Purchasing supplies over the Internet started in the mid-1990s when the sourcing software -- predecessors to today’s e-sourcing software -- brought buyers and sellers together in virtual marketplaces. The idea was that by aggregating their purchases of so-called indirect goods and services, manufacturers could get volume discounts and be in a stronger position to negotiate better prices.
But with most of the easy money already being saved on such commodity items as office supplies, manufacturers must use more advanced techniques to achieve further gains, analysts say. So vendors have added strategic sourcing tools to help companies incorporate factors like supplier risk and environmental compliance into such critical business processes as new product development.
Although some manufacturers have their sourcing processes to direct inputs such as raw materials and subassemblies, “companies are still learning to understand that their sourcing strategy can make or break their company,” said Mickey North Rizza, research director at Gartner Inc.
What is e-sourcing software?
Now often called e-sourcing, the technology can come as a standalone product or as part of a procurement software suite and is sold by ERP vendors or any one of several dozen niche players.
E-sourcing tools are supposed to save money by providing a ready-made community of potential suppliers along with negotiating tools for arranging deals. Basic functions include an RFP or RFQ process; reverse auctions, in which suppliers bid on contracts; and a mechanism for awarding the contracts. “The big role of these tools is that they’re a catalyst for a fundamental change in the way that you buy stuff,” said Duncan Jones, principal analyst at Forrester Research. “It forces you to do things properly.”
But many e-sourcing products now let buyers rate suppliers not just on price but on intangibles such as reputation for quality. “The e-sourcing tools are getting more sophisticated in how they take account of that in the sourcing process,” Jones said. Some also help optimize contracts by, for example, dividing them among many suppliers.
According to analysts, e-sourcing vendors have been acquiring or developing products that perform other strategic sourcing functions, including:
- Supplier market intelligence and discovery – industry news, stock brokerage reports, and other information providing clues to a supplier’s financial health.
- Spend visibility and analysis (spend analytics) – a database of purchases and suppliers with an analytical engine for finding savings by consolidating purchases from different departments, for example.
- Supplier performance and risk management – mechanisms for measuring and improving supplier performance and estimating the risk of failure.
- Contract lifecycle management (CLM) –software for managing supplier contracts, including negotiation and compliance monitoring.
Only a handful of vendors sell their software on-premise. Almost all new e-sourcing deployments are in the software as a service (SaaS) delivery model, which makes it easy to run proof-of-concept trials, according to Jones. He said several companies told him they saved money during their trials. Many manufacturers are finding that e-sourcing fits nicely into their SaaS strategies as an on-demand complement that extends their on-premise ERP, North Rizza said.
Supply chain financing, collaboration grow in popularity
Vendors and analysts both say the deep recession and credit crunch have driven interest in strategic sourcing software.
The price competition manufacturers wanted from e-sourcing has become a double-edged sword, as they realize that some suppliers won’t survive further erosion in profit margins. With less money coming into their own coffers, manufacturers seek to extend payment terms from the traditional 30 days up to six months. Suppliers, meanwhile, want to get paid faster than before. As a result, Jones said, more manufacturers are using e-sourcing’s performance and risk management features to predict the impact of a supplier going out of business.
Many sites have financing mechanisms built right into them for tweaking payment terms to improve cash flow without squeezing suppliers too hard. Some suppliers use online exchanges to offer buyers 2% discounts if they pay within 10 days, North Rizza said -- and even more for paying sooner.
In effect, times of crisis are driving manufacturers and suppliers to become partners, and the more advanced e-sourcing suites all come with collaboration modules to facilitate the relationship.
A small number of these integrate with product lifecycle management (PLM) systems, allowing manufacturers to invite suppliers into their product development process. “We continue to see PLM and sourcing functionality come together,” North Rizza said. The idea is to connect suppliers with key stakeholders in such departments as design, engineering, marketing and finance. But Gartner has observed that many companies use other collaboration tools to stay connected with suppliers, she said. The point is the relationship, not the technology.
E-sourcing buying advice
North Rizza advises having a clear idea of business needs to decide how complex an e-sourcing tool is necessary.
“For instance, if you have a heavy supply chain business dependent upon many modes of transportation and an immense amount of lanes, you might need a very complex sourcing tool,” she said. “But if you have two package services and it is pretty straightforward deliveries, you may not need the additional algorithms and sorting features found in more complex sourcing solutions.” She added that many companies use sealed bids instead of reverse auctions, an approach that is achievable in some lower-priced tools with fewer features.
Manufacturers should identify problematic spending categories before choosing an e-sourcing tool, Jones said. “Is advanced optimization on multi-line tenders more important than advanced reverse auctions?” he said. “Can I stick with arms-length negotiations, or do I need a more collaborative buying process linked to product design?”
Jones tells companies to consider the skills of their purchasers before deciding whether to develop advanced e-sourcing expertise in-house or have the vendor or a consultant manage auctions and other tasks. Vendors vary in the quality of their service arms and relationships with “transformation consultants,” he said. “CPOs that really need to transform their whole function may prefer to pick a consultancy and then let them help choose the tools, rather than picking a tool and then looking for who can implement it.” Jones also suggests scrutinizing a vendor’s ability to provide tech support to suppliers during auctions.