As most purchasers already know, an RFQ is a "request for quote". Why do these RFQs benefit manufactures?
The real benefit comes at the end, when a supply contract is signed to cover the companies ingredient needs over the period. An RFQ is a simple, great way for manufacturers to get the lowest bulk oil price possible and reap a number of other benefits in the process.
In fact, we see 3 major benefits that manufactures get from doing an RFQ for their annual volumes, and signing a contract for their ingredient needs. But first, we'll review what an RFQ is.
What is an RFQ?
And RFQ is a document that a food manufacturer or buyer releases to its suppliers, stating that they would like a quoted price on particular ingredients, with details about the packaging and volumes that they need. RFQs can be released before each individual order, or they can be offered for longer periods of time, like six months or one year.
When looking at longer periods of time, the buyer is requesting a quote on their volume used during that entire period, and the end result is a supply contract that is signed by both parties to cover the manufacturer’s ingredient needs.
The top 3 benefits a manufacture receives from doing an RFQ for their annual bulk oil volumes
Low prices based on higher volumes
An RFQ is a straightforward and organized way to request a quote from multiple suppliers. When a manufacturer does an RFQ, you supply a document to your vendors that provide all of the information they are going to need, including information on:
- Oil type
- Packaging size
- Delivery points
- Delivery cycles
Based on that detailed information, each vendor is able to put together their best quote for your needs. Knowing all of your volume needs upfront allows them to lock in better pricing for you.
Many suppliers offer bracketed pricing, which comes into play when dealing with RFQ's supply contracts.
The general rule is "the more you buy, the more you save"; if you are signing a contract for your annual volumes, your prices will be based on your total annual volumes, and will be much lower than of they were based on just one order.
Low prices based on competition
When you do an RFQ, you have a number of your top contending suppliers or potential vendors vying for your business. They all want to work with you. Typically, they all are willing to offer the lowest pricing that they can, in order to gain your business.
Competition in the marketplace is always a good thing, and will help you get low prices.
That said, never choose your winning supplier based on price alone. You can get a good idea of the market price that you will be able to get by reviewing the average of all of the different suppliers.
Choose your favorite suppliers in terms of quality, customer service, and accountability and then work with the top 1-2 personally to see if you can come to an agreement on a price that is going to work for both parties.
Steady, locked in prices
If you do an sign a supply contract for a longer period of time, your supplier will reserve the oil that you use in their supply chain. When the lock those volumes in, the oil price is locked in based on the current market, or a prediction of the futures market.
With locked in pricing, you are insured a steady price over the entire course of the year.
Why would your business prefer steady pricing? Many manufacturers prefer this system because it ensures them cost stability and guaranteed profit.
Steady pricing allows you to develop a price for your own product and keep it stable for your customers, without having to absorb any increases in your own costs. If you sign a supply contract, there will be no rising costs as the commodity market changes that will cut into your profit margin.
Even if your steady annual price is a few cents higher than if you had ridden the market, the stability is much preferred for your business.
Reserved and available inventory
When you sign an annual supply contract, your supplier is guaranteeing that they will have the inventory available to you. Not only have they locked it in at particular price but they have reserved it for you specifically so when you need it, you can get it.
This means you will never place an order and have your supplier say, “I'm sorry, we’re all out.” It ensures a continuous supply of your ingredient flowing into your production line, avoiding any unnecessary production delays.
Of course, this agreement isn’t a free for all. A supply contract still requires that you share your typical inventory pull cycles with your supplier. They will not have your entire year's inventory simply sitting in their warehouse all year. If you decide that you suddenly need half of your annual volume without any warning or prior planning, your supplier will probably not be able to accommodate. But if you communicate openly with them about what you will probably need and when you will probably need it (not guaranteed, you just have to give them a rough idea) you should be all set.
Requesting that your suppliers and potential vendors fill out an RFQ can benefit you in a number of ways. Not only will you get the lowest pricing, but it will also be steady and the inventory will be available to you.
Want to find out more about basics of the buying process and get some cost-saving tips? Download the The Ultimate Guide To Buying Bulk Olive Oil For Manufacturing.