Any business that needs to buy products or solutions will use the terms request for quote (RFQ) and request for proposal (RFP) when preparing to make a purchase or sign-on a new contractor. But do you know the difference between the two forms?
This article will show you how to unleash the power of a request for quote, how to use an RFQ effectively in the buying process, and how to avoid the pitfalls of using it at the wrong stage of the procurement process.
A request for quote is a standard business process that an organization will use when they want to buy a specific product or service. Typically, a company creates and issues an RFQ, and vendors offer price quotes. The business then chooses the lowest bid and signs a contract with the preferred vendor. An RFQ is similar to an invitation to bid (ITB) or invitation for bid (IFB). A company would use any of these forms to solicit quotes from potential suppliers in the procurement process.
A request for quote allows vendors to submit bids for how much they will charge for the precise product or service you are seeking. An RFQ lets you choose the best supplier with the best value because it includes the following:
- Exact specifications for the product you want to buy, including quantities
- A request that the vendor itemize costs so you can compare bids
- A deadline for submitting responses
- A timetable for delivering the product or service
- A system for comparing bids easily
Keep in mind a quote from any potential vendor is just that: a quote. It is not a firm offer and a company can’t use an RFQ as a contract or formal agreement. Once you extend an offer to the supplier and the vendor accepts, then you create the final contract.
RFQ can also stand for request for qualifications. Use a request for quote to determine the best price for a specific product or service, and use a request for qualifications to screen potential vendors to see whether they can meet your needs and whether they adhere to your financial and professional standards.
RFQ IN PURCHASING
Procurement and supply managers regularly employ the RFQ process as a primary way to invite suppliers to bid on a product, such as a piece of hardware, or on a service, like a maintenance contract. As a rule, people use the RFQ process when looking for something specific or quantifiable. The RFQ is also useful because it requires vendors to itemize the costs for every stage of a product or project.
As a purchasing manager, the RFQ can be your best friend when trying to get the best price for a standardized product. Vendors usually know they are competing to provide a specific product, and will offer competitive bids that save you money. The best bids also offer competitive payment terms that can give you flexibility. When you provide concrete details about what you want to buy, you get specific price quotes that are easy to compare.
RFQs help you keep costs down by managing the bidding process. Here are several types of RFQs and how they work:
The RFQ is open to all potential vendors. The bids may be opened during the process so price quotes may be revealed to other suppliers bidding on the project. While this can help drive down pricing, it also can lead to price fixing or collusion among vendors.
The buyer opens all the bids at the same time, after the submission deadline has passed. Vendors don’t know the quotes submitted by other suppliers until the company opens the bids. Sealed bids can help fight fraud during the bidding process and provide an added layer of transparency. This option is especially beneficial if you are managing a public or government project.
Specific vendors, usually those you’ve already worked with, are asked to bid on the product. You can use this process with either open or sealed bids.
In a typical auction, the seller is hoping to get the highest price for a product. RFQs are a form of reverse auction. If you do not get the price you want through the first round of an RFQ, you can ask selected vendors to offer the lowest price for the product you want to buy.
DIFFERENCE BETWEEN RFQ AND RFP
An RFQ is a critical component of your business. Yet, during the procurement process, many companies confuse RFQ with RFP (request for proposal) or RFI (request for information). In many organizations, you may see the entire process use the abbreviation RFx (x stands for any of the stages in procurement). Here’s the main difference:
- Use an RFI if you are gathering facts or looking for initial ideas about a product or service). You’re looking for information.
- Use an RFP if you have a roadmap for your business solution, but want someone to help you finalize the plans and be part of the creative process. You’re looking for proposals.
- Use an RFQ if you know exactly what you want to buy and are looking for the best price. You’re looking for price quotes.
It’s easy to understand why there is confusion between RFP and RFQ: Both use the bidding process to get the best solution at the best price, and sometimes RFQs are the initial step in an RFP. As such, companies may include RFQs as part of an RFP or follow the RFP process. The difference between the two formats is evident in the outcome: An RFP asks vendors to help with the solution to your business problem (the qualitative information you need to succeed), while an RFQ asks vendors to say how much the solution will cost (the quantitative information you can measure).
We should note that RFP as a term may be losing favor. More and more companies are turning to online solutions for procurement, which will standardize the vocabulary and the process. The request for proposal could be giving way to the request for offer (RFO), another term similar to request for quote. However, the two request documents are not the same. Here is the difference between the RFO and RFQ:
Use an RFQ when you know what you want to buy and need to get the best price.
Use an RFO when you are looking for solutions, as well as a product, and price is one of several factors that will affect your decision.
SHOULD WE USE RFQ
Since there are so many abbreviations used during the procurement process, how do you know when to use a request for quote? Use the RFQ process if the following are true for you:
- You have created a list of qualified vendors or suppliers you know can deliver the product you need.
- You know what you want to buy and are not looking for creative solutions to a problem.
- You plan on choosing a vendor based on the best price.
- You plan to buy a product typically ordered in bulk, such as equipment parts.
- You plan to buy a product that doesn’t need any customization, which would drive up costs.
- You don’t need a service plan or support contract.
PROs AND CONs OF AN RFQ
An RFQ focuses on the result — getting the product you want for the lowest price. But there are still choices to make in the process.
OPEN BIDDING OR INVITATION ONLY?
You probably know the vendors you want to work with when buying a product. Odds are, you have worked with them in the past and they have done a solid job with fulfillment. Perhaps you want to work with a new vendor who has a good reputation in your industry. Sending an RFQ to a small number of pre-qualified vendors expedites the selection process since you won’t need much time to review the bids or verify the vendors. On the down side, you limit the competition and may not get the best price possible.
YOUR RELATIONSHIP WITH VENDORS
An RFQ puts your business solidly in charge of the process. You decide what to buy, how much, and when. You also limit other purchasing options by being so specific. An RFQ works for purchasing, but it can create a perception among vendors that your organization is closed-minded and doesn’t seek creative solutions to problems.
Remember, many companies mistakenly call their request for quote a request for proposal. Be sure you know what you are looking for before you spend the time and resources soliciting bids from vendors.