e-Sourcing Tools — Means to an End

Why process integration and usage guidelines are more important than the tools

Many enterprises are making significant investments in e-sourcing tools to boost supply chain management (SCM) productivity and effectiveness. However, a common pitfall is to squander that investment by not executing properly on the associated process integration, and therefore never realize the value projected in the business case used to justify the tool.

In terms of bottom-line value, effective process integration, i.e., development of process definitions, issuance of method and procedure-level usage guidelines, training of staff, and implementation of appropriate governance and compliance frameworks, is more important than the actual functionality provided by the software.

To facilitate a successful e-sourcing tool implementation for project management, reporting, e-request for X (eRFxs) and online reverse auctions, process integration is essential in adding value to the business.

Establish Uniform Data Definitions and Provide Training

Laying the groundwork for successfully utilizing e-sourcing tools begins with establishing uniform data definitions and training. One of the primary benefits of an e-sourcing tool is that it allows staff to enter information in an autonomous, distributed manner while also allowing management access to reports that consolidate and aggregate the information into a comprehensive picture of department-wide activity. However, if the staff responsible for providing the information are not aligned and using the same data definitions and usage guidelines, then the reports generated will have little or no value.

For example, if the tool's project management function captures forecasted savings on each project, but individual users define or calculate savings differently, the aggregate numbers lose meaning and management will be unable to calculate accurate total savings by group, division or business unit.

Build Data Collection Requirements with the End Result in Mind

Another fundamental principle is the need to rigorously define the data that must be captured on each sourcing project or event in order to enable the analysis on the back end that will drive sourcing policy or process changes. The organization should begin with the end result in mind, asking which types of questions it ultimately wants to be able to answer, and from there work backward to build the data collection requirements. For example:

  • If the goal is to perform trend analysis and correlate sourcing process cycle time to the variables that drive the cycle time, the following data needs to be collected:
    — Start and end dates of the various steps in the enterprise's strategic sourcing process
    — Sourcing strategy selected, e.g., RFP, auction, sole source renegotiation
    — Project spend and complexity
    — Business unit
  • If the goal is to determine the value or return on investment (ROI) of various sourcing project types and approaches, the following data needs to be collected:
    — Savings realized
    — Project benefit summary, e.g., improved service quality, enabled product launch
    — Sourcing strategy selected, e.g., RFP, auction, sole source renegotiation — Project spend and complexity
    — Functional business units sponsoring the project, e.g., IT, Marketing, Sales
    — Project team resource levels, e.g., FTE, required to execute on the project

Project Management: What Data Attributes Should Be Captured?

To answer the types of questions above, a number of data attributes should be captured for each sourcing project and used for reporting. This enables valuable management decision-making. The following list sets forth 10 crucial (and often problematic) data elements:

1. Project Type — For reporting purposes, it is useful to group projects and aggregate reporting based on sub-types of activities performed or the functional groups performing the projects. Examples may include: competitive (RFx) strategic sourcing, sole-source renegotiation, vendor management, contract management and general (the "general" designation is used for any projects that do not fit neatly into any of the other defined Project Types).

Tip: Firmly establish criteria that define the qualifications for a project to be tracked in the system. Generally, some kind of materiality factor needs to be introduced to balance the desire to capture all projects in the system with the administrative burden of tracking immaterial projects.

2. Project Status — Designates the current stage of a project. Typical project status values include: Planned, In Process, Completed, Cancelled or On Hold.

Tip: Ensure that all staff keep the Project Status up to date, as this is a key filter used to generate reports for management review. For example, "In Progress" project reports can be used to identify current issues needing intervention, while "Completed" project reports may be used to book savings achieved.

3. Program — This attribute identifies individual projects that are part of a larger, over-arching program, such as a merger, acquisition or enterprise-wide cost restructuring, for which comprehensive reporting across all projects is required.

Tip: Staff must be able to universally understand all programs, and clear criteria should be used to qualify projects for a given program designation.

4. Savings — A number of variables must be defined to ensure that savings are calculated and documented such that they can be aggregated across projects. These should obviously also comport with the company's policy for defining savings. Key savings definition variables include: the methodology for determining baseline costs against which to measure, guidelines for determining the demand set for total cost of ownership (TCO) models and the types of savings allowed, e.g., unit cost reductions, cost avoidance, operational process efficiencies.

Tip: It is often helpful to establish a centralized savings definition and a financial modeling "center of excellence" that staff can utilize in developing TCO models and documenting savings. As savings is one of the most visible ways used to measure the value of a SCM organization, it is a wise investment to make sure that savings are reported comprehensively and consistently.

