Automating Strategic Sourcing - Understanding and Evaluating e-Sourcing
Marc Osofsky, Vice President
Frictionless Commerce
Although most companies recognize that strategic sourcing is instrumental to successful purchasing, very few have been able to implement effective strategic sourcing on a consistent basis. This is despite a recent study by the Center for Advanced Purchasing (CAPS), A.T. Kearny and the Wacht Group which concluded that 73% of all potential savings in purchasing can only be achieved through the sourcing process.
Currently, strategic sourcing is a manual and costly process. Few companies have truly tackled this problem and automated strategic sourcing. Amazingly, the IT revolution that has automated nearly every other part of the modern corporation has lagged in this area even though it is widely recognized as a huge savings opportunity.
As companies fight to remain competitive in this struggling economy, new systems will need to address the critical strategic sourcing questions of what to buy, who to buy from and how to set up and manage the process.
Traditionally, strategic sourcing incorporates the following three processes: (1) Expenditure Analysis; (2) Supplier Selection, and (3) Vendor Management. You can think of strategic sourcing as the critical step that falls between demand generation (an end-user or stakeholder request for a good or service) and the transaction activity (the actual order processing). Most strategic sourcing includes the following steps:
1. Mobilize team
2. Collect critical data (from past contracts and forecasts, as well as from various stakeholders across the company)
3. Analyze data
4. Develop sourcing strategy or plan
5. Initiate strategy (collaborative effort with assigned team)
6. Negotiate with suppliers and implement final agreement
7. Manage supplier relationship
As the pressure to cut costs, improve quality, and increase profitability continues, purchasing professionals are looking to automated strategic sourcing solutions—hoping to see the same kind of benefits that other IT automation projects have produced. Companies are realizing that there are only two ways to compete and succeed: increase the top line and/or reduce the bottom line.
e-Sourcing is an extremely effective way to reduce the bottom line and can dramatically increase overall productivity and efficiency—similar to the impact that salesforce automation tools have on the top line. Purchasing organizations are often responsible for millions, if not billions, of dollars in spend, but have no tools available to increase efficiency or effectiveness. In fact, one industry executive recently noted sarcastically that currently the leading “sourcing automation company must be Microsoft, since the only software tools that purchasing people have available to them are Excel, Word and Project.”
A new category of software is now emerging in purchasing called Supplier Relationship Management (SRM), focused on driving efficiencies within the buyer-supplier relationship. As companies depend more and more on an optimized supply chain, they need effective, efficient and strategic supplier relationships. Strategic sourcing is a critical part of determining, initiating and then managing supplier relationships and contracts.
The next big opportunity for the Global 2500 in their quest for competitive advantage and bottom-line improvements is to automate strategic sourcing. According to AMR Research “strategic sourcing is at the top of corporate agendas” and they estimate the market for e-sourcing will grow from $275M in 2000 to $3.5B in 2005, a Compound Annual Growth Rate (CAGR) of 75%. Goldman Sachs believes that by automating strategic sourcing companies can “reduce total purchasing costs as much as 30% and sourcing cycle times more than 50%.”
Technology is finally emerging that has the capacity to automate enterprise-class sourcing processes. This process is known as “strategic e-sourcing.” Software now exists that enables category managers to conduct the necessary sourcing efforts in a highly automated way—arming them with the tools, information and communication to strategically source online. In short, e-sourcing software leverages the Internet for better collaboration, communication, information sharing and automation. At its core, e-sourcing is simply applying web-enabled technology or software to automate the strategic sourcing process.
Initially, Internet-based solutions were developed that relied on outsourced hosted business models, or only supported small pieces of the e-sourcing process (like online negotiation). These solutions, although a good “test-run,” were less then effective in a sophisticated purchasing environment, relied on heavy transaction fees, and were not scaleable or easily integrated into existing systems or legacy data.
