Supply Excellence — Top Supply Strategy #3: Sourcing Grows Up

Top Supply Strategy #3: Sourcing Grows Up

October 25th, 2006 · by Tim Minahan · No Comments · Top 5 Supply Strategies, automotive sector, sourcing, supply management

I once wrote that “strategic sourcing provides the greatest and most direct lever for controlling costs and managing performance across the supply chain.” While not profound, this statement was somewhat controversial when I made it. At the time, the world’s largest enterprises were rushing to automate their requisitioning proceses in the hopes of driving down the cost of POs and to ensure that computer equipment and paper clips were bought on contract. Many didn’t want to hear that they could be spending millions to effeciently purchase from non-competitive contracts.

With globalization and outsourcing on the rise and with supply markets tightening, my conjecture is controversial no more. Strategic sourcing has become a must-have competency for enterprises of all sizes and industries. (Note number of public companies that have been blaming profit shortfalls on inflation and supply constraints.)

Further evidence comes from the nearly 300 supply management and business executives attending Empower 2006 that ranked adopting technologies to enhance strategic sourcing performance among their top three initiative for the next two years. Even earlier this week one of the country’s largest printing services suppliers told me point blank, “Our future competitiveness depends upon their ability to source a better quality, more reliable, and lower cost supply chain than our competition.”

What has changed is how companies approach strategic sourcing and how they deploy supporting technologies. By some estimates, more than 80% of Fortune 1000 enterprises have tested Web-based negotiation technologies, such as reverse auction and electronic RFx tools. These enterprises have reported measurable results in the form of double-digit cost savings, halving sourcing cycles, and improving overall productivity and process standardization.

However, many early e-sourcing approaches and solutions were too narrow in features and too price focused to drive sustained results, particularly in the face of tightening supply markets. As a result, many “early adopters” are looking to build upon their success by investing in broader e-sourcing suites.

For example, at Empower 2006, David Kassel, e-Sourcing Program Manager at Sun Microsystems, told the audience that his group has moved beyond simple seal-bids or dynamic bidding environments (i.e., reverse auctions) to include the following:

Multi-stage sourcing projects, such as electronic request for information (e-RFI) followed by reverse auctions or a “buy it now” option at reserve price.
Multiple lotting strategies per item or event, such as “winner take all” or various allocations of volume per event.
Price factors, such as “handicapping” bids on team-assigned supplier performance ratings. For example, during an online negotiation, Sun gives suppliers that have performed well or above average transformational value or credits that reward suppliers for good performance. Upshot: because of their good performance, suppliers receiving these credits (which can be associated with switching costs, innovation, performance, etc.) do not need to be the lowest-priced bid to win the new business.
Total cost of ownership analytics, such as the use of weighted surveys to scorecard and quantify non-price factors, such as performance, lead times, capabilities, innovation, etc. Sun also assesses suppliers’ risk mitigation plans to assure supply continuity and performance.

Sun is not alone in its transition to more advanced sourcing approaches or its need for solutions to enable these. In speaking with supply management executives and reviewing RFPs, I have noted an increased demand for the following advanced features in e-sourcing platforms:

Sourcing project and knowledge management — to ensure effective collaboration, control, process and category knowledge transfer, and consistency across sourcing projects.
Total cost/best-value-based negotiations — enabling the negotiation and evaluation of multiple price and non-price factors (e.g., delivery, leadtimes, performance, landed costs, innovation, etc.) to determine the true total cost of a supplier’s solution.
Flexible bidding — to empower suppliers to offer alternative bundles and bids to differentiate their offerings and to ensure best-value solutions.
Optimization — to enable the automated and simultaneous evaluation of multiple line items, complex pricing schedules and non-price factors — all within the constraints or objectives of the business (e.g., diversity set-asides, risk strategies, etc.)

Market intelligence — in the form of supply market dynamics, cost drivers, and category-specific sourcing tech

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