During the procurement process, most people are familiar with the acronym RFP, which stands for Request for Proposal. As anyone in purchasing knows, RFPs are created by businesses and sent to vendors in order to get a full quote on a project. Generally, the RFP contains the price, as well as any other important details that the businesses might need to consider during the review process. The price stated in the RFP is often considered to be the bid price for that project.
Another, perhaps less familiar, acronym used in procurement is RFQ. RFQ stands for Request for Quote. When a buyer sends out an RFQ, he is generally getting a feel for prices about an upcoming project. He is not opening the bidding on a project. Responses to RFQs are not considered formal bids and, therefore, can be changed if the same buyer later sends out a more formal RFP.
RFQs do play an important role in the procurement process. They are usually the first step taken by buyers, and the responses offer a wealth of data that can help them later on when they need to begin taking formal bids. For example, if Buyer A sends out an RFQ to three companies and only two respond to his inquiry, Buyer A automatically knows that the third person is either not interested in doing business with him or is not a reliable vendor. Either way, he has narrowed down his pool of potential suppliers, thus making less work for himself later on.
The RFQs can also help buyers determine their budgets for a particular project. For instance, if a new type of metal hose is needed by Buyer A for his project, and he's unsure of how much the purchase will cost, he can send out RFQs. By taking an average from all of the responses, Buyer A will have a decent range with which to plan his budget and also with which to compare later bids.
Usually after the buyer has received responses to the RFQs and has determined his criteria for selecting a vendor, he can then open up formal bidding procedures. If he is using an online reverse auction, he can automatically send invitations to any vendors with whom he is interested in doing business. The RFQs will have helped him make his selection of vendors. For example, Buyer A again sends out RFQs. Two vendors fail to respond by the designated date, so those vendors can be eliminated from the running. Of the suppliers who did respond, one may have quoted $5000, another may have quoted $6000, and a third may have quoted $10,000. Obviously, if Buyer A is concerned with price, he may choose to exclude the third vendor simply because his quote was out of the average budget range (around $7000).
RFQs may seem like an unnecessary extra step in the procurement process, but they do play an important role. As stated before, they do allow buyers to get a general idea of costs before they begin holding formal bidding. Without RFQs, both buyers and sellers might suffer. For instance, if Buyer A did not request any quotes but simply began holding bids and his first bids were for $2000 and $3000. However the details of an RFQ would help the buyer to know that these two bidders were not including some key items in their bids. He may assume that these are the average costs for what his project requires. Later bids of $5000 and $6000 may not even be considered even though they are more accurate. As a result, low-ball bidders may win out against legitimate vendors and buyers may end up paying more their goods or services in the long run.
RFQs also serve as a way for vendors to opt out of the bidding process early. If a company is too overworked or is simply not capable of providing that type of good or service, it simply does not need to respond or can refuse to submit a quote. This step helps both the buyer and the seller by saving them time and money later on.
Essentially, RFQs are just a way for businesses to get some preliminary pricing information and to narrow down qualified vendors. They need to know what to anticipate when the real bidding process begins and they need to determine their project's budget, otherwise they may encounter additional problems down the road.