Ron Larimer a Procurement Consultant with a background in management consulting, supply chain and procurement BPO. His focus is on extending procurement's ability to touch every silo in businesses, and access to the knowledge and resources of the entire supply base.
Traditionally this is a pretty straight-forward project, but there were a few "complications":
The client had savings requirements with the bank.
The category was part of the VCP (value creation plan) for the acquisition and had an aggressive speed to savings requirement.
The client is very decentralised.
Their plants have traditionally defined the specifications for their fleet and the contracts and maintenance have been handled locally, resulting in no less than 13 platforms (forklifts, paper roll trucks, reach trucks, pallet stackers ...).
The client had no category budget allocation.
Forklifts had always been anunmanaged category and wasn't budgeted. Therefore, no-one was prepared to say "we are going to order XX trucks in 2014". The question was always "how many do we need?" I can't define that.
The Forklift Sourcing Project
In the time allotted, there was no way to gather the specs on the 300+ unit fleet. There was no way to tie maintenance costs to the individual units to build a business case for replacement. And there was no definitive number of units that could be quoted in the RFP (request for proposal)... until, in a casual conversation, the sourcing manager at the acquired company mentioned that some of the fleet were long-term rentals. That was the break we needed.
There were 44 4/5,000# forklifts, three narrow reach trucks and 12 10/12,000# paper roll trucks on month-to-month rentals that could be replaced in the first wave. This, combined with size and ageing of the remainder of the fleet, created a large enough carrot to encourage aggressive RFP participation and had a definable monthly cost that could be used to offset the lease price of the new units. Win!
There was still a major issue: we didn't have a spec for any of the units and getting 25 plants to agree would have taken too long. I needed to help the client take a different approach.
The Forklift RFP Pricing Structure
Because the client needed so much flexibility in the specification and there were 13 platforms, we broke the pricing into four pieces.
(Chassis + Options) + Maintenance + Lease Money Factor
The first step with the RFP participants was to get a chassis price (defined as a discount from MSRP to allow for a multi-year agreement) for a base truck with an engine, transmission and three-stage mast and to request a cost-plus pricing for all additional options. This defined the pricing model that would govern the contract.
Maintenance was quoted by chassis platform and was required to be severed from the price of the truck to allow the client to delay making the buying decision until delivery.
The lease rate was also severed to allow the client the ability to purchase the units outright, purchase an operating lease or secure their own third-party financing. Again, this was designed to allow them to delay making decisions as long as possible, and make it possible to move forward.
The Forklift RFP Process
This pricing structure is very different to what the RFP participants are accustomed to because it forces them to negotiate their margin on each unit, as opposed to price, and after the initial purchase there was no volume commitment.
I held calls with every vendor to explain the process, WHY it had to be structured in this form and highlighting the urgency. Of the six suppliers it was released to, two declined to participate, stating they couldn't be competitive with this model, and four participated fully.
We used the two-week response period to define sample requirements for the initial 60 units to validate the RFP pricing. As soon as we received the last submission, we asked that they price the units using the proposed model. This data was then used to quantify the results.
After selecting the awarded supplier, and as we were finalising the pricing agreement (21 days from the date the RFP was released), the selected sales rep mentioned his manager had asked if we had signed a confidentiality agreement due to the volume of cost data and pricing we obtained as a result of this process. Win!
The broad range of chassis covered allow my client to elect to switch from propane to electric units and save in excess of $2 per hour on fuel costs in addition to the truck savings. Win!
My client was able to secure relief from their baseline rental rates during the 12-week period before delivery, booking immediate savings. Win!
Additionally, during the three-week sourcing period, three trucks from my client's own fleet were determined to need replacement as well and we were able to prove savings for both companies, regardless of truck specification. Win!
The savings for this project are already six times higher than the original VCP projections and less than 20% of the total fleet has been addressed. Over the three-year term, this structure will continue to deliver savings as the fleet is replaced and transitioned away from propane.
- Find out more about Ron Larimer at his website.