Market-informed sourcing – making it work, reaping the benefits

In the context of our new White Paper (available free to download here), we talked yesterday about how traditional  category management can restrict the market’s ability to offer solutions that may be economically beneficial to the buyer.

Market-informed sourcing provides an alternative.  The technology has been defined differently by different providers – optimisation, advanced sourcing, expressive bidding for instance.  But we feel that market-informed sourcing sums it up best; we ask the market to inform us of the best sourcing options, based on their knowledge of the true economics of the situation, rather than trying to second guess the market through our category management process.

So we ask the suppliers within that market how they would like to meet our needs. And it is clear that the market MUST understand this better than we do. But it is only the last few years that MIS technology has become powerful and clever enough to allow us to evaluate properly responses to many different types of requirement - responses that are complex, disaggregated, with potentially huge numbers of fields in the responses, and offering different options and approaches.

We can then use the technology to explore the options, look at the lowest cost option (or build in other evaluation factors), then look at what introducing various constraints does to the price. We can examine and actually price trade-offs.

We could look on this as an extension of the principles of output or outcome based specifications – but this takes it much, much further. It enables us to hear what suppliers have always said to themselves – “if only they could have taken our standard specification...   if only they hadn’t insisted on equal volumes  each month.... if only they hadn’t wanted a bit more volume than we can actually supply...."

It enables us to explore (just as examples)-

  • The optimal number of suppliers to meet a particular need
  • Regionality (e.g. a supplier who is great within Italy but does not supply to Holland);
  • Seasonality of supply
  • Major volume sensitivities for suppliers (e.g. big discounts if you commit to a certain purchase level, or capacity constraints)
  • Flexibility around specification that is worth exploring in terms of effect on price
  • Bundling and conditionality (“if you take these two products we’ll offer you an extra discount..”)

So we believe that category management needs to change fundamentally – at least in the spend categories where this is particularly relevant – in order to reflect the new possibilities. The category manager needs to go to the market with an open specification and requirement – not a closed down, precise description. Then there is a new set of capabilities required in terms of analysing responses and looking at the trade-offs, constraints and options.  This all requires a real change of mindset from professionals.

A few caveats – this is not suitable for small contracts. It may be less powerful for "oure" commodity purchases where there are few variables, although I know firms who have used it with great success for raw materials where issues of supplier capacity and seasonality can be explored.

And if you know already who you want to do business with, there’s no point really running this process– although MIS will tell you a lot about the market. (But we feel it is morally wrong to invite organisations to go through complex bidding processes if there is zero chance of them winning anything).  Finally, we need to think further about how this can be used successfully and legally within public procurement regulations.

There is already evidenced that even organisations that had strong and successful category management in place are seeing significant value improvements from MIS.  It is a significant development for procurement professionals, and the organisations that can benefit from it, and we believe that practitioners, consultants, academics and everyone in the procurement eco-system needs to be aware of the potential. And you can start by downloading our White Paper here.

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