Sourcing (with optimization) Solutions
An In-Depth Guide
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What Are Sourcing (with optimization) solutions?
Sourcing optimization is a subset of the broader sourcing segment that goes beyond generalist sourcing applications and capabilities to help procurement organizations find optimal solutions to their most complex sourcing challenges. Faced with balancing overlapping and sometimes conflicting constraints — including supplier location, item coverage, cost of sale, switching costs and risk — sourcing professionals found that more traditional, manual paths to decision-making were unable to account for all of these varying factors.
Intended to yield optimal ‘win-win’ sourcing decisions in large/complex sourcing events, sourcing optimization solutions enable users to model business/sourcing objectives and ‘constraints’ by product, category, supplier, region and/or event-specific rules, e.g., award allocations to diversify spend to various supplier types. By adding numerous constraints for business rules and costs into the sourcing equation, these tools can quickly parse large amounts of data and assess multiple scenarios, saving analysis time, negotiation time and, of course, money.
First-generation sourcing optimization providers focused on solving only the most intricate problems for the most advanced procurement organizations. Yet this mindset has limited procurement’s perception of what sourcing optimization can be. While these high-powered tools can accomplish amazing analytical feats, the effort and sophistication required to reach a desirable outcome is extensive and is often integrated into a Center of Excellence operating model.
While these advanced solutions are still on the market (and have been acquired by other providers) and address the most complex needs, a second wave of vendors has emerged with the aim of making these capabilities available to additional use cases — without the high technological barrier to entry that users have come to expect.
‘Optimization for the masses’ exists because sourcing optimization can (and should) be applied more broadly to a variety of sourcing scenarios, bringing a simpler approach and guided exploration that was designed with the everyday sourcing user in mind.
How Sourcing (with optimization) solutions factor into the S2P process
Sourcing is a crucial step within the broader source-to-pay (S2P) process. It is the foundation upon which the entire procurement process is built. Here’s how it fits in:
- Managing the need (and expectations): S2P starts with a business requirement for a good or a service. But, sourcing can also be triggered from a value optimization opportunity like cost savings and risk reduction or milestones (contract renewals for example).
- Sourcing takes over: Procurement professionals identify potential suppliers through various methods and solicit bids from them.
- Evaluation and selection: The sourcing team then evaluates the potential suppliers based on multiple factors like price, quality, reliability, risk and past performance. Multiple tendering rounds may happen to align offerings with the needs and/or drive value up.
- Moving through S2P: Once a supplier is awarded, the S2P process can move to contract negotiation, purchase order release, receiving goods/services, invoice processing and, finally, payment.
Why Sourcing (with optimization) solutions are important
Sourcing solutions have become increasingly important tools for businesses of all sizes. These software platforms streamline and optimize the process of finding, evaluating and selecting suppliers. However, in today’s complex and dynamic business environment, the above requires sophisticated tools that optimize the selection process and achieve the best possible outcomes by leveraging advanced algorithms and data analysis to find the most advantageous supplier partnerships.
These solutions allow for scenario planning, deep cost modeling and strategic sourcing decision optimization for large and complex sourcing events. Users can model business objectives and constraints and apply event-specific rules to ensure optimal sourcing decisions.
The key reasons why sourcing solutions are important for modern procurement practices are:
- Enhanced efficiency: Sourcing solutions can automate or streamline many manual tasks involved in traditional sourcing especially when looking at RFx preparation and bid evaluations. This allows organizations to increase the spend they manage, among other things.
- Improved decision-making: Sourcing solutions enable users to have more structured and richer data when analyzing bids and awarding which can lead to better decisions when multiple trade-offs are at play:
- Scenario modeling and what-if analysis: Optimization solutions allow users to model different sourcing scenarios to consider multiple variables like cost, quality, lead times and supplier capabilities. Teams can assess the potential impact of various sourcing strategies before making final decisions.
