Open Bidding: Due Diligence or Just Beating Up Vendors?

From "Buying Custom P-O-P" Who ever thought that three little letters (five if you count all of the variations) could shake up an entire industry? When the RFI / RFP / RFQ (Request for Information / Proposal / Quotation) process swept through the P-O-P business in the early years of this century, complaints were lodged, meetings were held and position papers were issued. However, most industry veterans had to concede that the RFP and its "evil twin," the reverse auction, were the logical next steps in the evolution of a business practice that few really liked in the first place. An "open bid" process can involve any number of producers, from three to 30 to several hundred, who are invited by a CPG company to present their highest creative concepts and lowest cost estimates for a proposed in-store display. Arguably, it's the oldest form of deal making in the P-O-P business. There's no doubt, however, that it's the most complained-about. Charges of abuse are legion: "Brand X liked my design in the creative shoot-out, but gave it to a competitor to produce " "Retailer Y took my drawings, said 'we'll call you,' and a year later, I saw my idea on a shelf in their stores, replicated, right down to the millimeter " "CPG company Z took in a million dollars worth of in-store creative in a cattle call, nobody got paid, and nobody got any business." Luckily, that level of abuse seems the exception rather than the rule. In fact, open bidding probably does, over time, serve a positive function by policing the marketplace. "Even when everything is completely above board," says Scott Eisen, president of Chicago-based producer Ideal, "marketers and purchasing people need to watch how hard they fight to keep a supplier because of the perceptions left by some industry scandals in the mid-1990s. The burden is now on the supplier to give the buyer quantitative reasons for why they should stay. That means facts, such as data showing how they hit every street date, and not just, 'I like this guy.'"The bigger problem with open bidding is inefficiency. "Not all marketing-at-retail suppliers are created equal," says Rapid Display's Brian McCormick. "Wide-open bidding presents a challenge to a buyer who has never used many of the suppliers being included in the bid. Buyers should spend at least as much time determining whether or not the display company is a qualified source as they do seeking the lowest price. Due diligence includes a visit to the supplier to 'kick the tires,' meet the supplier's team and understand their core competencies. I have seen too many jobs go to the lowest bidder, only to learn that the buyer was disappointed with the quality of the product or that it was not delivered on time." Greg Gunderson, channel marketing program manager at Andersen Windows, Bayport, MN, agrees. He never uses the cattle-call bidding approach because "there is too much risk of low quality, not having capabilities or not meeting deadlines. There is too much at risk, in many cases, to try out new suppliers." Still, open bidding can work. "Every once in a while in a cattle call, a client might hit on some out-of-the-box thinking from a producer that usually works in a different area of business," says Eisen. "The most positive part of a cattle call is that if you really need immediate price relief, you'll probably get it. But you might also get hurt because you could be dealing with a desperate company that doesn't have the financial resources to produce." The introduction of the RFP process was an attempt -- sincere in most cases -- to formalize the due diligence process. Karen Formico says Broan-NuTone has used RFQs properly and successfully for all projects in recent years: "We don't refer to them as 'cattle calls.' That term suggests opening the door to almost anyone who calls himself or herself a P-O-P producer. An RFQ, when done properly, is actually designed to fit a limited number of vendors. This will intentionally weed out those that are not the right fit and save them the time and aggravation of bidding on a job they most likely won't win. The RFQ is important because it solidifies the project expectations, budget and objectives, not only for the potential vendor, but for the client as well. It is a mind-clearer that forces the author to focus. By documenting everything, it removes any doubt or confusion as to how the project should be approached." Consortium's Clint Oberst agrees -- to a point: "RFQs can do a good job of separating the suppliers who are truly cost competitive from suppliers who lack the pricing structure, equipment versatility, or strategies needed to produce certain market baskets of business cost effectively. However, RFQs in the P-O-P industry usually miss the mark by asking the wrong questions." Rich Carrigan, president of Des Plaines, IL-based United Displaycraft, says that RFPs, when done right, are not necessarily a bad thing. "When they are too quick, too open and unorganized, they can be a real mess," he says. "But what vendors dislike most about many RFPs these days is that all our value and service is reduced to a single number on a spreadsheet. I learned in business school that price should be the deciding factor only when everything else is equal. In this industry, everything else is never equal."Whether right or wrong, some questions posed by RFQs came to be seen as intrusive. "I understand a buyer's need to evaluate the capacity and size of a potential supplier," says one producer. "But then they start ask about your profitability. Or how much I make. It's hard to share the core of your business: how you structure cost, materials, labor and efficiencies. That's the art of my business. I'll never apologize for making money. That's what drives innovation and growth." Some questions, moreover, are considered downright obnoxious. In one notorious RFP, a CPG company asked producers, "Which of our competitors do you supply, and what's the latest innovation you brought them?" The online reverse auction, however, was one step too far for a lot of producers. Web-based, real-time bidding for commodities like bolts or plywood (or even some common components in P-O-P displays) was a shrewd use of the Internet. However, a display program is a bundle of services, skills and innumerable changes that are hard to quantify. "Too many unanticipated things happen when specifications are translated from two dimensions on paper into a three-dimensional prototype," says DNI's Jeff Pacelt. "But with a reverse auction, there's no room for modifications and customer service. Good or bad, you get what you pay for, and that could cost a company millions." Broan-NuTone, which utilizes on-line auctions for big projects, exemplifies the right way to proceed. "I am the first to say that a display is not a commodity," says Formico, "but I have found that if you don't treat the auction like a cattle-call and pre-screen your bidders, you'll know that anyone who wins is supremely qualified to handle the job. An on-line auction goes through several stages. Getting to the final stage means a vendor has passed several rigorous requirements including presentation of a past, successful portfolio. I was surprised to see how many truly qualified vendors did participate in our auctions." Sadly, in less honorable hands, abuses abound. Rick DeHerder, president of Los Angeles-based Array Marketing, found "multiple instances where the winning bid was lower than our material cost, which is clearly impossible. When we stopped to analyze it, we found that the product delivered to the store did not match the specifications in the bid. So we choose not to be a part of a process that results in this kind of deceit." If all the participants in an online auction aren't qualified -- and made publicly known to all other participants -- you could be bidding against a "ringer," a bidder who is not a legitimate candidate for the work, but included only to push bids down. There have even been reports of auctions where, after the last identifiable participant had signed off the system, phantom bids continued to ratchet down. Today, therefore, producers make no bones about becoming more selective in how they respond. "The only way we participate in RFQs where there is wide-open bidding, is if we are the current vendor, or if there is an existing relationship within the account," says Jeff Krepline, director of national sales for the Retail Integration Institute, Neenah, WI. "And even then, it has to fit geographically within our service region. Quite frankly, upwards of 90% of the time, the CPGs that perform an RFP wind up staying with their existing vendors anyways." "In the wake of Sarbanes-Oxley," says Mike Draver, "I understand that public companies especially will want to demonstrate that they are following good public policy procedures with multiple-bidding contracts and a 'procurement' mentality. But frankly, we still won't do a lot of RFQs. However, if your biggest client comes in and says, 'This is the way we are going to do business' ... well, then, you'll have a decision to make."

Open Bidding: Due Diligence or Just Beating Up Vendors?

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