New Research: Going Collaborative/Quantitative – Limits of Basic Reverse Auctions, E-Sourcing

This morning, we're excited to announce the publication of a new Spend Matters and MetalMiner Perspective, A Personal Lesson: Reaching the Limits of Reverse Auctions and Strategic Sourcing -- When Collaborative and Quantitative Approaches Would Have Delivered More. The paper provides a first person account of how legacy e-sourcing approaches (and reverse auctions in particular) can come up short when it comes to navigating the waters of more complex categories and larger sourcing events. Written in a highly personal and straightforward manner, the informality of the whitepaper masks the complicated nature of the arguments and instructive lessons it imparts.

In it, I share some of my own lessons from a failed sourcing event that took place over a decade ago. By relying on a standard reverse auction format in a complex market, the sourcing team "couldn't enable suppliers to come back with their own proposals, terms, etc. to maximize their ability to compete. Rather, we took anecdotal feedback from the supply base and created what the team thought was an ideal bid package, but in effect represented a compromise that was not optimal for any one supplier, let alone the broader field or vendors." Moreover, "By placing too much emphasis on the benefits of a competitive market environment, we did not invite creativity from suppliers and internal stakeholders in a structured and data-driven manner."

Throughout the paper, we include specific examples of how optimization and advanced sourcing can change the strategic sourcing process, plus lessons learned from the advent of new approaches to creating markets and events using the latest in data gathering and analysis techniques. For example, newer approaches can provide "a means to deconstruct a supply market and understand which parties at different tiers could bundle/unbundle different components (e.g., parts, manufacturing processes, raw material inputs, etc.) in the most price-competitive manner. Diving down to the category level in metals, the Perspective also includes a case study in the market for sourcing tin cans.

The paper suggests that 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. Moreover, when it comes to general supplier management, sourcing optimization can play a key role in fostering and developing relationships founded on trust, transparency and continuous collaboration, rather than one-time sourcing and contracted related efforts. Depending on one's sourcing philosophy and general approach, this can be the difference between a hammer and a firm handshake, albeit a potential hand crusher that still gets the attention of the supplier in the manner desired.

In the coming weeks, we'll be launching our 2011/2012 Spend Matters Compass Series on Sourcing and Commodity Research. While the publication of today's paper marks, perhaps, the most informal and personal type of analysis we'll feature on the subject, the forthcoming Compass Series research will take a more analytical and technology-focused bent. It's our belief that a combination of the two formats is most useful when it comes to both providing essential background on key sourcing and commodity management technologies and bringing examples of how to use such tools and techniques alive.

After reading the paper (which you can download for free via this link), drop us a line (or post a comment) and let us know what you think of the style and approach. In personalizing the whitepaper format, we think there is tremendous opportunity to bring key subject matter to life that would otherwise become boring reference material that's a slog to get through, as so much of the research is in this space (ours included!).

Jason Busch

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