- Multi-criteria optimization: Sourcing optimization enables a user to define and prioritize multiple objectives and trade-offs. The solution then analyzes data and proposes allocation strategies that optimize across these elements.
- Advanced bidding and awarding mechanisms: These platforms facilitate the consideration of complex supplier offerings, including volume discounts, multi-item bids, alternative offers and combinations/bundling of items. This ensures companies capture the full potential cost savings and value offered by different suppliers.
- Constraint management: Sourcing optimization solutions can handle various constraints (budget limitations, minimum order quantities or geographic restrictions) and optimize the supplier selection while ensuring adherence to these constraints, leading to a more feasible and practical outcome.
- Increased value delivery:
- Cost savings: By identifying the most competitive suppliers and optimizing negotiation, optimization solutions can help businesses achieve more cost savings and faster.
- Reduced risk: Sourcing solutions can help mitigate associated risks by making the sourcing process risk-aware at different critical steps.
- Increased visibility and transparency: Sourcing solutions offer real-time visibility into the entire sourcing process, allowing procurement teams to track progress and identify potential bottlenecks. They also increase the level of data shared with suppliers which is taken into account in cross-functional decision making.
- Improved compliance: Sourcing solutions can help ensure compliance with regulations and company policies.
- Best practices: Sourcing solutions help to capture, share and preserve valuable tribal knowledge that might be lost when employees leave the organization. Also, digital knowledge can be updated instantly and made available to users.
How do I know my organization is ready for a Sourcing (with optimization) solution?
Some signs that it’s time to step in with a sourcing solution might be:
- Inefficiencies: Your sourcing process is slow, time-consuming, manual or prone to errors.
- Visibility: You lack visibility into your organization’s spending and sourcing activities.
- Control: You struggle to manage contract renewals, there is a lot of maverick buying or you cannot address all incoming requests.
- Savings generation: You need to identify incremental cost-saving opportunities and increase the amount of spend under management.
- Talent: Your procurement team lacks the expertise or resources to manage complex sourcing activities, or you are faced with a high employee turnover and a loss of expertise and know-how
- Growth: Your organization experiences organic or external growth or is frequently launching new products and needs help managing the increase in volume of sourcing activities.
- Improvement in collaboration: Your organization needs better collaboration internally and with suppliers to improve internal alignment on sourcing decisions and to improve supplier-led innovation.
- Complexity of sourcing events: your organization regularly manages large, complex sourcing events with multiple line items, overlapping bidders and various objectives and constraints.
- Need for improved strategic decision making: your organization requires a solution that can provide scenario planning, deep cost modeling and strategic sourcing decision optimization.
- Desire for optimal sourcing decisions: you are looking to optimize your sourcing decisions by modeling business objectives, sourcing objectives, constraints and event-specific rules to achieve optimal outcomes.
If any of the above describes your organization, it’s time to begin looking for a sourcing (with optimization) solution.
Some factors to consider when beginning the journey are:
- Business needs: What are your goals and objectives for implementing a sourcing solution, and what will be the scope (categories, geographies, etc.) of the implementation?
- Operating model: Will a limited number of users engage with the optimization features (e.g., a Center of Excellence), or will you make optimization available to all buyers?
- Change management: Is your organization prepared to undergo changes in processes and workflows that a new sourcing solution would bring?
- Stakeholder buy-in: Do you have buy-in from key stakeholders like IT, finance and executive leadership?
- Supplier buy-in and adoption: Have you identified the suppliers you want to enroll and developed an adoption strategy to ensure they will use the sourcing solution?
- Budget: Do you have the budget allocated for implementing and maintaining a new sourcing solution?
- Integration: Can your existing systems integrate with a new sourcing solution, or do you have the resources to manage integration?
- Process standardization: Is your current sourcing process (roles, steps, templates, supplier panels etc.) adopted across the organization, or are there many variations?
- Support: How will the support for internal users and suppliers be done?
How Sourcing (with optimization) is done: Common features of Sourcing (with optimization) technology
Both general and optimization-focused sourcing technologies enable companies to define and implement specified tendering/sourcing processes across simple and complex categories alike, starting with strategy development and ending with award decisions.
