The Sourcing Revolution – Market-Informed Sourcing

Last week I was lucky enough to go with Peter Smith and watch him lead one of the BravoSolution Real World Sourcing expert briefings (which you can find out more about here).  And the slides from the session are available here.

Entitled “The Sourcing Revolution”, the day revolved around market-informed sourcing - a relatively new sourcing approach, which has become possible “with the advent of affordable processing power that enables complex algorithms to run in minutes rather than days”.

His talk discussed methods used before this idea came about: when sourcing, if you wish to consider the variables in your specification and suppliers’ responses, the list can quickly become extremely long thus making the situation very complex. To overcome this, procurement tended historically to drive towards a standard solution that the suppliers can make offers against, so that we could handle the multiple variables more easily and make a rational assessment of the alternatives. We second guessed the market through research and strategising, and then decided in advance the specifications and parameters.

However, Peter believes that this is not the best way of doing things for complex sourcing tasks, as it restricts suppliers’ flexibility to offer alternatives (such as part-offers or time constraints) which could provide value.

So, what’s the alternative? Market-informed sourcing. Thanks to computing power being much faster and cheaper these days, this new technique of sourcing has become possible. In fact, Peter suggested that it is “perhaps the biggest advance in procurement since category management”.

Giving us a little mathematical task (with the encouragement of a bottle of wine for the winner), Peter quickly showed us how it can be difficult to calculate the optimal solution when there are many variables and high complexity. However, thanks to market-informed sourcing, the calculations can be performed much quicker, explaining why it could prove to be very useful in the future of procurement.

This new approach allows us to gather and analyse large amounts of information from potential suppliers, so that we can find the optimal sourcing solutions. From there, we’re also able to introduce different constraints to see whether this affects the outcome of the optimal solution, making this new form of sourcing particularly powerful in complex situations with many variables.

After the initial optimisation analysis, the user can then look at different scenarios. In each case, the system can assess the premium that would be paid against the initial optimal solution.

Having discussed it over lunch, I asked a few of the attendees what they thought of this new approach. I had mostly positive responses - some claimed they've already started using market-informed sourcing, while others said it has potential but might need slightly more work.

One briefly discussed how it may or may not work in the private vs. public sector, saying “I think it would be difficult in the public sector for regulatory reasons, but certainly not impossible. I look forward to seeing this used more in the private sector though”.

Another summed it up quite well, saying “it certainly has an application, but won’t be for everyone”.

The next in the Real World Sourcing series will be led by Guy Allen and is on 23rd October - the topic is  "Preparing for Merger or Takeover".  You can find out more here.

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