Cover Story: Putting the Strategy Back in Your Sourcing

Still struggling to achieve bottom-line savings with enabled technology? Maybe it's time to evaluate the strategic e-sourcing market. Forget auctions and RFQs -- this game has a whole new set of rules, and a reality check on this technology can position your company to win successfully.

[From iSource Business, December 2001] Automated request for quotes (RFQs) and reverse auctions have practically become second nature to sourcing professionals who, as a rule, like to negotiate for the best price among the widest selection of qualified suppliers. Unless, that is, you happen to work in the oil and gas industry, where capacity can often fluctuate between the relatively benign state of just plain tight to the more alarming state of being a tighter squeeze than passing a camel through the eye of the proverbial needle, as it was earlier this year. It's there that these tools take on a slightly different cast.

For us it's more of an availability check in the current market, explains Tim Pownell, general manager of Unocal Corp.'s e-Procurement Project, hunting for capital equipment.  We need boats and lifting vessels and pieces of equipment of which there are a finite number. Instead of making calls, Pownell sends out electronic RFQs to get a better feel for the market before making a buying decision.


In a way, it really can't get any worse for sourcing professionals when the main question for a supplier is not about quality, environmental standards or price, but rather, Do you even have any of XYZ equipment for me today?


But on the other hand, Pownell has never had it so good.


Simply put, a new generation of strategic e-sourcing tools is being offered by such suppliers as Perfect Commerce, eBreviate, Frictionless Commerce, Emptoris, Moai, Mindflow, Tradeffect, B2eMarkets ... the list just goes on. These tools allow a company to fundamentally change the way a vice president of sourcing thinks about buying a commodity, says Dave Gold, CEO of ProSavvy.


For starters, the current crop of e-sourcing tools is more developed than its predecessors were. Pownell, for example, wanted a lot of flexibility in a strategic e-sourcing product for his company -- flexibility that went beyond the template-based products of the early days. What we wanted was a template builder, he says. His company eventually found it in Perfect Commerce, which allows users to create request-for-quote (RFQ) templates from scratch or it gives them the option to use an existing RFQ template as a model. 


A great deal of attention has been paid to RFQs, request for proposals (RFPs) and electronic auctions over the months and years as strategic sourcing entered the automated age. They kicked it off, says Alex Milward, of Accenture's Supply Chain, Procurement and Exchanges division in the United Kingdom. They allowed companies to deliver massive reductions on contract price, whilst ensuring service levels are maintained.


But for all the value they have delivered, the focus on RFQs and auctions ultimately did a disservice to the rest of the strategic sourcing spectrum, which encompasses more than just negotiations. Until recently, little attention was paid -- by clients and, in many cases, by suppliers  to developing tools that supported spend analysis, supplier intelligence services, optimization and contract management. My frustration is that, time and time again, I hear someone say Rwe are e-sourcing,' says Sarah Pfaff, co-founder of Variante. Then I find out they are just running an auction. A lot has to happen before and after that auction for a process to qualify as e-sourcing.


AN IT REVOLUTION


Now this state of affairs is changing. In fact, the newest trend among enablers is to offer end-to-end sourcing solutions, which is an entire platform of strategic sourcing products. The market for strategic e-sourcing tools is growing at a 98 percent compound annual growth rate, according to a new report by the Aberdeen Group. This is a phenomenal spurt, when you consider that the IT industry in general is increasing by maybe 12 percent a year and purchases of other software applications are falling. There is something about strategic e-sourcing that has rendered it immune, or at least resistant, to corporate budget cuts. And that something is bottom-line savings. As most sourcing professionals know, purchased goods and services account for a little more than half of every dollar of revenue. Also, the end of the design and sourcing cycles sets as much as 80 percent of the cost of these goods and services. In short, sourcing offers the single largest opportunity for an organization to reduce costs, improve productivity and enhance overall performance, Aberdeen says.


