An Introduction to Sourcing Optimization - Part 2

Delivering value through every buyer by making holistic sourcing decisions using advanced software

In Part One of our introduction to Sourcing Optimization we have explored the changing expectations towards Procurement, discussed where optimization sits in the Procurement Technology landscape and explored the challenges faced by many category managers in strategic sourcing. In Part Two we will discuss how advanced technology can help with making holistic sourcing decisions that increase the individual value contribution of sourcing managers and its applicability across industries and categories.

Holistic sourcing decisions as enabler for strategic business partnering

Advanced sourcing software can mitigate many of the challenges stemming from Excel based analytics or disjointed systems (Read Part One for a full overview) and ensure that decisions become repeatable and independent of the individual sourcing manager running the analysis. Advanced analytics capabilities enable more holistic decisions by including additional external and internal information. These can include, among others, supplier credit ratings, sustainability information, supply chain risk, diversity scores or supplier quality and reliability (see graphic below). We refer to them as holistic sourcing decisions.

Stakeholders expect realistic and sustainable sourcing decisions that balance competing priorities rather than simply optimize on a single criterion like price. Outlining different scenarios and options therefore positions Procurement as a strategic business partner rather than a simple cost cutter.

Sourcing optimization empowers all sourcing managers to identify optimal supplier award and selection decisions in an easy and repeatable way. Decisions can be based on a combination of commercial considerations, business rules or preferences and constraints like performance, risk, sustainability or diversity. Each combination reflects a possible sourcing scenario, which can be modeled and flexibly updated in real-time based on changes in the above mentioned constraints, requirements or preferences. This flexibility and speed are at the core of driving efficiency and improving stakeholder relationships. It allows to have more fact-based discussions and to take a more holistic view on available award options.

To bring these benefits to life, structured data is required to run proper analysis and determine optimal award scenarios. Considering the limitations of existing tools and Excel outlined previously, most organizations rarely use additional information beyond price in a structured and methodical way in their sourcing decisions today. This is a missed opportunity from two perspectives. Firstly, bringing this information into the discussion can vastly improve stakeholder relationships and engagement levels as transparency around decision making processes increases. Secondly, supplier relationships will improve as discussions and negotiations become more nuanced and qualitative. Both aspects have a strong impact on the image of Procurement as a strategic business partner that drives value rather than focuses simply on the cheapest offer.

In this context, an optimal holistic decision is found, when all relevant items can be allocated to one or multiple suppliers under consideration of the specified business rules, preferences and external constraints. The cost of this solution is most likely not the cheapest, but one reflecting the best overall value for the business. Based on these insights, Procurement can lead data backed discussions and negotiations with internal and external stakeholders.

Benefits of sourcing optimization go well beyond increased savings

Reflecting on the challenges outlined above, advanced sourcing tools deliver a host of benefits to sourcing organizations that result in increased efficiency, improved savings delivery and better stakeholder relationships. Using advanced analytics and data validation features increases the accuracy of the analysis and leads to improved data quality. This is achieved by ensuring comparable quotes are available earlier on in the tender process. Because of the standardized and systematic approach to bid analysis across sourcing events, the results become more repeatable and depend less on the abilities of the individual user.

Besides being more accurate, the analysis of information becomes more complete and overall faster. By designing bid sheet templates with the desired outcome in mind, the time for analyzing information is reduced to a fraction of what is needed when conducting analysis in Excel. Reduction of 50-90% are not unrealisticdue to the automated nature of the analysis, especially in subsequent bidding rounds or recurring events. Because all information can truly be utilized in building scenarios, the overall analysis is also more complete. The reduced sourcing cycle time can be invested into more strategic tasks like preparing supplier negotiations or managing stakeholders.

Advanced reporting and analytics capabilities can be easily shared with team members and stakeholders to increase the overall transparency of the sourcing process. Evaluating and quantifying business rules in different scenarios as well as the ability to provide detailed feedback to suppliers enables data-backed discussions and negotiations with internal and external parties.

Next to the efficiency gains, advanced analytics and sourcing optimization lead to measurable savings improvements. The provision of consistent feedback combined with expressive bidding features for suppliers and the ability to analyze more complicated business deals results in improved savings delivery of 10-15% on average. Depending on the commodity and the maturity of a supplier relationship, much bigger savings upward 25% are possible. Game theory-based negotiation design using auction capabilities and multi-stage negotiations can result in even more on top savings and improved ROI.

Most notably, sourcing optimization improves the overall business relationship and Procurement’s strategic relevance to the business. By enabling holistic sourcing decisions that balance commercial factors and business requirements, internal discussions become fact based and quantifiable, raising Procurement’s profile and reputation. The ability to clearly articulate the cost of certain business rules allows management to reconsider their position and unlock additional savings opportunities.

Advanced sourcing applications are agnostic to industries and categories

Historically, the application of advanced sourcing optimization tools has been limited to events with the highest complexity, covering hundreds of items, suppliers and business constraints. While these use cases are extremely relevant, they only represent a small fraction of events covered by Procurement teams each year. Complex sourcing requirements exist across industries and across Direct and Indirect spend categories alike. Complex commercial structures, price break downs or Bill of Materials combined with internal business requirements and external supply constraints make sourcing events complex and difficult to manage, even with limited numbers of items or suppliers.

