Advanced Sourcing

Advanced Sourcing Achieving the Next Level of Savings & Efficiency in your Supply Chain 2 01 I What is Advanced Sourcing? Page 5 02 I A Review of Sourcing Technology Page 6 03 I Advanced Sourcing Techniques Page 12 04 I Optimization-Based Advanced Page 14 Sorucing Technologies 05 I Optimizing Savings and Efficiency Page 24 3 Advanced Sourcing Introduction This white paper helps to clarify the value of advanced sourcing solutions by providing an overview of the functional differences between various sourcing technologies, the characteristics of an advanced sourcing technology platform, and the benefits afforded by such technologies. It will also explain how JAGGAER Sourcing Optimizer can establish the framework by which companies like yours can change their sourcing strategies and practices. As companies continually strive to deliver ever-increasing value to shareholders, they will search out and implement new strategies, practices, and tools across their organizations. In the supply chain and sourcing domains, companies are changing the way they source, produce and distribute goods or services to their customers, in search of reduced costs and greater efficiency. 4 01 I What is Advanced Sourcing? While most companies spent the last friendly interface, a mobile data collection couple of decades centralizing their tool, or formatted reports. Fundamentally, approach to sourcing, recent shocks to the capability is the same; data is captured global supply chains have forced many or reconciled periodically in bulk for the to look for greater agility. Cost reductions purpose of creating required reports. come from consolidation of sourcing events and leveraged spend, as well as However, as the scale of the sourcing the rationalization of a global supply base. event increases in size or complexity, so Others have embraced their supply base too does the challenge of managing such in search of new efficiencies and product an event. More suppliers are invited to innovation to drive continuous cost savings participate, submitting a greater number while pursuing other goals such as risk of proposals that must be considered. mitigation and non-financial targets such Larger, more complex supply networks as supplier diversity and corporate social are produced, creating inefficiencies in responsibility (CSR). the distribution of goods, longer lead times, and additional logistical costs A chemical tracking and reporting tool and risks. Also, sourcing events that designed specifically to facilitate reporting span a broader group of stakeholders can offer some ease-of-use improvements generate additional internal competition versus a spreadsheet — a database of for influence over award decisions. materials linked to regulations, a user- 5 Managing Complex Sourcing Events In recent years, as companies have adopted more advanced sourcing strategies, the most innovative have also adopted the technologies needed to pursue these strategies. Optimization-enabled sourcing solutions provide capabilities to handle today’s real-world “complexities” found in an increasing number of sourcing events, which may include any or all of the following characteristics: • the need to manage larger-scale, global sourcing events • the need to collect diverse supplier proposals • the need to collect and model more complex business rules and a variety of stakeholder preferences • the analytical power to enable business users to evaluate tens of thousands of options in mere seconds to find the optimal solutions This white paper will help clarify the value of optimization-enabled advanced sourcing solutions by providing a high- level overview of the functional differences between various sourcing technologies, the characteristics of an advanced sourcing technology platform, and the benefits afforded by such technologies. It will also explain how advanced sourcing technologies can establish the framework by which companies like yours can change their sourcing strategies and practices. 6 02 I A Review of Sourcing Technologies For many spend categories, manually-intensive methods of acquiring and evaluating supplier proposals, such as face-to-face negotiations and the use of spreadsheets, gave way in the mid-1990s to faster, more efficient, and more transparent Internet-based sourcing methods. Rather than negotiating with one supplier at a time, eSourcing enables simultaneous bid collection from competing suppliers on a large scale. Additionally, because of the universal reach and speed of Internet technologies, sourcing events took on new dynamic capabilities, including real-time feedback to suppliers based on their bids. The inventory information must be accurate and reliable – researchers will use available inventory first, prior to making an external purchase. Container history of use must also be readily available and accurate. If a sample is contaminated, it will send a researcher down a time consuming false trail. History information helps the researcher understand whether a container from inventory is safe to use. Reverse auctions and eRFx two widely used eSourcing methods. Both their merits and limitations warrant scrutiny when evaluating their use for your sourcing activities. 7 Managing Complex Sourcing Events This lack of analytical power within The most widely publicized type of typical reverse auction solutions forces a eSourcing tool in the late 1990s and simplification of the items being sourced, to early 2000s, reverse auction technology, reduce the size of the problem set as well reverses the role of the buyer and seller as its complexity. Sourcing teams group in an auction setting, where an electronic items with similar characteristics into ‘lots’, descending-price auction is used to drive ‘bundles’, or ‘market baskets’, which are purchase prices down. The supplier presented to suppliers for online bidding. with the lowest bid is considered Rather than collecting (and then evaluating) the leading supplier, and is typically potentially hundreds of bids on any number awarded the business. of individual items, buyers request bids on a smaller set of multi-item market Reverse auction technologies automated baskets, reducing the total number of bids the process and were built primarily to evaluate. This helps to enable dynamic for speed, at the expense of flexibility supplier feedback during the bidding and analytical power. So while reverse round(s) and a quick decision making auctions are useful for sourcing items process in determining supplier awards. with little significant strategic impact on the business, they lost favor for use The shortcomings of creating market in more strategic sourcing events, because baskets are many, including a reduced most reverse auction technology lacked level of competition within the event by the ability to evaluate the non-price excluding smaller suppliers that are unable decision factors involved with such to supply all the items in the bundle. But spend categories. most importantly, suppliers that bid on 8 the bundles are unable to create proposals based on their production efficiencies on specific items, and they are forced to hedge their bids on the items in the bundle that they are not as efficient in delivering. So while Supplier A may be very efficient in delivering items 1, 2 and 3 in the bundle, they are unable to provide their best prices because of their inefficiency in delivering items 4, 5 and 6 in that same bundle. This ultimately results in higher prices across the bundles than would be achieved if each item was presented to suppliers and awarded separately. Because of the same analytical shortcomings that require the use of ‘bundles’, the buyer’s business rules and constraints, the preferences of stakeholders and other non-price attributes are not easily considered, leaving price as the driving force in the award of an auction’s items to suppliers. As such, the reverse auction results often yield savings projections (often called ‘screen savings’) that fail to materialize when buyers attempt to implement them in the real world. This is especially true for companies that are centralizing their sourcing processes, as there are decentralized stakeholders that have justifiable preferences over how their business is awarded and may deviate from the auction results in day- to-day operations — a major source of savings ‘leakage’. While reverse auctions have produced significant results in many spend categories, these savings have come primarily in the form of reduced supplier margins. As supplier margins have reached their limits, savings from these first-generation reverse auctions have begun to plateau, and buyers are looking for ways to deliver ongoing benefits and value. 9 eRFX Another eSourcing method that is still widely used, the electronic ‘request for x’, where x stands for proposal, quote, information or tender, is also essentially the automation of an existing sourcing practice to increase speed and scale. Nevertheless, the eRFx is a much more flexible tool than the reverse auction, capable of collecting much more information from suppliers, including non-price factors such as business information,capabilities, quality of service, lead time, terms and conditions, etc. But suppliers responding to an eRFx are often limited in their ability to propose more innovative ways of supporting the buyer’s business via creative or expressive bids, because of the lack of bid analysis capabilities found in most eSourcing tools, particularly those belonging to the larger- suite players like SAP, Ariba, and Oracle.

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