Among the benefits these Web-based sourcing technologies offer, the consulting firm goes on to report, are reduced process costs, sourcing cycles that are shortened by 25 to 30 percent, time-to-market cycles that are reduced by 10 to 15 percent, and unit prices that are reduced by 5 to 20 percent. On a global basis, strategic e-sourcing can save businesses more than $1.7 trillion.


That said, now it's time to deliver the bad news: many of these new tools are so complex that integration of system and business processes can be as bad as the early days of the enterprise resource planning (ERP) systems. Strategic sourcing is technically very hard, says Kevin Surace, president and CEO of Perfect Commerce. There are maybe 200,000 lines of code in one application alone. I can't think of any other application that has as many nooks and crannies as strategic sourcing does, including an ERP.


More worrisome is the hype that is endemic to the IT industry. Indeed, if this were a Greek tragedy the chorus would already be lamenting that they have heard all about end-to-end solutions before.


Quite frankly, there isn't an integrated, end-to-end solution to manage this entire process, says Michael Bateman, principal with RCG IT, a 20,000-person consulting firm. There are a couple of packages that started as a core product and then expanded into other areas. Then there are the purchasing systems that moved downstream to add functionality. But a true, pure-play solution? Bateman says no.


He is not the only one suggesting this either.


Many suppliers market end-to-end, but almost none of them are end-to-end, says Chris Sawchuck, director of supply chain solutions for Answerthink Inc. Simply put, he says, There is no supplier out there that doesn't have holes in its product. However, many of those holes are closing.


These gaps are not the main problem, Sawchuck says, at least not yet. In fact, many companies prefer to focus on automating and enhancing specific activities of their sourcing process and add on point solutions piece by piece. Based on a company's current focus and level of sophistication, an end-to-end solution may simply not make sense, at least not yet. You really have to understand your own business and its needs. Most important, he says, is conducting a thorough due diligence on the supplier's long-term viability -- whether the supplier is simply an enabler of reverse auctions or a provider of an entire sourcing suite of products. More than one company and consultant has been burned by positioning themselves with certain suppliers that faded away, especially during the challenging current market conditions.


Another barrier to the effective use of e-sourcing tools is lack of human resource skills, says Michael Fath, managing director of KPMG consulting's e-purchasing feature solution. The skill sets that can analyze a supply market and manage a $100 million spend are dramatically different from those that maintain control and compliance procedures and paperwork processing. Many people can make the transition with training, he says. In other cases, the company may need to hire people with different skills.


But these issues are just incidentals in the face of the biggest problem of all: many companies, especially those outside of the Fortune 500 clique, are grappling with the fundamentals of strategic sourcing, never mind implementing and using the automated version.


STRATEGIC SOURCING, STEP-BY-STEP


By now any sourcing professional worth his or her salary knows the drill: 1.) Mobilize the team, 2.) collect critical data, 3.) analyze the data, 4.) develop a new sourcing strategy, 5.) initiate the strategy 6.) negotiate and implement final agreements, and 7.) manage supplier relationships.


These steps, formalized by A.T. Kearney many years ago, are the industry bible to which sourcing professionals adhere. Many experts, however, like to tinker around and create their own sometimes simplified definitions of a best-practice sourcing strategy. There are three major buckets that make up the sourcing cycle, says Eric Levin, vice president of marketing for Frictionless Commerce. Expenditure analysis, supplier selection and supplier management. That, in a nutshell, is the cycle. Others tend to be just as elaborate as A.T. Kearney. For example, Les Shindelman, vice president for SBI, a supply chain consultancy headquartered in Salt Lake City, offers his own recipe for success. This recipe includes developing a purchase analysis, a total cost of acquisition model, and targeted strategies.


