Putting e-Power Into Strategic Sourcing

Strategic sourcing is big business these days, but how many companies really understand the complex, critical nature of this process? Here's a primer that will help your organization start delivering value.

In a March 2001 Aberdeen Group report, Strategic e-Sourcing: A Framework for Negotiating Competitive Advantage, the authors reported that, strategic sourcing offers the single largest opportunity to reduce costs, streamline processes and enhance overall responsiveness to changing market dynamics.

That's the potential for strategic sourcing, but most companies aren't there yet.  Aberdeen's report explains why: Despite its critical nature, sourcing remains a complex, labor-intensive and lengthy process for most companies & most organizations continue to rely on a diverse mix of manual proceeds and outdated technologies that limit their ability to establish competitive negotiation environments, make optimal purchase decisions, or apply strategic sourcing to a significant portion of expenditures.


Part of the problem is that sourcing gets a lot of lip service. Sourcing is one of those increasingly popular business terms whose meaning is obscured by continual overuse, most of which is misuse. 


Observers often apply the word to the mere act of spot purchasing, however that isn't sourcing. Sourcing is not gophering an order with a favored supplier. Nor is sourcing the process of shopping among several suppliers - through an online reverse auction or through personal negotiation - to see who has goods available at the lowest price. 


Sourcing can be defined as a disciplined process designed to increase the effectiveness of purchasing professionals in delivering best value. Let's break that down:


Sourcing is a disciplined process&  


The process begins with a spend analysis to review dollars spent.  Ideally, for every key spending pool, the enterprise should have a clearly defined sourcing process in place.  The process will include:


·        sourcing strategy (the result of industry analysis, market analysis, supplier analysis, and benchmarking), and


·        sourcing tactics (where the enterprise selects the best ways to actually procure items in the spend pool).


The discipline comes not just from defining the process, but also from diligently applying it to key spending pools and continually refining it.


&to increase the effectiveness of the purchasing professionals &


The objective of sourcing is to save time and money without sacrificing quality and performance. Purchasing professionals can increase their effectiveness substantially when they set up sourcing teams with clearly defined roles and use the right tools to promote and enhance internal collaboration, enable external collaboration, and maximize supplier competition.


&in delivering best value.


If purchasing professionals fail to evaluate quality and performance factors, they are essentially making price-only decisions. Proper evaluation of non-price factors remains an underdeveloped and under-appreciated skill. To deliver real value to users and cost savings to the enterprise, all sourcing teams need to institutionalize non-price factors into the sourcing process.


How can technology support sourcing?


Sourcing can theoretically be accomplished - albeit not efficiently - with no automation at all. Of course, it would be unusual today to see a purchasing professional still relying on a manual process that doesn't even include desktop computing for e-mail, word processing or spreadsheets. 


Over the last few years, many companies have tried some form of automated sourcing solution. At first, these were typically components of larger initiatives to implement enterprise resource planning systems (ERP). All too often, though, lofty expectations for ERP have been blind-sided by harsh realities: huge costs, lengthy implementations, insufficient ERP expertise and poor results. And, as many companies realized at the end of their ERP projects, a labyrinth of supposedly integrated systems doesn't guarantee that strategic sourcing goals will be achieved. 


Thankfully, the role of technology in strategic sourcing has evolved away from behemoth in-house systems requiring extensive integration and support. The next wave of automation after those cumbersome systems spawned a variety of Internet marketplaces and public exchanges that sought to bring buyers and sellers together for price negotiation. Most of these approaches, focusing only on simplistic mechanisms for price negotiation, fizzled due to lack of functionality addressing the rest of the sourcing process.


Today, companies are increasingly turning to e-sourcing - using the Internet as the most effective delivery platform to support true sourcing, not just the transactional piece of the process. e-Sourcing enables companies to streamline the overall sourcing process by applying technology strategically, quickly and inexpensively. 


A common misconception is the notion that e-sourcing is simply a reverse auction or public exchange process for competitive bidding. In reality, a reverse auction is just one tool in the sourcing process. It's a tool for collecting cost data. Other e-sourcing tools also serve to deliver best value in any supplier relationship, even when competitive bidding is not used for collecting costs. For example, you may collaborate with a sole supplier using request-for-information (RFI) and request-for-quote (RFQ) tools without ever going through a competitive bidding process.


e-Sourcing Trends Underway


1. Self-service


The market is moving away from sourcing services that take control of all or part of the process.  Why should the enterprise train an army of consultants on its sourcing needs, just so the solution provider can then select suppliers and run a process that the company should be managing itself?


Instead of paying significant fees to outside consultants to provide skills the organization already has, the organization should invest in technology that augments internal sourcing skills and improves its own staff's performance.  That's the approach taken by self-service solutions; they leave the buyer in control of the sourcing process.  


With the self-service approach, the company's purchasing professionals use desktop computers to conduct and extend their own best practices online. Only a modest amount of training from the service provider is required; then, after a pilot period, one of the company's senior sourcing professionals can take charge of enterprise-wide adoption of e-sourcing.


2. Selective use of e-sourcing tools


Think of e-sourcing as a box of carpentry tools. A carpenter doesn't use a jigsaw on every job, but it's a necessary tool to have at hand. Similarly, a sourcing professional needs appropriate tools at hand to deliver best value.