The tools available in the market often require specialist training, prohibiting their adoption across the organization and ignoring medium complexity events. Common scenarios like “limit the number of suppliers by region”, “limit the total spend for a given supplier to xx%” or “exclude supplier xyz from a specific item” are universal across categories, making advanced analytics and the ability to model scenarios therefore generally applicable. The graphic below provides an overview of categories we generally consider relevant for sourcing optimization due to their inherent product or market complexity (list not exhaustive).

Next to the analytics and scenario modeling capabilities, sourcing optimization tools can act as the single source of truth for sourcing data. Historic information, relevant scenarios, supplier behavior and other factors can be reused and stored in databases that capture information across events and improve the recommendations and guidance on future tenders via machine learning algorithms. Combined with category intelligence and best practices, these features can ensure the consistent application of category strategies or the inclusion of preferred suppliers across global organizations.

As this is only a small introduction to possible use cases of advanced sourcing tools in strategic sourcing, we will explore more detailed & category focused best practices in future blog posts and other knowledge sharing sessions.

Delivering value through every buyer with advanced sourcing software

In order to derive the full value and benefits from using sourcing optimization, organizations and sourcing managers need to change the way they approach tenders. It is necessary to think of an event with the end in mind."What is it I'm trying to accomplish, analyse or compare?" needs to be the guiding question when designing an event.

Today, many sourcing events are created hastily, not considering how to analyze and evaluate incoming quotations and proposals, resulting in increased effort for data cleansing and harmonization. Increased upfront planning and anticipating the information relevant for award decisions is essential for taking advantage of the analytics and modelling capabilities provided by advanced sourcing tools.

Optimization tools are very powerful and, like with most tools, really utilizing them to their full capacity requires some upfront training and change management. Most tools require up to 3 days of basic training for users to be able to navigate them, with individual user trainings sometimes carrying their own price tag. This power and investment can be prohibitive to wide user adoption and reduce the value add for the organization. Having a clear roll-out strategy and training plan is therefore essential. Modern applications like Archlet provide a B2C-style user interface with a focus on guiding users through the event creation and execution stages. This ensures value creation through every sourcing manager, while keeping training requirements very limited. Combined with action focused support resources and embedded gamification features, this automates the on-boarding process and drives adoption.

Nevertheless, training is essential for understanding the capabilities of the tools and provide the right perspective on how to maximize value from the available features. Sourcing teams can create flexible and customizable events, allowing for unlimited rows and columns with a variety of supplier input fields. This flexibility is one key differentiator between advanced sourcing optimization tools and standard sourcing software. Sourcing managers can collect all quantitative and qualitative information relevant for making holistic decisions and to calculate the Total Cost of Ownership (TCO) for a certain good or service. The ability to define cost formulas that go beyond “Volume x price” enables users to model and analyze cost breakdowns and components within the tool and to provide feedback on a granular level. Maintaining multiple volume options allows scenario-based thinking to reflect allocation scenarios based on the business development.

Considering that all information relevant for the event can be incorporated into scenario creation, the event design is crucial for realizing the benefits of sourcing optimization. Systematically collecting RFI information, supplier quality scores, alternative offers, bundles, discounts, and information like switching costs or handicaps will enable the organization to truly make holistic sourcing decisions. To support users in achieving the desired outcomes, sourcing tools provide the ability to create event templates that drive standardization and further reduce the set-up time. While most tools don’t provide category specific templates as a default and organizations need to create their own (potentially with external support), Archlet has embedded a generic event template as well as category specific best practice templates that allow users to derive value right from the start.

Creating events in a structured way enables the technology to deliver instant data analytics and customizable reports that allow sourcing managers to evaluate proposals between suppliers, scenarios and across bidding rounds within minutes of event closure. Conducting the analysis in the system also means that scope changes or volume updates can be incorporated and evaluated in real time, increasing the speed to market and driving up procurement efficiency.

One important aspect to deliver value and cost savings from advanced sourcing tools is the consequent use of feedback between bidding rounds. Where feedback is often delivered over the phone or e-mail for a sub-set of items, advanced sourcing tools provide various static and live feedback options (e.g., traffic light, % range difference, rank, input field comments) that allow for granular feedback on every supplier input.

This focus on feedback drives transparency for suppliers and allows them to improve their bids where it matters, improving their overall competitiveness. This reduces the overall variance in pricing proposals and allows buyers to apply advanced negotiation strategies and tactics (e.g., parallel, multi-stage or online negotiations) that result in improved savings. With analytics, insights and recommendations being updated within seconds of new data being uploaded, the impact of feedback provided between bidding rounds can be clearly assessed.

With Archlet, sourcing managers are empowered to unlock the full potential of sourcing optimization. The combination of responsive analytics and AI recommendation engines that suggest relevant actions and scenarios to further improve supplier competitiveness creates a competitive advantage for Procurement. It enables data-backed discussions with internal and external partners to deliver better results faster.

Easy-to-use Sourcing Optimization allows organizations to increase the impact of every sourcing manager in every sourcing event. In Part Three of our introduction to sourcing optimization we will discuss how suppliers benefit from sourcing optimization, which pitfalls to avoid in technology implementations and how Archlet rethinks strategic sourcing software.

Archlet is a user-first sourcing software company that rethinks strategic sourcing in a way that allows sourcing managers make better decisions faster. In our blog we discuss different topics around Digital Procurement and advanced sourcing. In this series we explore how to bring sourcing optimization to life and the steps required to deliver the desired value. Follow us on LinkedIn or sign-up to our newsletter to stay up to date with our pioneering thoughts and the latest company updates.