Advanced Sourcing: The Basics – Who, What, Where and How

Even though it will come as no surprise to Spend Matters readers that we’re big fans of advanced sourcing models that enable organizations to go beyond basic bidding strategies, we think there’s a general lack of awareness in the market about how these sourcing models work.

At BravoSolution’s customer event in New Orleans last week, I attended a couple of sessions dedicated to this concept of advanced/collaborative sourcing. Presenters (mostly Bravo customers) covered a variety of use cases for the tools in such categories as logistics, packaging and direct materials. But some took the time to provide a “dummies” look at the topic as well. I think the more basic information is useful to companies either looking to establish a foothold beyond RFIs and auctions or to build a case to expand on their early advanced sourcing journey (which usually starts with logistics).

When is advanced sourcing appropriate? In their words, it’s when “spend is large, there’s high stakeholder interest, there is supply market complexity and there’s high risk potential.” Another way to think about advanced sourcing approaches is that they represent a way for buyers and suppliers to “work together to drive costs out of system rather than squeezing margin, creating incremental savings” in the process.

The idea of advanced sourcing is that you factor into account, among other areas, “supplier economics, capacity and capabilities with discount structures, demand and potentially third-party information about suppliers.” As we note in the Spend Matters Compass series paper A Foundational Look at the Evolution of Sourcing Technology and Platforms:

On the most foundational level, advanced sourcing with optimization enables a more fluid RFX process that yokes flexible data collection efforts with the ability to encourage supplier creativity in responses – and with the ultimate ability to see how different offers compare, when measured against any number of internal business constraints a sourcing organization may define. Supplier responses in a sourcing optimization context may include alternative specifications and alternative proposals. Moreover, advanced sourcing/optimization capabilities enable organizations to fully explore all price and non-price factors in a given event, drilling into the impact of different supplier-submitted options as well as price and non-price variables calculated internally.

These tools enable the creation and application of various constraints (e.g. split of business/ minimum award thresholds based on diversity status, supplier geography, past performance levels). Organizations may opt to create highly specific constraints and run different scenarios to see the additional cost they may add into an equation initially, or even potentially on a net present value basis over the life of a contract. In certain cases, initial constraints that cause pricing to increase may in fact result in a lower total cost of ownership over a defined period of time – e.g. a retailer may conduct a tender for refrigeration equipment that has a higher upfront price point because it meets a certain green/energy usage standard, but over time, the reduced energy and maintenance costs may lead to a lower total cost.

Advanced sourcing/optimization platforms can also help procurement organizations directly address some of the broader challenges they currently face in the market, such as commodity price inflation. For example, a category lead for metals may opt to explore different commodity scenarios – e.g. who buys, from whom, how much, when, from what geographies/plants, on what terms – as well as discover unforeseen potential advantages/disadvantages of specific suppliers – e.g. access to mill-direct pricing, existing inventory needed to be burned off.

With advanced sourcing/optimization tools, these organizations can also begin to better understand the cost of commodity tradeoffs in particular award scenarios – e.g. exactly how much does it cost not to award 100% of the business to a total cost supplier to reduce the chance of a supply disruption in specific geographies that are dependent on purchasing underlying commodities/raw materials from specific markets.

Stay tuned as we apply all of these principles of advanced sourcing in practice with a great direct materials case study involving electronics and electromechanical commodities from the BravoSolution event in the next installment of this post.

See also (PRO subscription required):

Strategic Sourcing’s Evolution: A Roadmap For the Next Decade (Part 1)

Strategic Sourcing’s Evolution: A Roadmap For the Next Decade (Part 2)

Direct Material Sourcing and Supplier Management Platforms (Part 1)

Direct Material Sourcing and Supplier Management Platforms (Part 2)

Strategic Sourcing: Criteria for Selecting an E-Sourcing Provider

Our Evaluation Process: An Optimal RFP For E-Sourcing Solutions

E-Sourcing: What’s Changed in the Past Five Years?

E-Sourcing: What’s Changed in the Past Five Years (Part 2)

See also (free downloads):

Evaluating the Capabilities of ERP Providers Compared to Independent Vendors: Know Your Size
 Before Trying on the Suit

Making Sourcing Savings Stick: New (and Not-so-New) Strategies to Drive Savings Implementation

A Foundational Look at the Evolution of Sourcing Technology and Platforms

Advanced Sourcing Technologies and Platforms to Broaden a Portfolio

Minimizing Commodity Volatility Through Advanced Commodity Management and Hedging Approaches

A Personal Lesson: Reaching the Limits of Reverse Auctions and Strategic Sourcing: When Collaborative and Quantitative Approaches Would Have Delivered More


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