Some of the more popular tools in use today are:


·        A RFI tool allows buyers and suppliers to exchange information and coordinate product specifications in real-time. It facilitates the supplier qualification process, enhances product design and development, and streamlines logistics.


·        A RFQ template or console greatly simplifies the process of creating a RFQ with item specifications or converting a RFI into a RFQ for posting. A completed RFQ communicates product specifications, the terms and conditions of the intended purchase, and invitations to suppliers to submit their best offers. Suppliers may submit questions seeking clarification of the terms, item specification and delivery instructions, and buyers can respond electronically.


·        An online discussion group function works in conjunction with RFI and RFQ tools to save time through online communications with potential suppliers on key specifications and requirements. The function enables buyers to communicate more effectively in a manner similar to instant messaging. It can be used to facilitate one-to-one or one-to-many discussions and document exchange with multiple suppliers, between a single buyer and a single supplier, or among different individuals within the buyer organization.


·        An online document library can also be integrated with RFI and RFQ tools.  Virtually any type of document - such as engineering drawings or tables - may be distributed with the RFQ and maintained in a document library for future use.


·        Private reverse auctions can be extremely effective, but only when they are logical extensions of the sourcing strategy. Where competitive bidding is warranted, private reverse auctions are especially effective if the e-sourcing tool allows flexible structuring of the event to suit the buyer's tactics. Some of the more powerful features that help buyers refine their tactics are hierarchical bidding, nested RFQs, and non-price factor rating.


3. Phased adoption of e-sourcing capabilities


Early adopters of ERP-centric sourcing approaches learned a costly lesson: Everything touched by the sourcing process does not have to be automated and integrated from the outset. 


Today, the companies that are succeeding with e-sourcing are using a more deliberate, walk before you run approach. They found that integration of e-sourcing with their strategies and tactics is more important than full integration with other systems. 


With expeditious deployment of key e-sourcing capabilities - such as RFI/RFQ development, weighing of non-price factors, integrated collaboration and competitive bidding structures - companies can quickly achieve the bulk of e-sourcing's promise. As they learn from experience and reach return on investment (ROI) targets, they're ready to gradually introduce such sophisticated new capabilities as optimization, performance metrics, demand aggregation, supplier performance management, and contract management.


Evaluating e-Sourcing Platforms


To avoid huge cost overruns, companies interested in deploying e-sourcing should focus on solutions that achieve ROI rapidly. This focus impacts how they set up their evaluation criteria.


What are the prime factors that companies should consider as they evaluate various approaches to automating the sourcing process? Some key evaluation issues are:


1.      Ownership. The evaluation project logically falls within the domain of the chief financial officer's (CFO's) office and sourcing executives. IT executives should be consulted to ensure validity of the technology. Security, scalability, and consistency with existing systems are also important. Given the right e-sourcing platform, ongoing involvement from the IT department can be minimized.


2.      The range of capabilities. Look for e-sourcing solutions that focus on the big rocks first.  Some of the important capabilities are collaborative RFIs and RFQs, qualitative and non-qualitative factor weighting, and a sophisticated reverse auction engine. Later, add on new capabilities that can refine the sourcing process. A note of caution: Examine closely whether the proposed e-sourcing solution forces the company to deploy functions of questionable value. Some companies have spent millions to achieve integration that could be accomplished simply with a spreadsheet.


3.      Enterprise considerations. Companies want to use their e-sourcing platform freely and widely in multiple locations and at multiple levels within the organization. This sounds obvious, but consider some of the ramifications of extending e-sourcing throughout the enterprise:


·        Learning e-sourcing must be sufficiently intuitive and easy that the organization can take on this responsibility itself after a short pilot period with the solution provider's support. 


·        Buyers should be able to tailor access control methodology in accordance with organizational policies or special circumstances. Access rights should be assignable to user groups or to individuals based on product categories, specific RFQs or other user-defined criteria.


·        Buyers don't want to be penalized financially for successful expansion of e-sourcing. Incremental usage fees can be barriers or disincentives within customer organizations to widespread implementation. A subscription fee arrangement, on the other hand, can allow unlimited usage for a defined number of users.


4.      Scalability. From a functionality perspective, scalability means rapidly achieving the major benefits of e-sourcing, with gradual extension of capabilities into some of the more sophisticated areas mentioned above. From an organizational perspective, scalability means the ease with which e-sourcing can be introduced on a limited basis and quickly extended to enterprise-wide use without requiring involvement from outside consultants or from a software supplier.


5.      Control. Your e-sourcing solution should leave your sourcing teams in full control of all the tools they need to do their jobs. Avoid external service providers that expect you to turn over control of supplier selection, competitive bidding events or any other sourcing activity. If your e-sourcing supplier operates from the premise that it understands your business better than you do - find another supplier. It's your domain, and it's your domain expertise.


Remember: the end result of sourcing is to deliver the best value. By applying that criterion to your selection of an e-sourcing solution, you increase the likelihood that the chosen solution will provide a fast track to high, sustainable ROI.  

For more information on strategic e-sourcing, see our December 2001 cover story, Putting the Strategy Back in Your Sourcing.