Sourcing Optimization I A Definition I Part 1
A recent post by Peter Smith of SpendMatters UK asked why don’t we hear more noise in the procurement world about Market Informed Sourcing? One reason Peter cited for the ‘lack of noise’ was that:
“It still isn’t something that is widely talked about in procurement circles – most procurement people still couldn’t tell you, I suspect, what it is all about.”
In that vein, I decided to put together three short posts outlining what Market Informed Sourcing is, how it works and what the key benefits are. We start with part one today. Part Two is available here, and Part Three here.
Sourcing Optimisation – A Definition
Firstly, it is worth noting that to date there has not been a consensus on the name that best describes the approach. Some people call it Market Informed Sourcing (MIS), others call it Sourcing Optimisation or Collaborative Sourcing.
At the heart of these propositions though, is the view that ‘suppliers should be afforded the opportunity to have greater flexibility as to how they engage with buyers.’ However, if I were being pedantic, while one half of sourcing optimisation is better market informed bidding, better expressed business constraints are another key element. In short, market informed sourcing is a key component of sourcing optimisation!
Participant suppliers in a tender all have unique footprints, and different economic drivers. However, under most traditional sourcing processes they are currently unable to communicate ways they can leverage their unique strengths to elicit savings for the buyer. Market informed sourcing works on the premise that if diverse suppliers are able to participate in sourcing events that let them play to their respective strengths, win-win outcomes are achievable.
For example, in categories involving logistics/transport, suppliers would like to make informed bids which help them reduce waste i.e. dead miles where the vehicles are not being utilised. Allowing them to bundle contiguous routes together unlocks economies which they can then share with the buyer (by offering conditional discounts). “If I win London to Manchester, and Manchester to London I am happy to offer a 20% discount.” In this scenario both parties win as the buyer pays less for the return journey, and the supplier has full utilization and hence earns revenue on both legs.
The richer bid data captured via this format is then typically computed via powerful evaluation engines (in the software), which can also rapidly evaluate cost trade-offs against non-price objectives such as supplier diversity, risk management and incumbency switching tolerance.
An additional twist to the above is that an increasing number of market-informed sourcing players leverage recent developments in economics (including market design). This entails a strong initial focus on how the tender is structured to ensure the upfront conditions are designed to drive the optimal outcomes downstream (while also supporting key strategic objectives).
Using a sealed-bid format also helps reduce the risk of collusion, while also helping to ensure more considered rational bidding. Similarly, in the private sector, there is an ability to include business constraints as part of the evaluation process that takes account of the strategic context, for example:
1/ Worried about a potential supplier cartel?
Evaluate with Minimum Number of Suppliers < 3
2/ Worried about contract management costs?
Evaluate with Maximum Number of Suppliers < 2, <3, <4 and compare results
3/ Worried about incumbency switching costs?
Evaluate with 1 of 2 incumbents winning etc to minimize switching costs
In short, sourcing optimization can support a number of strategic aims, while also being designed to elicit savings leading to strong overall outcomes. By surfacing additional information from the supply side it is also possible to run various scenarios which help make more informed decisions. The starting premise though is that the upfront design is crucially important in creating the right conditions to ensure there is sufficient competitive tension amongst suppliers to lead to a favourable overall outcome.
This article originally appeared in Spend Matters UK.