Beyond Reverse Auctions/E-Sourcing — Advanced Sourcing/Optimization Portend Big Shifts (Part 1)

Earlier this week, CombineNet released the highlights of a recent study on sourcing events using their self-service technology including the types of flexible/expressive bidding fields procurement organizations are using across different event types and categories. The findings are, perhaps, the first data-driven samples we have to suggest how companies are adopting advanced sourcing and optimization tools such as CombineNet alongside traditional e-sourcing and reverse auction approaches. Last week, I had the chance to talk to CombineNet -- in full disclosure, it was on a conference call after a second Old Style at Wrigley while watching the Cubs destroy Prince Fielder and the rest of the Brewers -- about the study before it was announced. During our conversation, I learned the sample size of their analysis was based on data from 47 companies representing some 500+ events in the past few quarters ("most in 2011").

For those who aren't familiar with advanced sourcing/sourcing optimization, there are three Spend Matters papers that we recommend that you read on the subject:

A Foundational Look at the Evolution of Sourcing Technology and Platforms

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

Sourcing Optimisation -- Extracting Value From Complexity

On the most fundamental level, the difference between platforms like CombineNet and more pedestrian e-sourcing tools is twofold:

  1. They allow the sourcing organization to collect a virtually unlimited number of data points from suppliers, including gathering bids and offers in multiple ways (both buyer-recommended and creative supplier offers) in addition to required responses (e.g., "bid this lot or grouping of items")
  2. They allow procurement organizations to apply constraints against all offers and run scenarios to understand the impact of price and non-price based decision factors and criteria; note this is very different than the weighting models that many traditional eRFX tools enable

For further information on how advanced sourcing and optimization tools work in practice, the above-linked research reports explain the nuances in far more detail than this simple explanation. Now, back to the findings and research at hand.

CombineNet's analysis of user data found that companies are now using advanced sourcing tools across a wide range of spend categories and types. They're even using tools for events with fewer line items. Consider, for example, that 22% of events run during the timeframe of the analysis had fewer than 99 bids collected (33% of events collected 100-999 bids, 21% collected 1,000-9,999, 16% collected 10,000-99,000 and 8% collected over 100,000). For those familiar with optimization technology, you probably recall that until very recently, the traditional value and usage of the software focused on events with tens or hundreds of thousands of bids per event. The common deploymnet of advanced sourcing tools for smaller events is a new development.

We're also interested in what types of expressive bid response formats that customers are seeing. Across the sample set, 77% of bids included capacity or volume-based bid elements. CombineNet notes that "capacity can be collected at multiple the item level, at a 'group of items' level, or across the entire RFP. This ensures that the supplier can bid on as many business opportunities as they would like to win even if they can't meet the entire demand, and the buyer cannot over-award the supplier."

34% of bids included conditional offers. By CombineNet's definition and usage of the word, these are typically if/then "proposals that enable suppliers to create percentage or dollar volume discounts on supply options. Conditional offers can include tiered pricing offers in the form of volume discounts. These can be applied across all items, tied to specific items, or scoped in other ways (delivery location, item type, business unit, etc.). Conditional offers can also include pricing offers for different items within the event, enabling the supplier to mix and match offers (such as growing business within an account by discounting incumbent items based on the award of new items.)"

In addition, 34% of bids included alternative bids from suppliers. In Spend Matters' view, alternative bids represent one of the most useful elements of advanced sourcing and optimization capabilities in a manufacturing environment (especially for direct materials, including "semi-direct" categories like packaging). By CombineNet's definition, alternate bids "are line item bids that enable the supplier to suggest changes in the original line item specification at the same or a different price point. This can include a difference in material type, service level, lead time, or other item attributes/characteristics."

16% of bids also included packaged bids, where "a discounted price can be offered when the package is awarded to the supplier." Specifically, "packages can be used to offer discounts on certain cost components (material, labor, etc.) based on economies of scale that are reached based on the package award" and are "used frequently in transportation events where carriers build packages of lanes that create closed-loop or continuous moves, offering discounts on Packages that reduce dead-head (or empty) miles."

Across different spend areas, the adoption of different bid types is fascinating. For transportation bids, over 80% of supplier offers included capacity-based offers while roughly 50% included packaged bids and 30% included conditional offers. For direct spend categories (e.g., castings, forgings, plastic injection moldings, etc.) just under 50% of bids included capacity constrained offers. The percentage drops to around 35% for alternative bids and 15% for conditional offers. For indirect spend events, CombineNet found capacity bids factoring into the equation in 80% of supplier offers. Just under 50% of indirect bids featured conditional offers and slightly over 20% included alternative bids. For packaging (which some companies consider a direct spend category), over 80% of bids included capacity or alternative offers and just over 20% included conditional offers.

Stay tuned as we offer our own analysis and conclusions from this data in a forthcoming post. I know I've inundated you with information in this first installment, but I promise significant commentary and analysis in the concluding segment looking at what this data and advanced sourcing and optimization adoption means for the broader procurement market.

Jason Busch

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