The underlying technology components of sourcing technologies include base-level supplier management, RFI/RFP/RFQ creation, reverse auctions, bid response management, optimization, supplier collaboration (within a negotiation), template/knowledge management and category management.
Regarding sourcing with optimization, solutions covering the above (core sourcing) enable users to create sourcing events and configure them based on various organizational, category and process requirements. However, they go beyond generic sourcing solutions and include scenario planning, deep cost modeling and strategic sourcing decision optimization for large and complex sourcing events.
So, in addition to core components of broader souring, sourcing with optimization solutions have certain optimization-specific capabilities:
- Supplier directory and portal: A basic directory of suppliers with contact information necessary to invite suppliers to sourcing events. Also, each supplier needs a single entry point where its personnel can access the RFx and surveys directed to them, participate in competitive bidding events (including auctions), find information on the organization’s sourcing process, learn about award decisions and ask questions.
- Information gathering and evaluation functionality: Support for the creation and scoring of weighted questions, often organized in questionnaires, to gather and evaluate information from suppliers.
- Pricing and cost-data gathering and evaluation:
- Via RFQ or RFP functionality. Support for creation and organization of line items in order to gather and compare primarily pricing and cost information from suppliers.
- Deep cost breakdown to allow costs to be broken down across components, production process, distribution, etc. to get a more accurate picture of total landed costs and of the total cost of ownership (TCO).
- Market feeds for raw materials and other price drivers.
- Reverse Auction: Support for online multi-party negotiations in the form of real-time submission and visualization of bids in a reverse format, meaning new bids should be lower than previous bids.
- Project/Program Management:
- Workflow support for proprietary sourcing project models to ensure compliance to sourcing processes and collaboration.
- Ability to manage program level metadata like volumes, start or production (SOP), etc.
- Reporting: Including an extensive collection of reports that allow the buyer to get all of the data they need in easily digestible chunks and, preferably, a powerful report builder that allows them to design their own optimized reports for each sourcing situation. It should also offer a means to export information to other reporting/analytical environments.
- Decision support: What-if analysis to create and compare multiple sourcing scenarios to understand the impact of different variables (e.g., price changes, supplier performance) and optimization algorithms that use mathematical algorithms to identify the optimal sourcing options based on data from RFx and user-defined constraints (with automated relaxation to when a scenario has no solutions).
How technology supports Sourcing (with optimization) — Top 5 capabilities
These ‘Top 5’ critical digital capabilities stem from the Spend Matters TechMatch workbench — derived from a larger number of requirements scored in the SolutionMap solution benchmark.
The Top 5 capabilities are the highest-weighted critical capabilities that are central to the displayed solution market benchmark. They have been developed by Spend Matters team of analysts and refined by procurement users in tech-selection projects using our market-proven SolutionMap benchmarking dataset and associated TechMatch decision-making tool.
1. RFx creation
The ability to create sourcing events and configure them based on various organizational, category and process requirements.
The average sourcing optimization solution supports the creation of RFx from templates, Excel via uploads, scratch or past events. Users can collaborate during the creation and execution of sourcing events, and items can be organized into lots or groups and configured in a granular way, including the possibility to accept multiple alternative bids from suppliers.
Top performing solutions provide more guidance when creating RFx by recommending content, e.g., templates to be used or suppliers to be invited. They do so by using AI/ML to surface content and recommend specific actions, which extends their guidance beyond predefined rule-based workflows. Certain providers can automate the sourcing process by supporting cognitive buying in well-defined categories with set-and-forget automation.
2. Bidding and analysis
The capacity to enable suppliers to bid in the most appropriate way and to allow users to analyze/compare offers in various and detailed ways to ensure the right decision-making process (TCO, ESG, etc.).
The average optimization solution allows suppliers to use simple formula-based bids and enter their bids with arithmetic operators. They can propose alternative offers, including new/alternative items/services or variants. Suppliers also automatically get feedback on how they are performing compared to the competition.
