Sourcing Optimization v eSourcing
I am often asked by companies unfamiliar with sourcing optimization why it’s different to ordinary eSourcing tools and why it costs more. There are many standard eSourcing solutions that come with ERPs and some other independent vendors that offer standalone eSourcing solutions. These solutions are fine for small and medium sized businesses where there isn’t a large spend you wish to leverage and you’re simply a price taker and need a basic system to operate a process in a simple setting. Big businesses with spend volumes in the billions of dollars need something more powerful.
I use the analogy that eSourcing is like a bicycle where you must provide all the energy and the top speed isn’t very high whereas Sourcing Optimization is akin to a car. I use this analogy because eSourcing doesn’t have an engine even though it’s a useful means to organise data and give simple feedback. Large businesses need more power and must also gather richer inputs to truly leverage economies of scale so you generate savings but also execute complex processes much faster.
Sourcing Optimization has an engine that allows sourcing teams to gather much richer data and builds a mathematical model in the background that permits nuanced communication of conditional bids and is powerful and flexible enough to capture almost any process you should require. But it also allows you to do things you’d never be able to do in face to face negotiations or Excel based data gathering exercises because you’d be quickly overwhelmed by options to consider without an engine to search all the combinations imaginable.
A summary of the key differences is listed below:
- eSourcing software is a workflow tool to help manage the flow of data (i.e. who get’s what documents, when, how they’re collected, simple feedback etc).
- Sourcing Optimization supports package bids that collect conditional discounts that can generate savings of 3-12% in a variety of spend categories. This alone easily justifies the almost trivial cost of Sourcing Optimization relative to its benefits.
- eSourcing doesn’t capture structured data. Data resides in Word or Excel document, only the authors of those documents really understand the logic or important parts of interest. Value is lost because it is undiscoverable in document silos and when staff leave it can have very negative consequences.
- Sourcing Optimization collects data from bidders in structured tables in databases. The logic for comparing bids isn’t an Excel formula, instead these are all structured fields. The rules for feedback to bidders aren’t buried in unstructured documents or spreadsheets.
- Critically, eSourcing doesn’t let bidders describe economies of scale across different products, regions or services. Maybe they want to offer a 15% discount if they win a group of specific Lots that lead to operational savings? It is this lack of nuanced control that has been a barrier to adoption for eSourcing.
- Sourcing Optimization builds a complete model under the hood for all key decisions that may need to be made (e.g. maybe you want to see the trade-off between reducing supplier numbers and increasing cost) – this reasoning cannot be done in ordinary eSourcing tools.
- Comparing eSourcing and Sourcing Optimization is like comparing a bicycle and a car for the following reasons. With eSourcing you need to power the logic and data design and scenarios yourself. There’s no engine to power the analysis or superior control, e.g. if you’re interested in deeper insights such as “What if we keep 50% of our business with incumbents, which 50% should we switch?” There’s simply no power underlying standard eSourcing to even begin to model such a scenario. You’d have to try to do that in Excel and this approach is destined to be brittle, error-prone and non-transferable to colleagues. It’s also slow and time consuming. A major benefit of sourcing optimization is the speed it brings to evaulation. Even large bid events can be conducted swiftly and easily.
But the biggest difference between both technologies is that you receive more competitive and innovative offers from bidders. When game-theoretic strategizing is applied by suppliers, they use the option to offer alternative or combination bids (and they know their competitors have that weapon in their arsenal too) to bid more aggressively on desirable packages of Lots because contingent discounts offer them a form of free insurance against unattractive bundles. This drives win-win outcomes and allows for efficient operations for suppliers. This is why top sourcing teams in companies such as Schneider Electric, Coca-Cola, Siemens, McKesson, AB Foods, Drewry and others use sourcing optimization. Experts know that buying a bicycle for eSourcing is a false economy and motorized transport comes with a higher initial investment but the return on investment is almost immediate.
The staff profile of eSourcing and Sourcing Optimization vendors is very different too. Keelvar’s engineering team are a balanced mix of PhDs in AI and Optimization, experienced Engineers, customer focused professional services team members and UX/UI experts that strive to make power, flexibility and ease of use central to our SaaS solution.
And finally, to answer the opening question of why it costs more: if you’re smart at sourcing then you look at the total cost of ownership (TCO) of a solution and the TCO for eSourcing is actually quite high because every event that misses out on richer bid capture, insightful scenario analysis and intelligent feedback options with smart outlier detection wastes 3-10% in spend under management for that event. This is the hidden cost of using suboptimal eSourcing. Sourcing Optimization has possibly the highest return on Investment of any SaaS solution that a procurement team could buy so its a simple decision for well informed sourcing teams. Furthermore, once familiar with sourcing optimization, the process itself can be automated.
So if you’re a large company with spend under management that exceeds $1bn, then it is essential that you apply Sourcing Optimization for cost savings, speed of execution, control over incumbent switching and scenario analysis that finds the best value for money trade-off between cost and non cost objectives.