What it means
An RFQ works best for standard items, such as office furniture, raw materials, printing or computer hardware. The buyer lists the specification, the quantity, the delivery date and the place of delivery, and each supplier responds with its price.
Quotes are usually returned by a closing date. Because every supplier quotes for the same thing, the quotes can be compared directly.
This puts pressure on suppliers to offer a competitive price, and it gives the buyer evidence that it obtained a good deal. That evidence is useful when auditors ask why a supplier was chosen.
The RFQ should specify payment terms, validity of the quote and what is included in the price. Without this detail, one supplier may quote ex-works (collected from its premises) while another includes delivery, and the numbers will not be comparable.
Asking suppliers to complete a standard price form avoids this problem. Buyers often set a minimum number of quotes, commonly three, for purchases above a set value.
This is a standard internal control that helps prevent favouritism and shows auditors that purchasing was competitive. Exceptions, such as a sole-source supplier, should be approved and recorded.
The lowest quote is not always the best. Quality, reliability, lead time and the supplier's financial strength can matter, so buyers sometimes apply minimum standards before comparing prices.
A cheap supplier that delivers late can cost more than it saves. An RFQ is different from a quotation received without being asked.
It is also a step in the purchase process, and once the buyer accepts a quote it normally issues a purchase order that confirms the order.
In practice
Real-world examples.
Example
A hospital administrator sends an RFQ for 200 identical office chairs to four furniture suppliers. Each quotes a price including delivery and assembly. The lowest quote is $18,400, and the hospital issues a purchase order. The administrator files all four quotes with the order.
Example
A bakery chain needs 10 tonnes of flour a month and asks three mills for quotes valid for 30 days. One mill offers a lower price, but only if the bakery commits to a six-month contract. The finance manager compares the savings with the risk of being tied in. She decides to accept the lower price on a three-month trial.
Example
A small engineering firm requests quotes for a replacement machine part from five metal shops. Two cannot meet the delivery date, so they are excluded. Of the remaining three, the firm picks the lowest price and files all five quotes for the audit.
Formula
Calculation
Total landed cost = (Unit price x Quantity) + Freight and handling - Discounts
Suppose a company needs 5,000 units and receives two quotes. Supplier A offers $4.20 a unit with $600 of freight, so its landed cost is (4.20 x 5,000) + 600 = 21,000 + 600 = $21,600. Supplier B offers $4.05 a unit with $1,900 of freight, so its landed cost is (4.05 x 5,000) + 1,900 = 20,250 + 1,900 = $22,150. Supplier A is cheaper by 22,150 - 21,600 = $550, despite its higher unit price.Case study
Seen in the real world.
Ridgeway Clinics is an illustrative, fictional group of eight clinics that bought medical supplies from one supplier by habit. The new purchasing manager sent an RFQ for its 20 most-used items to four suppliers.
The quotes came back up to 14% lower than the price it was paying. After allowing for delivery charges and payment terms, the total saving was around $76,000 a year on spending of about $600,000.
The group now sends an RFQ for any recurring item worth more than $25,000 a year. In this illustrative story, it also keeps a second supplier approved so that it can switch if the first one fails to deliver. The savings paid for a part-time purchasing assistant.
Watch out
Common mistakes.
- Comparing quotes that do not cover the same scope, such as one with delivery included and one without.
- Choosing the lowest price without checking the supplier's quality, reliability and financial strength.
- Forgetting to check how long each quote is valid, so the price changes before the order is placed.
Questions
People also ask.
When should I use an RFQ instead of an RFP?
Use an RFQ when the item is clearly defined and price is the main difference, and an RFP when the solution or approach needs judging.
How many quotes should I obtain?
Many organisations require at least three for purchases above a set value, but the right number depends on the policy and the size of the spend. Very large purchases usually go through a more formal tender.
Is an RFQ a commitment to buy?
No, it is a request for information on price, and the buyer commits only when it issues a purchase order. Suppliers should treat the quote as a bid and nothing more until then.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related