Solutions can automatically rank the best offers for each item in every lot using a feature comparison matrix or cost roll-ups. Users can evaluate alternative bids with a feature comparison matrix. Also, the scoring/evaluation process can include multiple users who can be restricted to individual elements. Evaluations are weighted by authority and all responses can be analyzed and plotted (and outliers marked or removed).
Top performing vendors offer suppliers advanced AI/ML-based capabilities to prefill answers based on historical data and, in the absence of historical data, to give advanced price predictions based on the market and the particulars of the buying organization, supplier or individual. Suppliers can enter complex bids and price schemes using functions and market data. These solutions also support advanced methodologies, such as tier-based functions, net promoter scores, etc. Some leading providers provide advanced pricing guidance with advanced price predictions that are based on ML that adapts to the market and the buy- and sell-side particulars of the organization.
3. Optimization
The capability of the solution to offer strong foundations (analytical techniques, cost modeling, what-if scenarios, etc.) for the definition and execution of complex award scenarios.
Average optimization solutions use a linear optimization (LP) solver incorporating home-grown rounding/hybrid algorithms to allocate discrete units efficiently. These solutions offer the flexibility for users to define multiple cost components according to their requirements. Each cost component is treated separately, allowing additive or multiplicative formulas to be applied. Users can also apply individual discounts and constraints to each element.
Users can create scenarios based on existing ones, modifying them with predefined rules. These rules can include options like unconstrained scenarios or scenarios with specific constraints, such as involving three suppliers. Solutions come with a default set of commonly evaluated scenarios. Examples of these scenarios include three suppliers, product splits of 20/30/50, incumbents only and local sourcing. Buyers can use these default scenarios to create additional customized scenarios. They also can perform a side-by-side award comparison by line item based on various dimensions of interest, such as product, supplier, location or any other relevant base or derived dimension.
Top performing providers have deeper and more granular capabilities. For example, they employ a true mixed-integer linear program (MILP) solver with a powerful branch and bound algorithm. Leading providers offer users the flexibility to define an unlimited number of cost components. They can leverage advanced mathematical functions and establish non-circular interdependencies among the components, allowing for intricate and accurate cost modeling. Scenarios can be automatically generated for comparative purposes using hybrid AI capabilities. This feature enables users to assess and compare different scenarios without the need for manual instantiation, saving time and effort.
Top performing providers excel in dynamically generating scenario sets by using hybrid AI, business goals and rules. Each event or situation can have a custom-generated set of scenarios that align with specific business objectives to ensure that the scenarios are tailored to each event’s unique requirements, maximizing the relevance and applicability of the analysis. In addition, such providers offer capabilities to indicate constraint relaxations, potentially leading to lower costs without significant impacts on established goals. By identifying these relaxation opportunities, users can explore cost-saving options while maintaining the integrity of their objectives.
4. Constraint support
The ability for users to define constraints (capacity, allocation, risk, qualitative) that the solution needs to take into account when solving scenarios.
Average optimization providers allow customers to manually configure various granular constraints. They can define hard and soft constraints, but hard ones are limited to only the constraints that prevent a solution, and the soft ones are only for capacity and/or allocation. Automated constraint relaxation is only possible for capacity and allocation detected to be prohibiting a solution and only according to predefined rules or random selection.
Top performing solutions can dynamically set constraints based on various requirements (interdependent capacity requirements, soft constraints and model sensitivity). They can also automatically relax all constraints preventing a solution from being found by using a set of heuristics and knowledge-based rules.
5. Cost modeling
The ability for users to define complex cost models to ensure that all required elements are quantified and can be taken into account in scenarios.
Sourcing optimization solutions have more profound and richer capabilities than generic sourcing solutions concerning cost modeling. Average optimization solutions have a configurable and extensible data model that allows buyers to define and use as many cost components as they want. These elements are treated separately with additive or multiplicative formulas that enable their own discounts and constraints. Multi-year pricing and price breaks/scale are supported.
