In Sourcing, Throughput is Success

Five rules for getting more results from your sourcing efforts without reinventing the wheel.

Thursday, August 27, 2015
BY: Ole Nielsen, Chairman and Founder

Savings are always in style.

Regardless of the economic climate, savings always ranks at the very top of the list among the priorities of procurement professionals. The pendulum may swing from supply risk during a recession, to talent acquisition and commodity pricing during a boom period, but savings are always the number one goal as evidenced in CPO Rising: Keeping Score Report:

"Finding more savings" (65%) remains CPO's top business pressure, while "improving collaboration" - both internal (43%) and external (25%) - and "sourcing more" (33%) remain the primary CPO responses to that pressure.

eSourcing is a proven path

The easiest and most effective path to "sourcing more" is through eSourcing. Over the past fifteen-plus years, eSourcing has been used with great success by organizations of all sizes. When done correctly, eSourcing is proven to generate substantial savings (an average of 12-20% identified savings by most estimates), increase efficiency, and improve transparency and compliance. In addition, the advent of cloud solutions means that sourcing technologies are significantly better and more affordable than in the past. Given the proven success of eSourcing, it seems counter-intuitive that very few organizations have broadly adopted eSourcing across their spend. (Note: eSourcing in this context incorporates all eRFX types including online RFPs, eAuctions, sealed bids, etc).

But for many, a path seldom taken
These facts present us with a conundrum, if:

  1. Savings are critical,and
  2. eSourcing is proven to deliver significant savings and value,then
  3. Why do most organizations run <50 eSourcing events annually on only a small percentage of their spend?

With such a compelling business case, there must be some significant hurdles. And there are, such as:

  • Overly complex and cumbersome eSourcing tools
  • Insufficient execution support
  • Limited internal expertise in identifying candidates for eSourcing
  • Incomplete training and change management, both for buyers and bidders

The question: What's a savvy procurement executive to do in order to keep savings flowing without unlimited resources and expertise?

The answer: Focus on throughput

There's an old saying in retail, "Sales cure all ills". For eSourcing, it would be "Throughput cures all ills", because the more volume an organization puts through eSourcing, the more savings it will generate. Even if the average savings rate drops a bit, the increase in volume will more than make up the difference. There's a right way and a wrong way to do eSourcing, but overallit's all about throughput.

Five rules for increasing the throughput of your sourcing efforts:

  1. Make it easy. The vast majority of eSourcing events don't need complicated tools, expertise or consulting. While optimization, multi-variate scoring, and complex scenario analysis might work for your ocean-freight spend, chances are most of your spend doesn't. Throughput will be better served by finding and using a tool set that's intuitive, user-friendly and doesn't frighten away your stakeholders.
  2. Admit it, not everything's strategic. A comprehensive, 12-week, 300-hour strategic sourcing initiative is the right approach for your $40 million IT hardware category, but probably not for your $500,000 office furniture purchase. A comprehensive sourcing effort might generate >20% savings but you will never have the time or resources to apply that kind of rigor to non-strategic spend. Instead, employ simpler, more efficient eSourcing techniques such as an eAuction program to find savings.$1 saved on a category you weren't going to touch with formal strategic sourcing is $1 more than you had before.
  3. Go after unmanaged spend wherever it is. Unmanaged spend is always a great source of savings. Why is it "low-hanging fruit"? Because no one's picked it yet. Most organizations have less than 50% of spend under management (i.e. the portion of an organization's non-labor spend that is actively managed by procurement resources and processes) so there are plenty of categories "ripe for the picking".
  4. Open up your network. The key driver for sourcing savings is competition, and competition is driven by inviting new qualified bidders. Benchmarks say that more than 40% of the overall sourcing process is allocated to finding and qualifying new sources of supply. Make sure that you're taking advantage of all the existing seller discovery sources available to you.
  5. Get help, wherever it generates a positive return. It is said that procurement teams only have two kinds of things to do each day, stuff that is important, and stuff that is on fire. By the time you have dealt with the stuff that is on fire, there is no time left for the stuff that is important. Always leverage outside help,especially tactical support,to address those areas where you know there are savings but your team's not going to have the time or expertise to get to it. While there might be some incremental cost, it will almost always be swamped by the savings and many providers will entertain flexible commercial arrangements that reduce the upfront investment.

By following these five simple rules, you can apply the proven benefits of eSourcing to a wider range of your company's spend. In addition to the savings you'll generate, the additional sourcing throughput will also provide increased levels of procurement discipline, supply risk management, transparency and support to your customers and stakeholders in the business.