Recent Supply Excellence posts demonstrating why current economic factors (i.e., low demand, lower fuel prices, tight credit, and high unemployment) have conspired to create the best sourcing market in decades have been met with mixed response. While a number of sourcing managers are boasting how the current market has reenergized their sourcing automation (e-sourcing) programs, an equal number of dissenters — including uber-negotiator IACCM President Tim Cummins — warn that renegotiating contracts in a down economy threatens to damage supplier relationships.

The noise crescendoed yesterday with a post from some of my Supply Excellence colleagues on why e-sourcing is good for suppliers. These events prompted me to dust off a presentation I was asked to give at the supplier conference of one of the world’s largest technology companies that was launching its own e-sourcing program. Knowing I was in hostile territory, I did some prework to understand the typical objections to online sourcing programs. What I discovered was that most objections were wrongheaded myths perpetuated by either internal stakeholders that disliked change (either the ”you-can’t-auction-that” bunch or the “I-have-a-personal (golfing) -relationship” crew) or lazy incumbent suppliers that were accustomed to an unfair playing field.

I presented the results of my research under the hyperbolic banner, “The 7 Myths of e-Sourcing:”

• Myth #1: e-Sourcing is all about lowering prices. False. Thanks to tightening supply markets and maturing sourcing methods (and e-sourcing functionality), price-only negotiations have gone the way of Member’s Only jackets. Advanced auctioning capabilities enable buyers to evaluate suppliers on a myriad of price and non-price factors, such as lead-time, delivery, quality, and payment terms. Nearly all e-sourcing users engage in multi-threaded negotiations (e.g., e-RFI-to-e-RFP-to-auction), enabling qualification and evaluation on all attributes of a supplier’s capabilities and costs. And many optimization-based sourcing tools allow suppliers to offer alternative bundles or bids that boost their profit margins and further differentiate their offerings.
• Myth #2: e-Sourcing is unfair to suppliers. Untrue. In most cases e-sourcing introduces greater integrity into the sourcing process than existed in the offline mode. e-Sourcing mandates that buyers clearly articulate their selection criteria and award decision framework to all participating suppliers. Suppliers go into a negotiation full knowing how they will be judged and how the award decision will be made. Any clarifying questions asked by suppliers and corresponding answers from the buyer are available for all suppliers to see, further leveling the playing field. This was best summarized by a VP of Sourcing at Cadbury Schweppes, who stated, “We emphasize fairness and open disclosure on both sides of the sourcing process. We have shut down ‘backdoors’ for internal stakeholders and suppliers.”
• Myth #3: e-Sourcing is unfair to incumbents. Nope. Competitive incumbents are in a better position to be exposed to more business volume and new business opportunities, particularly considering that any strategic sourcing initiative goes hand in hand with a supply base rationalization effort. Better e-Sourcing tools also enable the ability for users to incorporate “transformational” elements that give “credits” (in the form of switching costs or innovation credits) to good performing incumbents. As a result, incumbents don’t need to be the lowest price bidder in order to win the business. Consider the approach taken by Eastman Kodak: “We sat down with incumbents to explain why we were [using e-auctions] and prepare them with the right strategy and techniques to competitively participate in the event.”
• Myth #4: e-Sourcing makes it difficult to win new business. On the contrary, e-sourcing dramatically shrinks sourcing cycles. These efficiencies alone enable buyers to negotiate more spend volumes, across more spend categories, with more suppliers. As noted in the previous example, qualified incumbents in good performance are in a position to expand existing business and be exposed to new business opportunities. One large industrial manufacturing used its e-sourcing strategy to cut the number of MRO suppliers from nearly 2,000 to just 20. Incumbents retaining the business are doing 4X to 10X the volumes than in the past, and they’ve added new, more profitable revenue streams, such as integrated supply relationships.
• Myth #5: e-Sourcing lengthens the sales cycle. There is ample evidence that e-sourcing shortens sourcing and, hence, sales cycles. And as an old boss of mine would say, “In a sales cycle, getting to no fast, can be as valuable as getting to yes.” His point was getting to “no” enables you to focus your sales force on the opportunities they can win.
• Myth #6: e-Sourcing burdens suppliers with new cost, technology, and resource requirements. Wrong again. There is compelling evidence that e-sourcing also reduces overall SG&A costs. A study from the University of North Texas found: “A supplier can reduce its cost of sales (salesperson commissions, advertising, etc.) using reverse auctions.”
• Myth #7: e-Sourcing eliminates buyer-supplier relationships: I recently asked a supply management executive at a major life sciences company how he was able to drive such aggressive use of reverse auctions. His response, “I tell suppliers, ‘If you believe your customer relationship is all about negotiating, then you don’t have a relationship.’” This isn’t just rhetoric. Many companies have begun partnering with suppliers to remove cost from the entire supply chain. New multi-tier sourcing, co-sourcing, and buy-sell approaches are being embraced by a wide range of enterprises (particularly in the aerospace, automotive, and high-tech sectors) looking to gain better visibility into costs and risks inherent in the sub-tier supply and to aggregate spend volumes and remove costs from the total supply chain.

Bottomline: Neither renegotiation nor e-sourcing is about beating up suppliers on price. It is about remove uncessary cost (i.e., waste and inefficiency) from the supply chain so that you and your suppliers have a collective edge versus the competition. Those who ignore the opportunity to create a more competitive cost structure today are at risk of being at a severe disadvantage when the economy finally does recover.