What are the different Procurement Bidding Methods utilized by ERP Systems?

Featured article by Madhavi Putta, Independent Technology Author

Annually there are thousands of procurements awarded that are worth billions of dollars. Procurement Contracts run the gamut from computer support to janitorial services to major construction projects that include building, infrastructure and roadways development. It is very important to choose right procurement method to gain efficiency. But are these methods included in today’s ERP and cloud-based systems? What changes can be made to use these systems more efficiently? Let’s get into the details here:

The most common and widely used procurement bidding methods are:

1. Competitive Bidding (e.g. IFB, Informal)
2. Non-Competitive Bidding (aka negotiated bid e.g. RFP, RFO)
3. Competitive and Negotiated bidding

1. Competitive Bidding

Competitive bidding is a form of solicitation that is one of the common practices used worldwide for procuring goods and services. The traditional bidding involves the buyer receiving bids from various invited suppliers to provide the best possible price for a defined scope of work and evaluating those bids before finalizing supplier. This is simplest method where the contract is awarded to the lowest bidder. This method is widely used in United States, Asia, Europe and other parts of the world both in public and private sectors.

Advantages of Competitive Procurement

According to James F. Nagle, in the book A History of Government Contracting said “since the early 1800’s, government organizations have often relied on the relatively simplistic lowest-bid process of publically-advertised competition as the primary method for getting value from its purchases”.

Competitive bidding adopts generic pricing methodology that applies to all customers. In competitive procurement any company that could provide the goods or service is able to submit the bid or proposal making the process more transparent. “The lowest price is guaranteed in this process.

Disadvantages of Competitive Procurement

“The big problem is bid pricing” wrote E. Jerome Mc.Carthy and William D. Perreault Jr. in basic Marketing, “is estimating all the cost that will apply to each job. Price Setting is a key strategy decision”. Complex paperwork, quality of material, communication barrier are the other main drawbacks in this method. There is risk of unfair bias or corruption.

2. Non-Competitive Bidding:

Not all competitive bids end with the customer’s acceptance of one of the bids offered. In some situations, there might be subsequent negotiation to take place. “Some buying situations (including much government buying) require the use of bids—and the purchasing agent must take the lowest bid,” said Mc. Carthy and Perreault. “In other cases, however, the customer asks for bids and then singles out the company that submits the most attractive bid—not necessarily the lowest—for further bargaining. The list price or bidding price the seller would like to charge is sometimes only the starting point for discussions with individual customers. What a customer will buy—if the customer buys at all—depends on the negotiated price, a price set based on bargaining between the buyer and seller.” McCarthy and Perreault go on to note that negotiated pricing, like simple bid pricing, “is most common in situations where the marketing mix is adjusted for each customer—so bargaining may involve the whole marketing mix, not just the price level.”

Advantages of Non-Competitive Procurement

This is the most commonly and widely used Procurement Method. In non-competitive procurement, the buyer invites suppliers to bid on the good or service they provide based on the proposal. In this process, the buyer doesn’t open the bids to every potential supplier. This method is faster than competitive bidding, less paperwork and more likely to receive realistic final cost.

Disadvantages of Non-Competitive Procurement

Non-competitive procurement can result in higher cost at times and can be difficult if the buyer has not previously worked with the selected vendor. An inability for the buyer to compare the vendor’s proposal to other proposals gives the buyer no way to determine if the bid is reasonable.

3.Competitive and Negotiated Bidding Process:

The third procurement method which combination of competitive method and Negotiated bidding is also known as sealed bidding involves inviting bidders to bid once without allowing modifications. This allows customer to select bidders who offer goods and/or services for lower price along with the responses received for the bid offered.

Advantages of Sealed Bidding:

The main advantage of using this method to procure goods and services is the process consumes less time. When the customer has clear specifications that won’t require back and forth discussion during the bidding process, this method work very well. This bidding is also suitable when there are several bidders in the market who likely have the qualification and ability to offer a price the customer can afford.

Disadvantages of Sealed Bidding:

There may be potential to lose best supplier by considering just few factors like price, basic ability to meet specifications and responsiveness. This method doesn’t allow to interview the supplier. Lack of flexibility is another main drawback using this method.

References:

1. Friedman, L. (1956). “A Competitive Bidding Strategy,” Operations Research 4, 104–112.Google Scholar

2. Milgrom, P.R., and Weber, R.J. (1982). “A Theory of Auctions and Competitive Bidding,” Econometrica 50, 1089–1122.Google Scholar

3. Rothkopf, M.H. and Harstad, R.M. (1994). “Modeling Competitive Bidding: A Critical Essay,” Management Science 40, 364–384.Google Scholar