Within the private sector procurement, there are a number of advanced technologies that are beginning to reshape how we think about the role of “buying.” Perhaps the best place to start is in the world of sourcing itself. When I first started in the profession, top performing private sector organizations were moving to embrace standardized sourcing processes involving any number of steps (5, 7, 9). We can thank AT Kearney, McKinsey, FreeMarkets and other firms for introducing these rigorous approaches. Without quoting from a textbook, the general philosophy of these programs involves:
- Starting with data/category analysis including the aggregation of spend from various stakeholders, business units, etc.
- Developing a perspective on the supply market through research
- Coming up with a general sourcing strategy for the program in question (e.g., in certain cases a “make/buy” analysis might apply for buying parts and assembling them in-house versus a finished component or product)
- Conducting an initial request for information (RFI) to understand the high-level capabilities of suppliers to meet specific needs
- Creating lot structures (groups of items/SKUs/services) and issuing a formal RFP
- Conducting a direct negotiation with suppliers including an “apples to apples” comparison process which may or may not have involved the use of technology (reverse auctions were the first common “online” format used)
- Analyzing the various submitted bids and weighting different criteria (if applicable) beyond price
- Awarding the business
- Implementing the contract and savings (probably the most under appreciated area, but that is a topic for another day)
Without question, such strategic sourcing processes work. They are bound to yield savings (of some sort) and reduce the category and supply risk for an organization – private or public sector – provided each step is followed in sequence with managerial and expert oversight. But this traditional approach breaks down in a few key areas.
The Limits of Strategic Sourcing
First, basic strategic sourcing forces a certain premature rigor in how one structures a given bid. A sourcing manager might believe she has created the right lotting structure for a specific effort (e.g., 10 lots with 10 SKUs each) based on maximizing the potential for competition based on her understanding of what suppliers can deliver.
But in reality, suppliers are often far more capable, clever and creative around proposing alternative solutions and capabilities than we give them credit for. Forcing them down a certain path too early is in effect cutting out a potential route to savings or other benefits. Second, the process limits the type of analysis that can be conducted on the back-end after a bid.
Traditionally, we have been able to “weight” the results of different RFI responses in a basic manner either in Microsoft Excel or in a strategic sourcing tool. But weighting only allows us to compare basic factors together at a single point in time. Nor does weighting let us run alternative scenarios based on weighing supplier responses against an internally defined set of constraints (e.g., “give me the low cost solution that awards at least 20% of business to diversity/minority suppliers, gives no more than 50% of a lot allocation to a single supplier and limit the percentage of the award to suppliers using off-shore parts or materials to no more than 75% of the total award value”).
Pinpointing the Challenge
When we begin to look at sourcing approaches from this perspective, it is clear that traditional approaches have limits for a variety of reasons:
- We are traditionally (without new technology) incapable of flexible data collection efforts (e.g., letting suppliers bid alternative approaches and suggest different ways of solving for a problem – such as substituting material or providing a shipment in less than container load quantity)
- From an internal perspective, the limits of our analytical abilities to look at bid submission break down as we begin to apply a combinatorial set of constraints against submitted bids. The boundaries of Excel show up quickly here especially if we want to analyze alternative award scenarios
- Sourcing activities inherently stay limited to procurement under a strategic sourcing approach – it makes it difficult to think about supply chain (e.g., inventory) or finance (e.g., working capital) implications at the same time as a negotiation or award decision takes place. Hence, our understanding of total cost is limited to a procurement standpoint rather than a broader one
But there is more than hope to overcoming these challenges. I previously wrote on the topic that if we can take a different approach to sourcing we become capable of “inviting and breaking down the gathering and analysis of the true economic costs (price and non-price) of different decisions [which] can help serve as a foundation for collective understanding and change inside a company.”
Moreover, “These newer models can also be a catalyst to incorporate related problem sets (and opportunities) into a sourcing decision for the first time. For example, sourcing optimization can make organizations more risk aware of decisions that prioritize reduced-unit cost at the expense of geographic concentration of suppliers, distribution facilities, etc. in global markets, which might be prone to specific or general risk types (e.g., natural disaster, labor concerns, political upheaval, etc.).”
The best news of all? These advanced sourcing approaches are in use today by early adopters in the private sector.
In the private sector, we refer to this approach to sourcing either as “sourcing optimization” or “advanced sourcing.” There are numerous categories where such approaches are most commonly applied, such as logistics and transportation. Keelvar, an upstart technology firm in this sector specializing in the UK market, has one such public sector case study worth considering – which could be easily applied to the US market as well.
More established specialist providers used to dealing with high levels of complexity in the United States include SciQuest Advanced Sourcing Optimizer (ASO), formerly known as CombineNet, and Coupa Sourcing Optimization (formerly Trade Extensions), probably the most sophisticated of all the providers in the market. Both firms have extensive case studies supporting the use of optimization and scenario approaches within the sourcing market, especially large-scale logistics bids (e.g., truckload, LTL, ocean freight, air, etc.) Other providers serving this market include BravoSolution and Iasta/Selectica.
Some of the most strategic use cases for optimization extend beyond logistics alone to the very nexus of sourcing and supply chain. Consider the case of sourcing a printed catalog for a large global retailer (a Trade Extensions customer) that we previously wrote about in a Spend Matters research brief. Imagine such a catalog was read by 1 billion people per year—not a misprint.
Further, consider “how versions of this catalog would have to be sent to individuals in nearly 40 countries around the world—with regional languages, variations, and tastes accounted for —and showcased in over 300 stores.” Then consider the supply chain: “Mills produce paper. Then the component parts are delivered to printers and binders (who in turn need to acquire ink, MRO parts, and other items to fulfill requirements as well). Then the finished product is sent to the distribution facilities. Finally, repeat the cycle for the next catalog.” Further, “consider all the various constraints and requirements throughout the extended supply chain, including the following:
Production scheduling for mills, printers, binders, and distribution facilities
Distances and logistical decisions between raw material, production, and distribution centers —and inventory requirements based on those decisions
Quality—including paper, ink, and related elements
Localization and frequency—and its effect on sales”
As we observed in our previous analysis, it turns out “there are literally trillions of potential permutations of optimal supply chain designs to ensure the highest possible fill rates (without excess inventory), how to manage unit and total costs, improve sustainability metrics (e.g., carbon footprints), and so on. But there is only one optimal outcome based on all the possible inputs and all the business constraints that the retailer could opt to put into the sourcing and supply chain design equation.”
The result of a sourcing process accounting for all of these variables over a massive data gathering and analysis effort in a single project led to tens of millions of dollars in direct annual savings that also came along with significant corporate social responsibility (CSR) improvements—not to mention the ability to showcase the tradeoffs of different award scenarios to get all stakeholders aligned.
This is but one example of a powerful case that highlights what sourcing optimization can bring to the private sector. Now imagine the example being applied to complex acquisitions and supply chains within the DoD or healthcare (e.g., VA) and the possibilities for better constituent outcomes and savings become even more apparent.