Beyond Reverse Auctions/E-Sourcing — Advanced Sourcing/Optimization Portend Big Shifts (Part 2)

In the first installment of this series, I shared a significant quantity of information and findings to come out of a recent CombineNet study of nearly 50 companies using its self-service advanced sourcing/optimization capability across over 500 different sourcing events in the past few quarters. Even though the sample size probably represents <1% of the actual number of sourcing events taking place through self-service platforms in this period, it's fascinating (and valuable) for a number of reasons:

  • CombineNet users are generally innovators or early adopters (more mainstream sourcing teams will follow their lead using CombineNet or other rival advanced sourcing/optimization technology in the coming years)
  • The sample size represents a decent diversity of companies across industries including CPG, food, retail, transportation, etc. (interestingly, just as food and CPG companies are ahead of diversified manufacturers in adopting commodity management platforms, they're also ahead in the sourcing area as well when it comes to adopting and using advanced tools)
  • A number of companies in the sample did not necessarily use CombineNet or another provider for full-service (i.e., consultative) optimization events in the past; they jumped straight into using self-service tools themselves

When it comes to the actual findings, CombineNet put out their own press release on what they observed. I won't repeat it here -- go ahead and read it for yourself if you're curious. But here are some of the observations -- and our extrapolations -- that specifically stood out to us from the data itself:

  • Advanced sourcing/optimization is appropriate for a wide range of categories; if you think it's just for transportation, you're living in a different sourcing world and need to come back to this procurement planet
  • Companies are becoming comfortable with the notion of collecting dozens, even hundreds of bid attributes per event (rather than just unit price bids). Because the complexity of analysis is simplified by many orders of magnitude with solutions like CombineNet -- the "maths" are done for you, provided you know how to build formulas and/or apply constraints -- you're only limited by your practical imagination when it comes to collecting and using different elements in a sourcing event (e.g., past performance, service levels, lead-times, order quantity, etc.)
  • The curmudgeons in the audience (including myself) who originally wrote off advanced sourcing/optimization as just a feature of a broader sourcing suite will be proved completely incorrect as these tools change how typical buying organizations envision supplier engagement, negotiation, sourcing creativity and the broader procurement process itself
  • The data shows that companies will apply a new sourcing approach and philosophy -- really, a new mindset that goes beyond strategic sourcing -- to even smaller categories of spend when given the opportunity. This in turn makes the notion of having a "basic" e-sourcing platform unnecessary if you also have a solution that enables advanced optimization like CombineNet, Trade Extensions, BravoSolution, Iasta, Emptoris, etc.
  • When trained, even middling procurement team members do learn how to encourage the use of -- and analyze -- different supplier offers and to express bidding elements; advanced sourcing/optimization is not rocket science anymore and the ability to use such an application internally will become a prerequisite (just like Excel) to thriving in the function
  • In the next 24 months, SAP, Oracle and Ariba will need to decide if they're going to get serious about building this capability themselves (or acquiring it) -- or they should shift their focus from strategic sourcing to tactical sourcing, including supplier identification/winnowing as part of initial supplier qualification only for larger-scale sourcing events

Perhaps the most controversial observation I'll make regarding the findings is that the actual usage of CombineNet within many companies well versed in traditional online RFX initiatives and different bidding formats is that this predicts the death of the reverse auction as a strategy. Rather, reverse auctions are likely to become a tactic used only in very specific supply market situations or when a company is looking to qualify suppliers or winnow down a supply pool in an earlier bidding round.

In addition, the use of CombineNet and similar tools, which enable market-feedback as a part of the advanced sourcing/optimization process, will blur the line between what an auction is and what it is not. But mark my words -- I believe that in less than a decade, we'll see the use of traditional sourcing events using basic reverse auction formats (including bid weighting) relegated to the backburner inside Global 2000 companies who learn to use advanced sourcing/optimization tools effectively.

What do you think?

Jason Busch

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