Recent reports show strategic e-sourcing has yet to be tapped by industry as a whole despite its promise of easy implementation, reduced costs and cycle-times.

Strategic e-sourcing is the process of utilizing web-based technology to handle the identification and screening of suppliers, so that they might be assembled into an effective supply chain network which can react rapidly to changes in the market. Strategic e-sourcing is generally considered one of the less difficult e-commerce initiatives to implement and its benefits have led it to be called the low-hanging fruit on the B2B tree. A recent report by the Aberdeen Group, a Boston-based IT market analysis firm, maintains that with successful implementation of this technology users can…

• Identify and negotiate with a broad range of qualified suppliers.

• Reduce sourcing process costs.

• Shorten their sourcing cycle time by 25% to 30%.

• Negotiate 5% to 20% unit price reductions

• Extend the technology’s capabilities to a wider range of products and services.

• Deepen levels of collaboration with supply chain partners.

Considering strategic sourcing’s reputation for trimming cycle time, it is important to note the disproportionate awards that accumulate from saving time in this respect. Experts estimate that even a savings of 2% in cycle time can snowball into a heaping 14% reduction in the end cost of a new product. The Aberdeen report allocates the time spent in the sourcing cycle by individual companies as follows:

• Identifying vendors (52%)

• Managing and communicating with preferred vendors (5%)

• RFQ development (8%)

• RFQ response/receipt (5%)

• Screening and sorting of proposals (20%)

• Contract negotiation (10%)

The Aberdeen report indicates that companies implementing strategic sourcing capabilities can experience savings of 5% to 20% in unit price reductions, in addition to cutting the time-to-market of their products by 10% to 15%. Looking at the big picture, the Aberdeen report estimates that U.S. businesses can save $690 billion through adopting strategic sourcing technology.

To handle the selection of vendors, strategic sourcing employs an entire range of pre- and post-purchase supplier assessments designed to determine, in the long run, which of a possible supplier pool will yield the best results for the user. The sourcing technology does that by handling an enormous amount of data and analyzing it to formulate strategies to manage the supply chain. This is important in creating a lasting supply chain relationship. As Eric Levin, marketing vice president for sourcing software provider Frictionless, explains, “It’s very much a cyclic process, so the people that do this for a living are constantly doing it over and over again on the same categories to be sure that they’re always maximizing who they’re buying from.” One can see that strategic sourcing goes far beyond simple procurement, which is more or less a tactical process of finding the least expensive supplier for the short term.

Until recently, the sort of in-depth analysis strategic sourcing that Mr. Levin describes would have been inordinately time-consuming. With the development of complex multi-attribute algorithms, however, this kind of calculating power is included in the vendor evaluation capabilities of many strategic sourcing packages.

On a less enthusiastic note, the Aberdeen whitepaper reports that more than 75% of companies have indicated insufficient results with strategic sourcing technology. One of the main problems that the study identifies is that, even after implementing the sourcing technology, many companies still rely on traditional methods of communication to carry out negotiations with existing and potential suppliers. The reliance on legacy processes eats up no small portion of the savings that strategic sourcing makes possible. It will most likely take more than overnight implementation of the technology for companies to make the cultural shift that strategic sourcing requires.

Looking at the bright side, the report emphasizes that the 25% who do properly utilize strategic sourcing have managed to maximize expenditures and reduce overall spending. And, as more and more purchasing departments witness the success of their peers, wide spread implementation of strategic sourcing technology is apt to follow.

Sources: e-Sourcing Still Promising, Says Aberdeen
Demir Barlas
Line 56, May 4, 2001
http://www.line56.com/articles/default.asp?NewsID=2466

Strategic e-Sourcing: A Framework for Negotiating Competitive Advantage
Aberdeen Group web site
http://www.aberdeen.com/ab_company/hottopics/esourcing

E-Sourcing: It’s All About the Bottom Line
Eric Leven
Advisor, February 15, 2001
http://www.advisor.com/Articles.nsf/aid/SMITT150