It's not surprising that the actual implementation of these steps -- be they three or eight -- have been complicated by reality. Globalization is a given for many companies, which means that even the best designed sourcing operation will be distorted by unrelated local laws, tax regulations, and transportation and logistics operations. Ever-evolving product development and new business models also add to the strain. Then there is the challenge of managing the sourcing for multiple product generations. Product life cycles have dropped from roughly 24 to 36 months to 6 to 18 months, says Sean Willems, chief scientist at Optiant Inc., a provider of supply chain software. Now the supply chain manager has to manage two different classes of parts -- differentiating parts that will be replaced every generation and supporting parts that will service multiple generations.


The result is that many companies have cobbled together strategic sourcing operations that consist of a mix of outdated methodologies, piecemeal technology, an awful lot of spread sheets, and, in the saddest cases, faxes, phone calls and snail mail. Josh Kanner, director of product marketing for Emptoris, tells of some companies that would calculate all the what-if scenarios for sourcing decisions using a multitude of spread sheets and then paste them up on boards around a big room. People would walk around and read the analysis and actually make a decision that way.


While such examples may be extreme, it does appear there has been a certain level of discontent among sourcing professionals as they practice their craft.


While most companies engage in some form of strategic sourcing or supplier review, not all have been as successful or comprehensive as they would like, says Accenture's Milward. He cites one report which reveals that, even after investing an average of three to four months in a sourcing cycle, an astounding 75 percent of companies rated their ability to affect or reduce the cost or quality of a product or service as only fair or poor.


I believe that nearly 90 percent of Fortune 1000 companies have implemented some sort of strategic sourcing policy, says Levin of Frictionless Commerce. The issue really is, how imbedded are those policies in the organization? Are they used everyday, or are they episodic events?


PART II, SCENE I: THE TOOLS OF THE GAME


Enter the RFQs and reverse auctions which, for all intents and purposes, have ushered in a new era of strategic sourcing. Let Act II, Scene I of the strategic e-sourcing story begin.


The actors, err, suppliers seem to be much more sophisticated in their tools and overall knowledge, but there has yet to be any such thing as a true, end-to-end provider in this space, although a handful of companies come awfully close. eBreviate, Perfect Commerce, Frictionless Commerce, and B2eMarkets are a few examples. These end-to-end, or pure-play, suppliers automate the entire sourcing cycle, from spend analysis to contract management.


Usually, reports Aberdeen, a supplier billing itself as a pure-play will offer survey templates for internal spending, and it will also offer requirements analysis and wizard-driven templates for industry or product-specific RFPs or RFQs. In addition, users are able to upload industry lists or computer aided designs directly into the RFQs to gain market intelligence internally or through a partnership. However, some sort of decision support should be included, as well as contract management and negotiation tools, which are often the forgotten steps in strategic sourcing.


Strategic e-sourcing is analyzing and managing what you buy, who you buy it from and what commercial terms you have in place, says Niul Burton, co-founder of Variante. It's understanding your spend and then determining how to reduce the total cost that is tied up in that expenditure. It's understanding the requirements that drive the purchase and understanding the specs and how suppliers can best meet them.


The technology and solutions are much more sophisticated than just cutting a purchase order, he concludes.


They may be more sophisticated, but adoption of these complete solutions is still moderately slow. We are live with customers at each one of the point solutions, says Pfaff. Some customers may focus on auctions, some on spend-management technology, she says. But they are all migrating into other, linking technologies. They are building the house one block at a time. Nor do many in the industry expect to see a wholesale rush to adopt any time soon. It's going to be some time before e-sourcing takes off at the rate that first generation    e-procurement did two years ago, says Perfect Commerce's Surace. The Ariba days are over. It used to take five to seven years to build up a major software category, and I think we have returned to that timeline.


This is not necessarily a bad thing. At the very least it will give companies time to become acquainted with the ways and means of these technologies, especially when deployed on an end-to-end basis. To help readers along, the following are some basic tools in a not-so-basic IT category:


Spend Analysis


When Unocal's Pownell began looking for sourcing solutions a few years ago, the main focus of the subject of e-procurement was on catalog buying. We recognized, for our business, that it was a valuable tool, but we realized that there was much more to strategic sourcing than just that. What Pownell and his colleagues at Unocal wanted was to build a tool kit of sorts that could address any aspect of a strategic sourcing initiative and could be used to fit most business situations because those always change, he says. So we started looking at gaps in our capabilities and matching them with the best tools we could find.