Top performing providers allow users to define costs based on advanced formulas and to compute future costs based on projected cost trends across raw materials, labor, energy and overhead costs, as well as support for multi-currency at the line-item/cost component level. The platform can use AI or a hybrid approach to compare cost factors against market trends to identify the major cost drivers at any given time. Real-time cost interpolation, using advanced metrics and formulas, is used for more accurate costing and should-costing.
Why selecting Sourcing (with optimization) technology can be difficult
Selecting any technology product can be difficult for a variety of reasons, but we will highlight some of the most important factors you should consider when starting this journey below:
- Market characteristics:
- The sourcing technology sector is large, complex and fragmented, with a diverse range of vendors that sometimes specialize in specific areas. This multitude of options can be overwhelming for procurement organizations looking to find the best fit for their specific needs.
- New features and functionalities are constantly emerging. Keeping pace with the evolving landscape and selecting a solution that can scale with future needs requires ongoing research and evaluation.
- Interoperability:
- Sourcing is at the crossroads of many other S2P activities, such as supplier management, contract management and ordering, that all rely on it at some point. In addition, sourcing depends on other processes like supplier management, as the efficient and effective selection of suppliers and awarding requires data beyond price (performance, risk, etc.).
- Configuration management:
- Despite sourcing processes being well known and established, there are multiple variations, even within an organization. Therefore, the need to configure a solution to fit with potential specific requirements is often an important activity. And, not all solutions have the same degree of configurability nor the same approach to configuration management (self-service by customers, via support tickets, etc.).
How Spend Matters can help you select Sourcing (with optimization) technology
Spend Matters specializes in procurement technology diligence. In addition to projects and advisory, Spend Matters offers Insider, the only membership community and technology comparison tool of its kind: access to Spend Matters SolutionMap vendor rankings dataset combined with independent, zero pay-to-play, brutally honest coverage of solution providers, market developments and trends affecting procurement, finance and supply chain.
We can help you find a solution that:
- Can support the transition from manual (email, Excel, etc.) sourcing processes to 100% digital processes.
- Has the required configurability to be tailored to your specific needs and processes in a self-service mode or via support, depending on your capabilities and preferences.
- Provides outside-in intelligence to enhance decision-making processes.
- Enables users to deep dive in costs (TCO).
- Enables the evaluation of complex award scenarios taking into account multiple trade-offs and criteria across a vast amount of data points.
- Supports complex optimization scenarios in categories like transportation and freight.
- Can augment your teams by providing guidance and insights at every step of the sourcing process.
Discover Sourcing (with optimization) vendors
These are the vendors we are covering today (or very soon). Visit their vendor directory pages on Spend Matters for a quick vendor overview, demographic information and relevant articles, including vendor analyses.
