual requirements. This would allow us to determine if we have over engineered the requirements provided to our incumbent supplier, meaning that we would be able to enjoy the savings provided by the lower bidders. Or, we might determine that our RFQ did not clearly explain the requirements of the statement of work, and the low bidders will not be able to satisfy our requirements. Dependant on the results of this gap analysis, we would select a short list of three or four bidders for a best and final offer to the RFQ. We would eliminate any opportunity for misunderstanding of the requirements in the RFQ documents. Due to the high levels of inventory on hand, we have the luxury of the additional time this would require, and would have the benefit of being assured that our final selection would be able to satisfy our requirements, while enjoying a modest profit for themselves, thereby ensuring their continued interest in the program.
Part 5- Recommendations and Implementation
I recommend that we take a step backwards and go through the competitive bid process again. The perils of proceeding under the current RFQ are too great. We could spend the five years of the agreement forcing a vendor to comply with a contract where they are losing money and not interested in cooperating with us. We currently have the luxury of time to do our due diligence and ensure that we have clearly communicated our needs to the potential suppliers. Doing so will create a level playing field where the bidders can compete against each other and we can determine how to create the best value though our vendor selection.
Part 6 – Monitor and Control
Providing a clearer RFQ document will reduce the variation from the high to low bids from the current 73% to an approximate 20% gap between the high and low. This will confirm that the vendors clearly understood the requirements and are bidding against each other on their own capabilities.
The long term benefits to our company of this strategy will be evident from the value created through the bidding process. We will be able to make a supplier selection that offers us value, as well as can be a sustainable long term partner for our business.
Part 7 – Conclusion and Management Plan
In conclusion, we need to ensure that the RFQ documents that we use to competitively bid products provide a clear understanding of the requirements to our vendors. This will provide us the benefits of the competitive bidding process without the additional effort of going through the process a second time.