As strategic e-sourcing begins to really take off, most analysts expect that this sort of strategy -- evaluate your problems first and then find the tool, rather than vice versa -- will become a standard operating procedure. It seems like common sense, but the reality is that, until recently, there were only a few e-tools available to companies. These companies would then make those tools fit their business problems around their capabilities. Meanwhile, some very important needs were going largely unmet.


Like spend analysis, for example.


This was one gap Pownell knew he wanted to address. We wanted a common global database that we could mine, regardless of whatever tools we would deploy.


Spend analysis is an interesting, paradoxical space in the strategic sourcing spectrum. As probably the most important first step there are few e-tools that truly serve it well, says Rakesh Batra, supply chain practice area leader for Syncata. Mining for company-wide spend information has its own challenges, (see the box entitled 5-Step Spend Analysis Checklist on page 44), and I don't see a lot of sufficient support tools that will allow me to monitor what is going on in the marketplace, he says.


For example, a company that buys steel may be the major purchaser in the market, giving it a certain level of leverage. On the other hand, a consumer goods company that sources cardboard containers might find itself in the company of thousands of other purchasers with an entirely different set of market dynamics. At the highest level, that is what the game is all about, Batra says. There are no tools that can support you in this sort of analysis, except your own judgment.


Spend analysis is 80 percent consulting and 20 percent software, agrees Arnold Waldstein, vice president of marketing and strategic alliances for Moai Technologies.  It's not a tool that is exportable. Moai has allied itself with Accenture and Silver Oak Partners, in order to provide customers with consultant-heavy services. Silver Oak can do a spend analysis in a variety of packages that range from $20,000 to millions of dollars, Waldstein says.


Those companies that have done the early analytics work are way ahead, says Pierre Mitchell, service director of Enterprise Management Strategies for AMR Research. Spending analysis is still a tough one. For a lot of companies, the hardest part is cleaning up the data, and people aren't funding data cleansing projects right now, he says. This is not a problem that will be solved quickly. There is only very fragmented support in the market, and it will continue to be fragmented for some time.


Supplier Intelligence


Scott Dever, currently vice president of global procurement at Hasbro Inc., has stared down the common problem of maverick buying over his many years in purchasing. However, he has been known to blink, on occasion, when it comes to the procurement of consulting services. Deals would be completed without any real involvement from purchasing or finance. People would enter into agreements without feedback from us. By the time the contract was signed it would be too late for us to negotiate any costs or integrate accountability or performance metrics into the contract. Traditional purchasing strategies don't work when it comes to hiring consultants, he says. As a result, managers too often rely on big names without investigating other possibilities.


While there are any number of automated solutions that address this problem, the consulting industry presents a unique set of challenges. Traditional methodologies do not apply, such as placing all the business with a few suppliers to get the best deal. Ideally you want access to the world in order to get the best person for the job, Dever says. Also, it can be hard to get consultants to answer definitively about rates and hours for a particular project during a selection process. These problems can translate into real costs. Large corporations typically spend between 2 and 5 percent of their revenue on consultants, says ProSavvy's Gold. Most significantly, the consulting industry is very decentralized -- even identifying the right person or office within mammoth corporations like Accenture and KPMG can be problematic. Therefore, it's little wonder that Hasbro executives would turn to the tried-and-true consultants with whom they had always worked.


At the very least, Dever said that the company wanted to assemble a bigger selection or community of consultants from which he could post bids. He eventually turned to ProSavvy, a provider of Internet-based solutions for selecting and managing consulting services. ProSavvy gave us visibility to hundreds of suppliers that we wouldn't have found on our own, Dever says. Hasbro has been using the service for about a year -- too early in the consultant industry to determine a true return on investment -- but we are working on that now, he says. Early feedback, however, has been very positive, he says. We have met our goal of identifying and qualifying firms and producing a short list of uniquely qualified firms.