| Vendor | Description |
|---|---|
| Archlet | Archlet offers a user-friendly sourcing solution that enables optimization and scenario-based sourcing, key data-backed analytics and insights to drive quicker sourcing decisions. Archlet is not a complete sourcing tool (e.g., it does not offer e-auction support), nor does it claim to be. Archlet augments existing sourcing applications. |
| Corcentric | Corcentric Platform is a sourcing tool that stands out for its capabilities for better decision making, cost identification and strategic sourcing opportunities across various spend categories, including direct materials and services. |
| Coupa | Coupa is a leading S2P platform that offers a user-friendly interface, automated sourcing processes and opportunities for cost savings based on its large user community. It has one of the leading sourcing optimization tools since the acquisition of Sweden-based Trade Extensions in 2017. |
| GEP | GEP is more than a technology provider. It offers a full range of services, including market/category intelligence, supplier management services and BPO. Its natively integrated suite covers sourcing including category management, cost and should-cost modeling, opportunity identification and sourcing execution that can be used for indirect and direct. |
| Ivalua | Ivalua offers a natively integrated, intuitive and very flexible suite that includes sourcing. It has capabilities for all types of spend, including direct materials. Ivalua enables organizations to streamline sourcing, optimize supplier relationships and better outcomes through cross-functional collaboration and cross-process fertilization and integration. |
| Jaggaer | Jaggaer is a prominent sourcing technology provider known for its comprehensive sourcing suite covering all types of spend that it built over time through multiple acquisitions. Jaggaer’s platform also offers sophisticated direct materials sourcing capabilities. Its solution empowers organizations to drive strategic sourcing initiatives and optimize procurement processes. It has a leading sourcing optimization engine since its acquisition of CombineNet in 2013 when Jaggaer was still SciQuest. |
| Keelvar | Keelvar is an innovative sourcing technology provider known for its AI-powered sourcing optimization capabilities. Leveraging artificial intelligence, Keelvar streamlines sourcing processes, enhances supplier collaborations and drives cost efficiencies by providing automated sourcing strategies and optimization algorithms for effective direct material procurement. |
| SAP Ariba | SAP Ariba is a leading S2P suites platform known for its comprehensive capabilities in multiple verticals and for all spend. Its sourcing offering covers all the expected functional blocks (RFx, e-auction, savings management, project/program mgmt., etc.). The company recently launched a category management module that it will continue to enhance. |
| Simfoni | Simfoni, which started with just a spend analytics offering, now offers two core platforms: Spend Intelligence and Spend Automation. Spend Automation is its new procurement support platform with vendor management, basic quick-sourcing and a contract repository on the upstream buy-side and catalog hosting order management, central marketplace access, invoice automation, rebates management and some underlying workflow support on the downstream procurement side. It also includes a BuyDesk staffed by category experts to augment sourcing capability wherever needed within the organization. |
Glossary
| Term | Definition |
|---|---|
| Bill of materials (BoM) | A structured list of components, parts and materials required to manufacture a product or assembly. It provides detailed information on the components needed and their relationships. |
| Category management (CatMan) | Category management in procurement is a strategic method (or discipline) that treats procurement categories as ‘business units’ rather than isolated purchases. It strategically orchestrates procurement activities based on specific spending categories, with a focus on adding value through ongoing analysis to anticipate trends, mitigate risks and adapt to demands or supply changes. It strategically manages categories throughout their lifecycle involving long-term planning, market analysis and relationship-building with suppliers |
| Constraint | A constraint refers to a limitation or restriction that can be based on factors such as price, total cost, score, question response, supplier profile, allocations, volumes or any other specific requirements that need to be considered during the optimization process. Constraints help ensure that the sourcing solution is able to generate optimal decisions while taking into account various limitations or conditions that need to be adhered to. |
| Enterprise resource planning (ERP) | A software system used to manage and integrate core business processes such as finance, human resources and supply chain management. |
| New product introduction (NPI) and new product development (NPD) | These terms refer to the processes involved in bringing a new product to market, from initial ideation to final launch. NPI focuses on pre-optimizing and negotiating the best components for new products, while NPD involves the overall development and creation of new products. |
| Product lifecycle management (PLM) | Software that helps companies track, manage and share product information throughout the entire product lifecycle. |
| Relaxation | Relaxation refers to the adjustment or loosening of constraints that are preventing a solution from being found. |
| RFQ/RFI/RFP | Requests for Information (RFI), Requests for Quotation (RFQ), or Requests for Proposal (RFP) |
| Sourcing execution | Sourcing execution refers to the process of carrying out sourcing activities such as managing market approaches, running RFxs (development, execution and award), conducting e-auctions and managing portfolio/performance in the context of procurement. |
| Strategic sourcing | Strategic sourcing follows an event/process-based approach, focusing on immediate cost savings and supplier selection, negotiation and contract management. It aims at selecting the right suppliers and negotiating the best pricing to meet business objectives. |
| Total cost of ownership (TCO) | The total cost associated with acquiring, owning and using a good or service, not just the initial purchase price. |
