Sourcing as a process sits right at the heart of procurement strategy, activity, and success. Taking a requirement to the market, choosing the right supplier or suppliers, and putting an appropriate contract in place is arguably the central element of what we generally call “procurement”.
Technology has played a role in sourcing for at least twenty years now, since the early days of electronic auctions, eSourcing and similar tools. Auctions certainly brought a new dimension to corporate procurement, even if they are an ancient concept, going back to the earliest days of trade. But electronic sourcing tools tended to simply automate the sourcing approach that had been used in a manual form for many years; a tendering process with suppliers responding to a defined requirement set by the buyer, with their responses marked in some manner to select the winning bidder or bidders.
But this process has some hidden drawbacks. The need to make a structured selection process means that we often simplify requirements – we either define quite tightly what we want to buy, or we split up requirements to make the competition more manageable. Or in other cases, where the requirement is complex, we aggregate requirements and look for a single “master vendor” or similar. In effect, we just pass the problem of satisfying a complex requirement onto that organisation!
However, technology is now enabling leading companies to take a different approach to complex sourcing requirements. The approach has been called sourcing optimisation, advanced or market informed sourcing, but it relies on the greater computing power available now and uses mathematical approaches to drive much more sophisticated approaches to the task.
Basically, the buyer can ask potential suppliers to respond to complex requirements by suggesting with some flexibility how they would like to help meet the needs. That could mean suppliers proposing to fulfil just part of the overall requirement; or suggesting “conditions” such as different pricing if they win certain elements of the work; or other constraints on their supply.
In the next Real World Procurement webinar on the 28th of March, Sourcing Optimisation – Understanding the Process and the Benefits, Peter Smith will give an overview of optimisation, how it works, and the key factors to consider if you are considering introducing it or indeed extending its scope. We will also look at the different types of benefits that you can expect from optimisation. Register here.
As one can imagine, this produces tender responses that are very different from those obtained from a traditional “all the suppliers answer the same questions in the same way” sourcing exercise. But the power of the software now used means it can analyse these more complex responses and come up with an “optimum” solution – one that may well include multiple suppliers or even different approaches for different parts of the requirement.
The software can then handle “what if” questions from the buyer, and respond with new solutions – comparing the cost of those against the original optimum. So, in the case of large logistics tender for instance, if the optimum solution involves 50 suppliers, and we think that is just too many, then we can ask “how much more would the overall solution cost if I limit the supplier number to 20, and optimise on that basis?”
The early adopters of these tools and processes have seen major gains, which stem really from allowing suppliers to offer what makes economic sense for them, not simply what is defined by the buyer.
These tools are becoming more powerful, and in the latest developments, we are beginning to see some of the principles of optimisation being incorporated into sourcing tools that are designed for more everyday sourcing exercises – not just the most complex questions. It is early days, but soon we expect to see suppliers given more freedom to express their own preferences and ideas in many tender responses, and systems clever enough to handle the resulting complex supplier selection process in a structured manner.
This new generation of eSourcing tools has the potential to allow organisations to take advantage of supply agreements that offer better value to both parties – buyers and sellers – which would of course be a very positive result for everyone, and indeed will help to drive better relationships as well as value.