Supplier identification eats up the most time -- 52 percent -- in an average sourcing cycle, according to Aberdeen. Fortunately a number of business intelligence solutions are now available to help buyers better case the field. At the core of these supplier intelligence services is a database of information that offers insight into a diverse range of evaluative information on suppliers, including profiles, product listings, financial data and performance ratings, Aberdeen says. The more advanced products have utilities that allow users to gather and monitor data that is most important to them on an ongoing basis and then use this continual stream to rank or screen out suppliers in future transactions.


RFQ/RFPs and Reverse Auctions


The timber and building markets are about as old-line industry as you can get. Their use of these       e-sourcing tools therefore signify a certain validity for e-sourcing -- at least with the RFQ, RFP and reverse auction technologies -- that no other type of industry officialdom can bestow.


The e-leader in this industry is ForestExpress, an industry consortium whose partners include Boise Cascade Corp., Georgia-Pacific Corp., and Weyerhaeuser Co. and whose sourcing and auction capabilities are powered in part by Moai Technologies. Late last year, the timber market was the exchange's first e-market to go live with a transaction between a mill and a supplier, christening the exchange. Subsequent marketplaces have been established in the paper market, building materials market and recycling market. Within each vertical market there are unique ways folks buy and sell forest products, says Bob Renner, chief technology officer of ForestExpress. Moai is the core dynamic negotiation engine we use to automate this sometimes quirky process.


Reverse auctions or dynamic trading engines, as they are sometimes called, have evolved more than most of these tools over time. Over the last six to 12 months there has been a major push by auction providers to develop even more complex ways of negotiating, Milward says. Multi-line and threaded bidding, which allow users to bid out multiple products and list criteria other than price; as well as weighted bidding systems that modify the rating of a supplier on the basis of a score that the supplier achieved on non-price parameters, are common features among the more advanced providers, he says.


Optimization


Paradise Tomato Kitchens is a medium-sized manufacturer of tomato sauces, but it still has to compete with the Del Montes of the food industry. Every tool, therefore, is fair game, as far as competition goes, says Ron Peters, president and owner of the Louisville, Ky.-based company. His arsenal includes customer relationship management (CRM) applications, research and development conducted by world-class chefs, and strategic sourcing. The decision support or optimization applications are specifically provided by Mindflow Technologies.


I make better decisions by running different scenarios with the ability to change them very quickly -- 10 times in a few hours on one day, versus once over two to three weeks [prior to installing ProcureMind]. Since he began using ProcureMind to orchestrate Paradise Tomato Kitchen's sourcing decisions, Peters has seen business increase by 10 percent over two months. We maximize the volume of our customer base, seeing which accounts we should really go after and which are just okay.


Optimization, decision support or online analytical processing. Whatever name you choose to call it, this capability is the hallmark of an advanced e-sourcing solution, according to Aberdeen. It is also one of the most cost effective, as sorting and reviewing supplier proposals is the second-most time consuming task for companies, taking up 20 percent of the sourcing cycle. Basically, these engines allow users to analyze what-if scenarios around different price and non-price variables, business objectives and purchasing policies so they can arrive at the best mix of products. Some industry statistics show they can realize an additional 10 percent in unit cost savings for companies.


Not that any of this is new. Methodologies to weight and score suppliers have always been part of strategic sourcing -- whether done in Excel spreadsheets or analytical engines governed by complex business rules, says Richard Waugh, executive vice president and co-founder of B2eMarkets. Applying these techniques to the new discipline of e-sourcing is therefore a continuation of existing practices. The trick, he says, is the process for developing those weights. To be meaningful, optimization decisions must be an outcome of a consensus building process where not only procurement, but engineering, manufacturing, finance and others have participated in and buy off on the results.