5. Vendor Diversity Opportunity — This field notes whether a diverse vendor is involved in, or considered for award on, a given sourcing opportunity. Applying this designation accurately and consistently enables tracking and reporting of statistics regarding the enterprise's efforts to enhance supplier diversity.

Tip: All staff must have access to an accurate and up-to-date list of diverse suppliers and understand the steps required to classify the vendor as diverse per the company's diversity policy.

6. Project Description — Provides a brief overview of the project scope. This write-up allows a reader to quickly understand a project and its parameters.

Tip: The description should be written so the reader (who it should be assumed is reviewing the project "cold," with no prior knowledge) can quickly gain an understanding of the project's scope and objectives from a cursory review of reports including multiple project descriptions.

7. Project Status Update — A periodic, qualitative description of the status of the project. The update should emphasize the major accomplishments and events since the last status update as well as key next steps in the project's progress.

Tip: The status update should be concise, but also written with the audience in mind. For instance, a manager who has little background on the project needs enough detail to assess the current and planned activities.

8. Risk Indicator — This attribute assigns the level of risk that the project is currently facing. A relatively simple structure for risk indication may include: "Green" — project is on track with no expected delays; "Yellow" — project may fall behind schedule; or "Red" — project is off track and requires management attention.

Tip: Use the Risk Indicator to prioritize projects for management review and escalation. Challenge whether users are being honest about their assessment of project risk, e.g., Green being used when the project is in jeopardy just to avoid the inevitable management attention.

9. Issue List — Provides a qualitative description of potential reasons for possible project delays or objectives that are in jeopardy.

Tip: Use this field to explain why a project is in "Yellow" or "Red" status for the Risk Indicator. This will help management to understand the specific nature of the risk and perhaps help them develop risk mitigation strategies.

10. Priority — Establishing the priority of a project helps identify areas that require enhanced management team attention. Typical designations include: "Low," "Medium," "High" or "Critical," with objective criteria that define the characteristics of a project at each level, e.g., impact on business operations, cost implications, product/service launch, regulatory/legal compliance.

Tip: The old adage "When everything is a priority, nothing is a priority" applies here. This is a subjective designation and discipline is required to produce a rough bell-shaped curve. For example, a typical target percentage of Critical/High/Medium/Low priority projects might break down as 5 percent/15 percent/70 percent/10 percent.

Online eRFx and Reverse Auctions

In addition to the project management function, process integration also plays a critical role in the successful implementation of eRFx and reverse auction functionality.

Companies can better leverage e-sourcing tool auto-scoring capabilities for vendor proposals by structuring as many requirements as possible in the form of binary (yes/no) answers, or requiring the vendor to enter a specific value, or choose from a list of multiple-choice responses. This improves evaluation process efficiency as the assignment of weights to these requirements can be built into the tool ahead of time. The tool will then apply the appropriate weights to vendor proposal responses and auto-score them without manual intervention.

Vendor training also plays a significant role in saving time and effort for both eRFx and reverse auctions. While most large vendors now have experience with e-sourcing tools in general, they may not have experience in the specific tools the company has implemented. Also, many of the smaller vendors have limited experience in using these tools at any level; therefore, not educating them places them at a competitive disadvantage and undermines the competitive process. Detailed training sessions should be conducted with vendors before any eRFx or auction event to ensure a smooth and efficient interaction. This is particularly important in auction events as they happen in a discrete, relatively brief period of time, and any errors on the part of the vendor can compromise the quality and effectiveness of the entire auction.

There are many different ways to conduct an online auction, and the sourcing team should work through and customize a number of variables to optimize each sourcing event. Some of these variables include:

  • the degree to which the auction will be solely price-based versus "handicapped" to account for variations in proposal quality on the non-pricing areas, e.g., technical, operational, legal;
  • the opportunity to auction non-pricing terms such as warranty periods and service-level agreement (SLA) performance credits;
  • time limits for the auction event;
  • rules for extending the time limit based on vendor bidding activity; and
  • the information that will be shown to vendors regarding their bids relative to competing bids.

Process integration considerations for a successful e-sourcing tool rollout may seem like a substantial amount of work (and it is), but in reality it is a small investment relative to the payoff received in the form of enhanced efficiency and effectiveness from the sourcing process. With significant dollars and time on the line, it is vital that the enterprise plans ahead and allocates sufficient priority and resources to process integration when making a decision to implement an e-sourcing tool.

About the Author Andy Sealock is a principal at Pace Harmon, an advisory and management consulting firm focused on providing business support through the entire sourcing lifecycle for large-scale technology, outsourcing, network, and other complex transactions. www.paceharmon.com.