What it means
An RFQ contains a detailed specification, the quantities required, the delivery location and dates, the payment terms and the deadline for responses. Suppliers reply with a price, a lead time and any conditions, and because the specification is fixed there is little scope for them to propose a different approach.
The distinction from a request for proposal is worth holding onto. An RFP asks how a supplier would solve a problem, an RFQ asks what a supplier charges for something already defined, and using the wrong one wastes time on both sides.
The purchasing benefit is comparability. When five suppliers quote against the same specification, differences in price are genuinely differences in price rather than differences in what is being offered, which makes negotiation and internal approval much simpler.
The trap is comparing headline unit prices without the costs that surround them. Freight, customs duty, packaging, minimum order quantities, payment terms and warranty length can easily swing the real cost by 10% or more, which is why buyers compare landed cost rather than list price.
RFQs are usually repeated on a cycle for recurring purchases, giving the buyer a running view of market pricing and a credible position in renewal negotiations. Many organisations run them through a portal so quotes arrive in a standard format and can be compared automatically.
In practice
Real-world examples.
Example
A construction firm needs 400 tonnes of a specified steel grade delivered to a site over three months. It issues an RFQ to five stockholders with the grade, tolerances and delivery schedule fixed, then awards on landed cost and delivery reliability.
Example
A hospital pharmacy runs a quarterly RFQ for a list of generic medicines against agreed specifications. The regular cycle keeps pricing honest and gives the finance team a documented basis for budgeting.
Example
A marketing team needs 20,000 printed brochures to an exact paper weight, size and finish. Because the specification is complete, an RFQ is the right tool, and quotes range from $9,400 to $14,800 for identical output. The team awards to the middle quote of $10,900 because that printer guaranteed delivery two weeks earlier than the cheapest bidder.
Formula
Calculation
Landed unit cost = (Unit price x quantity + freight + duty + other charges) / quantity
A buyer needs 5,000 units of a specified component and receives two quotes. Supplier X quotes $12.00 per unit, so goods cost $12.00 x 5,000 = $60,000, with freight of $3,000 and duty at 5% of goods value, which is $60,000 x 0.05 = $3,000. Supplier X's total is $60,000 + $3,000 + $3,000 = $66,000, or $66,000 / 5,000 = $13.20 per unit landed. Supplier Y quotes $11.40 per unit, so goods cost $11.40 x 5,000 = $57,000, with freight of $6,500 and duty of $57,000 x 0.05 = $2,850, giving a total of $57,000 + $6,500 + $2,850 = $66,350, or $13.27 per unit landed. Supplier X wins on landed cost by $0.07 per unit, or $350 across the order, despite quoting the higher sticker price.Case study
Seen in the real world.
Pinehaven Assembly is a fictional electronics assembler used here as an illustrative example. It had bought a connector from the same supplier for six years at $2.40 per unit and used around 300,000 units a year, a spend of $720,000.
A new purchasing manager wrote a proper specification and issued an RFQ to eight suppliers, four of them new to the company. The best landed quote came in at $2.05 per unit, and the incumbent, told only that the item had gone to market, matched at $2.08 with an improved lead time.
Staying with the incumbent at $2.08 saved $0.32 per unit, or $96,000 a year on the same volume, with no change of supplier risk and no requalification of the part. The illustrative point is that the RFQ created the competitive pressure; the savings did not require switching supplier at all. Pinehaven went on to schedule an RFQ for each of its ten highest-spend components on a rolling two-year cycle.
Watch out
Common mistakes.
- Issuing an RFQ when the requirement is not yet fully specified, which produces quotes for slightly different things and destroys comparability.
- Awarding on unit price alone and ignoring freight, duty, packaging and payment terms that change the true cost.
- Sending the RFQ only to existing suppliers, which tests loyalty rather than the market.
Questions
People also ask.
When should I use an RFQ instead of an RFP?
Use an RFQ when the specification is complete and the decision is essentially about price, lead time and terms; use an RFP when you need suppliers to propose an approach.
Is a quote legally binding?
A quote is usually an offer that becomes binding once accepted within its stated validity period, so always note the validity date and any conditions attached.
How many suppliers should be invited?
Three to six is typical; fewer weakens competition and more creates evaluation work without improving the outcome much, and it is worth including at least one supplier you have never used so the exercise genuinely tests the market.
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