Sometimes even the most basic of sourcing tasks, like aggregating demand with one or two suppliers, can get a powerful boost from an optimization application. Staples, for example, is serving clients through five independent channels, says Greg Papp, manager of business services. These include the retail stores, the Web site, catalog and separate businesses for small and large companies. Even after isolating one service  custom printing of office stationary and business cards -- Papp says it can still be difficult to pare down to a few suppliers for all five channels he says. Each customer has distinct printing needs and service requirements that the suppliers have to meet. At the same time, the suppliers all have different functionalities because the channels are so different.


Fortunately, Emptoris' ePass optimization product, he says, is a big help. It allows us to automate the bid collection and take the bids in formats that emphasize the different aspects of the suppliers' offerings, so we can compare them in an apple-to-apples format.


The tools that support strategic e-sourcing are growing more powerful. As traditional enterprises engage this technology, the opportunities for effective strategic sourcing will only increase. But, the technology does have a ways to go. And like Unocal's Pownell, other sourcing professionals expectantly await the improvements of these e-sourcing tools.


SIDEBAR: 5 Step Spend Analysis Checklist


If you thought the eight steps of strategic sourcing were too difficult  or bureaucratic -- to follow (see the sidebar on page 42), then perhaps it might be best to skip the following. But spend analysis, the first step in a strategic sourcing program, is important enough that it warrants its own set of procedures, says Rakesh Batra, supply chain practice area leader for Syncata. Spend analysis is one of the most critical activities in strategic sourcing because it's the key input into sourcing strategy development for the future, he says. With that in mind, Batra offers the following advice for companies waiting to make their move:


1 Stay in constant motion: Spend analysis should be an on-going exercise at every enterprise to monitor the profile and changes in spending patterns.


2 Determine past and future demand:  To be meaningful, spend analysis requires comprehensive data on suppliers, commodities and purchasing activity that is not only based on history, but also the projected demand for the near future -- about one to three years.


3 Consolidate and analyze:  The availability of data to support the analysis of past and future spend is generally spread across various systems, data structures, business units and geographies. The task of consolidating and analyzing it is a huge effort, he says. There are also various stakeholders involved, and parting with spend information is sometimes considered as interference in their operations, Batra says. In these cases, unfortunately, a company is not likely to get a thorough understanding of the complete spend profile and therefore make sub-optimal decisions.  


4 Standardize processes: Organizations need to standardize processes across all business units and set up appropriate mechanisms, such as a data warehouse, to capture this data in an organized and automated fashion, Batra says. They also need to set up the strategic sourcing process so it represents and involves the various groups and business units, he says.


5 Monitor: Last of all, companies need to be able to monitor the progressive spend against the established strategic contracts to ensure that they are actually receiving the value they anticipated, Batra says. This, of course, is contract management, a whole other step in the strategic sourcing process. So those companies that diligently follow this series of procedures can take heart and check at least one step off of the strategic sourcing master list.


SIDEBAR: Declaring Checkmate


SBI's Shindleman gives eight steps to position your company to win at the game of strategic e-sourcing.


1  Analyze  existing purchases for all key commodities, including the dollar amount spent and the number of suppliers (see The Matrix on page 68 of the August 2001 issue of iSource Business, or go to www.isourceonline.com and put in the search phrase The Matrix to bring up the article).


2  Develop a total cost of acquisition model that includes invoice price, execution cost, inventory cost, and quality cost.  


3  Group commodities into different categories based upon such characteristics as unit cost, annual spend, volume, strategic importance and industry uniqueness.


4  Assess the savings potential for each major commodity group.


5  Pick your target commodity opportunities, basing the decisions upon cost improvement potential and ease of change.


6  Develop a new strategy for the targeted commodities using online marketplaces, industry-led consortium, one-to-one commerce supplier partnership, or some variation of the three.


7  Develop a vision and strategy that will support the day-to-day transaction processing and enable compliance. Focus on process, information technology, measurements and change management.


8  Prepare an implementation plan for moving forward.


 

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