As Steve McGill, vice president of supply chain strategy at Need2Buy, an e-business technology provider, explains, The terms sourcing' and procurement' get used sometimes interchangeably and in a very blurry fashion. The way we define sourcing is that sourcing is the decision process one goes through to determine who you are ultimately going to buy from. Procurement is the actual buying of the product. This decision process includes compiling a preferred supplier list after you have determined the suppliers from which you will buy. According to Aberdeen, this can constitute up to 52 percent of the sourcing cycle and lay the foundation of opportunity for cost savings and efficiency to begin.
In a sense, e-business technology providers began to work backwards, realizing that the time-intensive and critical sourcing process held the real potential for cost reduction and efficiency within the supply chain. As Louis Columbus, a supply chain analyst at AMR Research, puts it, strategic sourcing is really the promise of e-procurement. Thus, it is in the decisions made before the procurement process, not during the procurement process, where the advantages lay.
But the most challenging distinction that must be made is between e-sourcing and strategic e-sourcing. In short, strategic sourcing is just that: a strategy. It is a cross-functional and cross-enterprise process aimed at optimizing supply chain lifecycle performance. Strategic sourcing is predominately cited as an organizational issue, whereas e-procurement and e-sourcing are cited as application or technology issues.
The distinction can best be thought of like this: strategic sourcing is a methodology that a company chooses to adopt internally; whereas e-sourcing is the technology outsourced by a company to support its strategic sourcing initiatives. If, and only if, that outsourced technology fully supports a company's strategic sourcing goals,'strategic e-sourcing' is achieved.
Although strategic sourcing initiatives are different at every company, strategic sourcing is generally considered to entail the following components:
1. Spend Analysis: Collecting data in order to assess how corporate money is being spent, based upon spending category and supplier. This also includes identifying spending requirements and supplier performance. (For an in-depth look at spend analysis, see The Matrix on page 68 of iSource's August issue.)
2. Developing a Sourcing Strategy: Companies must answer such questions as, What products do I make and what products do I buy?,' In which supply categories should non-incumbent suppliers be considered?' and Do we contract or spot buy?'
3. Negotiating: Sourcing requirements and preferred supplier lists are used to build request for quote/request for information (RFQ/RFI) documents. Then, negotiations are held and can be evaluated upon multiple price and non-price factors.
4. Monitoring and Managing: Once a supplier is selected, its performance must be tracked. In addition, a company's relationship with each supplier must be well maintained.
Although most enablers claim to offer strategic e-sourcing,' current e-sourcing tools on the market can technologically organize and expedite only a few or some of the above strategic sourcing processes and the procedural elements they entail. According to Greg Rietzke, vice president of e-business at SAP, when looking at strategic sourcing applications, the analysis layer is paramount. He defines this analysis layer as a huge data warehouse of content, and a huge data warehouse of transactional information to help make decisions for sourcing suppliers easier for a buyer community. Ultimately, that's the goal, he says.
There are a litany of functions involved in spend analysis, but e-sourcing technology, thus far, has concentrated predominately on contract management and content management. And, in many ways, e-sourcing tools are best suited to supporting the spend-analysis function of strategic sourcing. Contract and content management tools help companies move contractual data from back-end enterprise resource planning (ERP) systems to a centralized e-sourcing engine, greatly improving the organization and visibility so crucial to spend analysis and helping to identify contract leakage or supplier data quality issues.
More advanced e-sourcing tools are also embedding supplier scorecards into their systems, like SCOR (Supply Chain Operations Reference Model). This technological adoption of scorecards represents a move in the e-sourcing market toward more metric-oriented approaches. The focus of the whole market is really going more toward ROI [return on investment], says AMR's Columbus. We're going to see more of a focus on metrics and cross-functional processes.