Research with CPOs, Director’s of Worldwide Sourcing and other high-level executives has shown that in order for large enterprises to drive hard-dollar, repeatable savings, they need software solutions that are delivered in a traditional enterprise model. Global 2500 companies have sophisticated IT infrastructures, significant professional sourcing personnel, and the need to integrate with both existing systems (ERP, MRP, GL, e-procurement, etc.) as well as extract and integrate legacy data from across the organization. Although perhaps a viable solution for small-to-medium size enterprises, ASP-based solutions rarely meet the integration or scalability needs of large enterprise companies. They often require significant consulting engagements or up-front work in order to drive any value, and if they do drive value, it is rarely a repeatable process or an ongoing area of savings (instead it is a one-time savings).
Strategic e-sourcing best practices can be a vital tool for purchasing departments to use for both cost reduction and cost avoidance. As well, by automating strategic sourcing and developing their own best practices, organizations establish a systematic approach to sourcing that guarantees that projects and events are both efficient and productive. This includes incorporating project management into the sourcing process, enabling cross-functional collaboration for creation of long term sourcing plans and tracking, and enabling category managers to focus on the strategic aspects of their jobs.
Until now, the sourcing process has been painfully manual—requiring months to determine a purchase, create an RFI, negotiate terms, create a contract, and track processes. Companies are rarely able to institutionalize best practices and capture knowledge created in the process. Today, the “wheel” is reinvented with each strategic purchase. But if corporations are going to realize the long-term benefits of streamlining the purchasing process, they need to be able to analyze internal and external data, increase knowledge management and sharing and utilize advanced decision support technologies on an ongoing basis.
e-Sourcing software should give companies the end-to-end platform they require to truly automate strategic sourcing right from the desktop—enabling them to realize the following benefits:
Operational efficiency – consistent processes reduce cycle-times and better utilize man-hours
Best practices at every step – using a complete application accessible from the desktop with all of the information and tools available to the contract manager, makes it easy to use best practices at every step from analytics to contract development
Strategic value-add – through knowledge management, sharing and transfer – empowering the purchasing function to improve sourcing metrics and encouraging collaboration with stakeholders, and knowledge transfer through commodity strategy development and data analysis
Visibility of the purchasing process – by delivering trusted tools and cooperation, there is painless collaboration (company-wide), executive visibility into the process, and greater alignment with corporate goals and spend
When evaluating strategic e-sourcing solutions, companies need to make sure that the solution enables the above four benefits. As well, there are some simple questions that should be asked of the technology enablers to make sure that the company’s e-sourcing needs will be met. Research with more than 100 Chief Procurement Officers from the Global 2500 and extensive work with the world’s leading consultants on strategic sourcing, unveiled that purchasing professionals in large organizations consider the following the most critical components of an optimal e-sourcing solution:
· Does this sourcing solution automate the entire sourcing process, including expenditure analysis, supplier selection and negotiations, and vendor management?
· Does this sourcing solution include a centralized portal or workplace for all users of the system to access data?
· Does this solution provide a personalized view for different kinds of users, such as category managers, collaborators, executive management, and suppliers?
· Does this solution allow for multiple users to collaborate in the creation, execution and monitoring of sourcing processes, such as RFPs, auctions and contracts?
· Does this solution provide storage and easy access to information for reference and auditing purposes?
· Does this solution provide automated decision support so that RFPs can be scored and ranked on multiple attributes?
· Does this solution include a complete portfolio of auction formats, and does the auction function integrate with other sourcing functions?
· Does this solution provide analytics for benchmarking and understanding expenditures?
Is this a platform that can share data with my existing ERP and e-procurement systems?
When implemented correctly with the right strategic e-sourcing solution, companies can significantly drive bottom-line savings, improve supplier relationships and performance, increase collaboration, drive down cycle times and improve overall buying.
| Marc Osofsky can be contacted at Marc@Frictionless.Com Frictionless Commerce specializes in the e-sourcing market, delivering innovative e-commerce software solutions www.Frictionless.Com |
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