Global Enabled Supply Chain Series: Strategic e-Sourcing

With analysts casting new e-commerce terms into the limelight every week, those terms can be easily confused. But make no mistake, there is a big difference between e-sourcing and strategic e-sourcing. Here's how the market is trying to close that gap, and how much further it has to go.

[From iSource Business, October 2001] A purchasing professional from five years ago might find it impossible to believe that Jason Saunders, global purchasing manager for Millennium Inorganic Chemicals, the second largest producer of titanium dioxide in the United States, does not look first at the price tag when selecting a supplier for Millennium's raw materials. In fact, many of today's purchasing professionals wouldn't believe it either.

Titanium dioxide, a white pigment used in paints, plastics and papers, can only be manufactured with the most specific kinds of chemicals. And as Saunders well knows, the price of chemicals is largely dependent on market conditions, making it the most inflexible item by which to evaluate suppliers. But today, Saunders is using one of the many emerging strategic e-sourcing tools on the market: B2eMarkets' B2eSourcing solution. According to Saunders, B2eMarkets' system allows Millennium to assess the value of a supplier quickly and effectively based on numerous critical terms. B2eMarkets forces you to do your homework, he explains. You have to look at the other options of an agreement outside of price, such as delivery terms, payment terms and different shipping practices. Especially when dealing with raw materials and chemicals, it's the additional decision factors that really determine where the cost savings are.

A Darwinian Theory

The ability to evaluate suppliers based on multiple non-price decision factors is indeed one of the hallmarks of strategic e-sourcing. But there are a host of other benefits that these tools facilitate, depending on the definition of strategic e-sourcing to which a technology enabler adheres. That's the catch. In today's market, it appears that almost every enabler defines strategic e-sourcing, and the functionalities it provides to leverage the process, differently.

In order to understand the current confusion surrounding strategic e-sourcing, it's important to remember that online sourcing and procurement have been continuously evolving over the past few years, and strategic e-sourcing simply represents the latest stage of this evolution. As a result, the solution providers, analysts and practitioners of today are struggling to define the blurring lines between e-procurement, e-sourcing and strategic e-sourcing.

According to a report by the Aberdeen Group, the road to strategic e-sourcing is marked by three primary waves of technology. At the onset of the B2B feeding frenzy a few years back, e-procurement was all the rage, allowing companies to automate the tactical processes and workflow associated with purchasing. Purchasing managers were finally able to dig their way out of massive paper trails, and the procurement process made giant, critical strides in efficiency. However, this initial round of e-procurement technology was used almost exclusively for purchases that were already on contract with a set group of suppliers.

Then came reverse auctions and e-marketplaces, which offered users more dynamic trading methods. Both facilitated buyer-seller negotiations in different trading environments, but both also continued to rely on product price as the primary factor in negotiations. It soon became apparent to the enablers and practitioners of these e-procurement tools that, while procurement was moving quickly toward a more ideal, streamlined world, it was the sourcing cycle that was the most time-consuming element of the purchasing process. In fact, it has been estimated that sourcing a new production material, part, assembly or service takes an average of 3.3 to 4.2 months. The typical sourcing cycle, especially for procuring direct goods, can be so lengthy because of the mission-critical nature of the decisions made during this process.

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.

Being Supportive       

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.

While e-sourcing technology is poised to impress in the spend-analysis category, it may be poised to disappoint in the realm of supply strategy. But condemning current technology for not being able to support the development of supply strategy might be analogous to condemning a computer program for not being able to tell you how to raise your kids. This is the inherent flaw of strategic e-sourcing. In order to develop a powerful strategy, a company must have a deep understanding of the market, supplier, technology, cost and other factors impacting the product or service it is attempting to source. Technology may allow you to capture some of this information, but, ultimately, a strategy can only be outlined by a purchasing and management team.

Companies cannot rely on technology to make all the decisions, but the good news is that, once a company's data is aggregated and properly analyzed and a supply strategy has been developed, e-sourcing tools like negotiation and bid analysis can make sourcing decisions much easier. This is where purchasing professionals begin to get really excited about e-sourcing's capabilities.

One of the biggest promises of e-sourcing is its ability to improve workflow efficiencies and substantially reduce cycle times through RFI/RFQ creation and bid analysis. According to AMR Research, cycle-time reductions have averaged in the range of 45 to 65 percent. But for Millennium Chemicals' Saunders, it wasn't the reduced cycle times that got him so excited about B2eMarkets' e-sourcing system, rather it was its ability to leverage private online offerings and consistent reporting for bid analysis and awarding of contracts.

When dealing with direct raw materials, where price is often an inflexible factor, it's rare that a buyer will look to non-incumbent suppliers for goods. You are usually better off staying with your incumbent suppliers, because change management always takes time and money, Saunders explains. But the B2eMarkets solution helped Saunders identify those areas where non-price variables might produce considerable cost reductions if RFQs were opened to non-incumbent suppliers via an online private offering.

Of course, it's not always easy to tell an incumbent supplier that you're going to begin taking bids for its contract. The incumbents tend to be surprised that we would ever want to take the relationship and do something like this to them, Saunders says. But, Saunders admits explaining it to them like this: If you participate in the private offering, you may lose our business. If you don't, you will lose our business.

In the end, Saunders says, incumbents almost always decide to participate because they realize that they have the immediate advantage of knowing the buyer company and its desires. But, when the bids begin rolling in, it is anyone's game. In many cases, private offerings allowed Millennium to discover many shipping, payment and delivery terms they were not aware that their incumbent suppliers offered. In one instance, says Saunders, Millennium's incumbent came in with a 34 percent cost reduction. My first thought was wow!', he says, But my second thought was, wait a second, why have we been buying from them for so long and thinking that we had a strategic sourcing partnership with them?'

Mixed feelings or not, the ROI is definitely there. If you do it right, he says, it can pay for itself in one event.

So far, e-sourcing technology has helped produce significant benefits, such as shortened sourcing cycle times, price reduction negotiations, reductions in time-to-market cycles and improved collaboration among suppliers. Nevertheless, e-sourcing solutions have a long way to go on the road to strategic e-sourcing.

Contract management, spend analysis, RFQ building tools, bid analysis and supplier relationship management tools are all there in the marketplace of today. The problem is, however, that it is highly fragmented. Consolidation within the e-sourcing market is imminent. Larger e-procurement and ERP suppliers, recognizing the increased demand for more strategic e-sourcing technologies, such as increased metrics capabilities and non-price bid analysis functionality, will scramble to acquire and partner with these smaller, more targeted companies.

And while building an arsenal of targeted strategic e-sourcing tools will be important for solution providers, they must struggle to keep that package fluid and well integrated. Rietzke, of SAP, explains, "Strategic sourcing is not just a RFP/RFQ engine with an indirect procurement engine underneath it. It has to be holistic.

Indeed, a holistic, integrated approach will be the key to success in the strategic e-sourcing market during the next year, driving a major shakeout for the niche e-sourcing suppliers of today. But for those that survive, the rewards will be great. According to Aberdeen research, the market for strategic e-sourcing solutions will grow from $382 million today to more than $3.3 billion in revenues by 2004, representing a 98 percent compound annual growth rate. No doubt e-sourcing suppliers will be scrambling to get a slice of that market, but it will require getting past semantics, and getting down to real strategy. 

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