Supply Excellence — Why e-Sourcing is Good for Suppliers: The Sequel

Why e-Sourcing is Good for Suppliers: The Sequel

August 10th, 2006 · by Tim Minahan · No Comments · best practices, sourcing, supplier management

The first part of this series debunked the most common myths about e-sourcing. It also provided tangible proof of how e-sourcing has improved integrity of buyer-supplier negotiations and provided competitive suppliers opportunities for more and new business, enhanced customer relationships, and lower SG&A costs. And, if these points weren’t convincing enough, it drove home the indisputable fact that e-sourcing has become the foundation of strategic sourcing process for “…all large enterprises.”
In short, suppliers who continue to resist e-sourcing risk missing opportunities to win new business or even sustain existing business. Faced with this scenario, suppliers would be wise to define strategies to make the most of e-sourcing. Here are some tips to get your started:

Teach your buyers well: As a supplier, you are the expert on your products, your company, and your market. Educate buyers on the total cost and value drivers of your industry. Use the e-RFx process to lobby buyers to incorporate your strengths (e.g., innovations, fulfillment, quality, etc.) into the negotiation and award criteria. If you’re the incumbent, help buyers quantify the true switching costs they would incur in moving the business to a competing supplier. Ensure you are given credit for this switching cost in the negotiation and final award evaluation. For example, one buyer I recently spoke with awarded business to several incumbents even though he paid a premium above the lowest bidding supplier. The buyer not only incorporated switching costs into his award decision but also gave incumbents “transformational” value or credit for good performance and innovation.
Fire bad customers: I have documented strategic supply base rationalization and segmentation efforts in the past. A recent Arizona State University study recommends that suppliers take a similar approach with customers. According to the study, “The top 20% of your customers contribute 80% of your profits.” The study recommends that suppliers perform segmentation analysis on customers to determine which are most profitable. This segmentation can help determine your e-sourcing response strategy, by aligning your aggressiveness to each customer segment. For example, you may want to be more aggressive to win the business from your most profitable suppliers. Likewise, you would be less aggressive when bidding on business with customers offering lower or no profit margins.
Do your homework: It amazes me the number of suppliers that wind up losing the business (or diminishing their share of it) solely because they are resistant to the e-sourcing process. To give yourself an edge, ensure that you fully understand the buyer’s specifications and award criteria. If you don’t, ask. And pay attention to other supplier questions as well as the buyer’s answers to them. Know the rules of engagement for the online negotiation (e.g., Is there a starting gate? What triggers overtime?) And fully understand the nuances of the e-sourcing technology being used (e.g., how to bid; how to pre-set starting and incremental bids; how to offer alternative bundles and offers). Leading e-sourcing providers offer supplier training as well as online and phone-based help. Most providers run mock events, enabling suppliers to become familiar with the tool and to trial their negotiation strategies.
Have a game plan…and stick to it: e-Bay users are all too familiar with the irrational “auction mentality” that often sets in while competing for that rare Beanie Baby or a signed copy of Abbey Road. Unschooled and undisciplined suppliers can fall victim of a similar affliction. In a previous post, ITT Industries shared a story of how “one vendor bid away all his margin, which is not a sustainable or preferable business for him or us. Inoculation requires suppliers to assess their true costs and strengths, including switching costs and quantifiable differentiators. Use this intelligence to pre-determine your starting bid, bidding increments, and final bid price. Most importantly, once you reach your absolute lowest offer, be prepared to walk away from the business.
Play fair: Fair play is a two way street. Unfortunately, suppliers are the biggest offenders or trying to undermine the integrity of the e-sourcing process. (See: “Dirty Supplier Tricks And How to Combat Them.”) Here are some guidelines for good supplier conduct: Don’t threaten that you won’t participate in an online sourcing or negotiation event, unless you mean it. Don’t engage in sour grapes or “sniping” and attempt to drive down the price in an event that you know you can’t win. Finally, don’t try to undermine or circumvent the e-sourcing process. You’ll only wind up hurting yourself. Buyers are savvy to these tricks and will “fire” a supplier on the spot for such devious practices.
Win the business every day: As noted above, e-sourcing encourages buyers to give transformational values or credit to good performing incumbent suppliers. So once you win the business ensure that you win this credit by complying with and exceeding expectations in the contracted agreement. Encourage and schedule performance reviews. And use these meetings to introduce new opportunities for collaboration, joint waste and cost reduction, and continuous improvement initiatives.
Suppliers need to come to grips with the fact that the e-Sourcing boat is leaving the dock. How fast your get on board and hone your sailing skills will determine whether you’re in First Class or in steerage. Or, worse yet, whether you’re left ashore.