Are You Sabotaging Your Sourcing Savings?

KayRee Lee

In a traditional sourcing event, the event winner is typically awarded based on cost or a combination of cost and service level. However, sourcing events can get complex rather quickly. With variations in sourcing scenarios based on delivered prices across sites, volume discounts, rebates, substitute items, internal stakeholder strategy requirements, and so on, the award process can increase exponentially in complexity. Sourcing strategies, processes, and tools that do not consider these scenarios may result in sub-optimal savings for your organization, particularly if it is still using traditional tools and analytical techniques based on cost alone.

Advanced sourcing features like sourcing optimization have been around for a while. While its use is common within the transportation industry, the feature has yet to gain adoption within the sourcing community.

Introduction to sourcing optimization

The idea behind sourcing optimization is simple: To optimize the outcome of a sourcing event subject to various business constraints. The objective of a sourcing event may be as simple as minimizing the delivered costs from a supplier. On the other hand, the business constraints may take the form of:

  • Only three suppliers may be awarded
  • At least 50% of business must remain with incumbents (to minimize disruptions to business)
  • At least one supplier must be MWBO certified

It’s situations like this where sourcing optimization lends its strength. Available as a standard feature in most e-sourcing solutions, the sourcing optimization functionality enhances an organization’s ability to analyze various combinations of scenarios to arrive at an optimal answer.

Consider a simple sourcing event where three suppliers have responded to an RFP for MRO items supplied to a plant and the plant is seeking to minimize its purchasing cost. For simplicity, the plant plans on buying at least one of each item (preferably the lowest cost).

Scenario A: Lowest cost. Supplier C is the awarded winner based on the total lowest cost

Scenario B: Cherry picking. Supplier B and C are the awarded winners. However, implementation of this scenario could pose a challenge, particularly if the number of plants and suppliers are amplified for large spend categories.

Scenario C: A new constraint is introduced into the equation – at least 30% of the business must reside with Supplier A (incumbent).

Clearly, the introduction of this scenario has added some complexity. The question now is: Does this indicate that Supplier C should still be awarded the business (because of its total lowest cost), in addition to the incumbent (Supplier A)? By process of elimination (see table below), we determined that if Plant A purchased the double-shielded bearings and v-belts from Supplier B and the elbows from Supplier A, their total cost is actually $54.66 and lower than the total lowest cost bid – an additional savings of 0.25% or $2.5M per $billion in spend!

However, to reach the conclusion, the complexity introduced into the scenario with just one additional constraint resulted in 12 different scenarios.

 

Benefits of using sourcing optimization

Sourcing optimization generates higher savings than traditional sourcing methods for different reasons:

  • Analytical capabilities: The analytical capabilities within the sourcing optimization functionality features mathematical algorithms that can reach feasible solutions that traditional analytical tools are not built for, and sourcing professionals are not taught to handle.
  • Efficient solutions: Sourcing optimization functionality is built to calculate and handle large volumes of data much quicker than traditional analytical tools, leading to process efficiency savings.
  • Availability of bid options/scenarios: Sourcing optimization functionality enables the introduction of different scenarios that help to maximize the value of the event while adhering to the event constraints.

When to use sourcing optimization

Sourcing optimization is ideal for sourcing events where the following factors may exist:

  • Events with lots of suppliers and/or items
  • Events that may result in more than one sourcing winner
  • Complex bidding structure – events that require an analysis of volume discounts, rebates, and other alternative terms

How to get started

Advanced sourcing features like sourcing optimization are often overlooked because of the learning curve required to use them. However, they offer significant savings beyond the traditional RFP and analytical tools. For organizations already using e-sourcing tools, it is the path of least resistance (you already own it). For other organizations, sourcing optimization is another tool to help optimize your sourcing process and yield savings beyond the ordinary.

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About KayRee Lee

Kay Ree Lee is Director of Business Analytics and Insights at SAP Ariba. Kay Ree has specialized expertise in procurement, sourcing, vendor management and analytics. He is a results-oriented, hands-on leader with experience improving the performance of Fortune 500 and small to midsize companies. He is based in Atlanta, GA.