Long term contracts are often used to negotiate cheaper rates from suppliers. Long term contracts can be leveraged effectively but it assumes that the price of commodity/service to be procured will go up or atleast maintain the current value as time progresses. Long term contracts can't be of too much help if the commodity/service price is likely to go down with time. One typical example of such a commodity is computer peripherals which usually show steep fall in prices with time, specially after a period of say 8-12 months after launch.
In such a situation how should the bidders be asked to quote? It's is almost impossible for even suppliers to intelligently predict the prices of such items 6 months or an year down the line. Under such cirumstances what price should a supplier quote for the items?
Thus we see that asking bidders to quote prices for a long term contract may not be the best option as nobody has enough knowledge of how the prices are going to behave after say 6 to 8 months or an year. Computer peripherals show steep decline after certain period which typicalls depends on the product and the kind of innovation we are seeing in that product line. If we ask suppliers to quote their prices they will base their quotation on present prices which might be much higher than what the prices will be 1 year later. Then how to leverage a long term contract in such a case?
What should then we ask for, from bidders, if not prices? How about asking them to submit the percentage discount on MRP (Maximum Retail Price) that they want to offer for a long term contract (where MRP keeps changing with time). A further extension can be to link the discpunt relative to an index for the good/material or its cost driver. I believe that suppliers are better positioned to quote a discount (and thus keeping in mind a profit margin) that they can offer rather than an actual price which will be fixed over the period of contract.
We can then compare bidders on the value of discount quoted.
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