Margins are thin in manufacturing and amplify any impact of unforeseen circumstances. This makes spot quotes one of the costliest mistakes your sourcing team can make.
Spot quotes occur when your business needs to make an “on the spot” purchase and are subject to market pricing. Since market price is typically much higher than bulk pricing, your profits on orders are reduced, and if too many of these spot quotes occur, your whole business might be in trouble.
Read on for helpful guidance to help your business understand the impact of spot quotes, why they occur, and how to manage them. You’ll also get a detailed overview of how your team can appropriately leverage spot quotes as part of an overall direct procurement strategy for manufacturers.
Why do Spot Quotes Occur?
In most cases, spot quotes will typically occur for one of four reasons.
1. Human error. Someone in your sourcing team makes a mistake and doesn't order enough supplies to meet a given deadline.
2. Administrative or data management error. Your sourcing team believes they are short on supplies based on unreliable data from your warehouse, leading to lost inventory or incorrect inventory status.
3. Significant supply chain disruptions. This scenario is typically beyond the control of your business (i.e., a ship getting stuck in the Suez Canal or a worldwide pandemic) that impacts trade routes.
While the first two situations can be mitigated completely, situations three and four cannot be controlled.
The question then becomes, how can you balance costly spot quotes in a way that helps your business while still maximizing returns? The answer? Strike the best balance between costs, quality and agility.
Balancing Costs, Quality & Agility
All businesses must find the proper balance of reducing costs per product, managing a quality standard and maintaining at least a certain level of agility. Therefore, using one supplier becomes risky since, although costs are reduced, a greater risk is incurred if they cannot meet a set delivery standard. On the other hand, finding multiple suppliers that can provide the right quality can also be a challenge when some bargaining power is lost due to the smaller order size.
Admittedly, the most successful manufacturers are those that have maintained strategic relationships with several qualifying suppliers, achieving the ultimate balance of agility, quality and costs.
In practice, procurement teams are encouraged to continuously identify and qualify suppliers so their supply base can remain agile when preferred suppliers are unable to deliver due to normal or unforeseen circumstances. Further, established companies are encouraged to continually review their supplier lists to remove underperforming suppliers so quality standards are maintained. On the costs front, A/B sourcing can help buyers run price comparisons between the lowest market rate and quoted prices to ensure the lowest prices are being paid.
Strategies for Managing Spot Quotes
Working with several suppliers is only part one of a successful strategy to managing spot quotes. Part two is pre-negotiating the ability to purchase additional supplies as shortages arise. Doing so may make the price per product higher than the bulk rate. However, this will also guarantee you aren’t forced into paying high market rates either.
LEVERAGE A MORE STRATEGIC TAKE ON SUPPLIER MANAGEMENT
Making these arrangements will require a more strategic look at supplier management since cultivating mutually beneficial partnerships requires commitment from both sides. While most buyers focus on what a supplier will do for them, a true partnership will consider what each company can do for the other to lower costs. By considering the supplier-buyer relationship from the other side, suppliers are more likely to see the ongoing value of the engagement, rather than feel “squeezed by the buyer” and be more lenient when it comes to pre-negotiated rates.
REDUCE ERRORS AND ACCEPT ACCOUNTABILITY
That said, if an “emergency” order is needed every couple of weeks, the relationship is unlikely to last long. Therefore, buyers will need to ensure that their sourcing teams are equipped with the right tools to forecast and plan deliveries to minimize as many opportunities for last-minute orders as possible.
Typically, businesses that have leveraged closely integrated solutions to sourcing and forecasting have the easiest time consolidating data and making accurate orders in future months. This is especially true in cases of just-in-time inventory since suppliers need access to the buyer’s inventory levels to replenish products accordingly.
MAINTAIN TRANSPARENCY FROM BOTH SIDES
Like the foundation of strong personal relationships, supplier relationships are built on qualities including honesty and integrity. Therefore, companies should strive to maintain open and immediate communication when unavoidable supplier situations occur. Executing this strategy will require two parts; an open policy that encourages honesty that is communicated to the greater sourcing team and an immediate notification system that promotes transparency between the buyer and the supplier. In practice, this system might include a supplier portal that can be accessed by both sides of the table to facilitate two-way communication. The caveat here is that supporting technologies, often systems a business does not already have in place, are needed.
MAKE A PLAN FOR EVERYDAY EXCEPTIONS
The final consideration is an internal step. Emergencies that require spot quotes are bound to occur occasionally; the difference between a successful supplier and a non-successful one is how they manage it. Your team needs to agree ahead of time on how emergencies will be handled and consider why they occurred (e.g. was it an extenuating circumstance that could not be prevented or a mistake made internally due to complicated processes). Situations that can be prevented through new process solutions should be considered, otherwise, buyers are encouraged to negotiate committed stock into their contracts. Although these rates may be higher than the bulk rate, they allow buyers to add on to existing supply from an already qualified supplier with an “option to buy.”
Developing a Spot Quote Strategy for the Future
To help buyers with spot quotes, the ConvergentIS team has developed a solution that allows teams to quickly experience online sourcing without a substantial commitment of time or resources. Our Simplified Requisitioning application, built on SAP BTP, will enable users to easily create a Request for Quotation (RFQ) by issuing a purchase requisition from their SAP ERP system; afterwards, an RFQ event is created from the list of existing preapproved suppliers, to ensure businesses aren’t starting from the beginning of the sourcing event and can fulfill their orders quickly. These steps are easy to follow and based on a guided process determined through the Design Thinking approach.
Check out our procurement for manufacturers guide for additional support, including guidance for businesses that may face complicated workflows and require further tailoring or several solutions to solve their impending procurement problem.