What Is eSourcing?
As experts in Strategic eSourcing, we've written this article that defines eSourcing and explains the typical eSourcing tools and their benefits.
eSourcing is the business process of finding, evaluating, selecting and collaborating with current and potential suppliers via an online, web-based platform. Using eSourcing software, buyers collect information about suppliers, their products and their pricing. This information is then organized, normalized and compiled by the eSourcing tool into eRFx documents, such as RFI, RFP and RFQ to make viable comparisons based on what the buyer needs to purchase, and how they want to evaluate their potential sources of supply.
eSourcing software covers all aspects when identifying the need for sourcing: the sourcing strategy, negotiations and contract management. Scanmarket covers all these areas with our eSourcing modules: Spend Analysis, eRFx, eAuction and Contract Management.
The eSourcing Process
The eSourcing tools are directly applicable when using a variety of the traditional 7-9 step Sourcing Process. The steps that need to be completed are no different when using eSourcing tools. You will still need to conduct a category analysis, develop a sourcing strategy, pre-qualify suppliers and negotiate with the chosen suppliers. The crucial difference is HOW you complete the individual steps.
The usage of the electronic negotiation tools (eRFx and eAuction) depends, like all other tools, on the given situation and the chosen sourcing strategy. Only by having extensive knowledge about all the tools in the toolbox, is it possible to select the right tool each time.
As a sourcing specialist or category manager, you should select the tools that suit your requirements. In the Sourcing Process below, the available eSourcing modules are inserted under the steps, where they are applicable.
The typical eSourcing tools
- RFI – Request for Information; used by buyers to collect and evaluate initial, high-level information about potential suppliers. RFI’s are typically focused on a supplier’s broader capabilities rather than specifics about the product offered and its costs. An RFI is the tool to use when you are looking for new sources of supply and want to “find out what’s out there”
- RFP – Request for Proposal; suppliers who are deemed qualified in the RFI can be invited to an RFP. In it, the buyer “requests a proposal” meaning they lay out in significant detail what they are looking to purchase and ask the bidder to provide a detailed response on how they would fulfill this need. This proposal will target either a buyer-defined solution (i.e. I want to buy this particular product with these specifications) or a buyer-defined outcome (i.e. I, the buyer, need to solve a business problem but I want you, the supplier, to suggest a particular solution to my problem). RFPs generally ask for specific responses about the company, product/service offered and pricing. An RFP is the tool to use when you know what you want and want suppliers to tell you how they’ll provide it.
- RFQ – Request for Quotation; is typically the final step in a sourcing process. In it, the buyer is negotiating the final terms of an agreement, usually price. In some instances, an RFQ can solicit bids on items other than price such as payment terms, service requirements or quantity discounts. An RFQ is the tool to use when you are comfortable with everyone bidding as a potential supplier and want to get the best deal.
Depending on the specific category or purchase, a buyer may choose an RFI, RFP, RFQ or some combination of all three. A complete, three-stage eRFx will always have the RFI first, then the RFP and lastly the RFQ.
In the eRFx process, one starts with the broadest “audience” (i.e. pool of potential suppliers) in the RFI and then at each step, moves to a more narrow set of increasingly qualified bidders. It’s not uncommon to start with fifty or more suppliers in an RFI and narrow down to a half-dozen or even fewer in the final RFQ.
eAuctions and Their Role In eSourcing
eAuctions are a specific type of eRFQ. In an eAuction, buyers will invite pre-qualified bidders to compete on the final components of a negotiation. Most often, price is the primary data element collected in an eAuction, although not always. Being invited to an eAuction should mean that the buyer is comfortable with doing business with the potential supplier assuming the final negotiated terms are acceptable. Some organizations, especially in the public sector, even have corporate policies that the winner of the eAuction will be awarded the contract.
There are many different types of buy-side eAuctions. Scanmarket has an in-depth explanation of each here. The most common are:
- Reverse Auction – bidders are given a starting price for the eAuction that all can agree to. The bidders will then compete against each other, progressively lowering their bids and hence the price paid by the buyer. The eAuction ends when the bidders stop improving on one another’s bids, leaving each bidder at their lowest acceptable price.
- Dutch Auction – “First in the pool” prices start at a level so low that it would not be acceptable to any of the bidders. At pre-determined intervals, the price level “ticks up”. The first bidder to accept the new price wins the eAuction. The price will continue to tick up until a bidder accepts it. Once a bidder accepts the price, the event closes for all participants.
- Japanese Auction – “Last one standing” prices start at a level so high that all bidders would accept it. Each bidder has to signal their acceptance within a specific time frame. Once that time frame has elapsed, the price will tick down, usually by a fraction of a percent, and the bidders again have that same time frame (usually 1-2 minutes) to signal their acceptance. If a bidder does not signal their acceptance, they are removed from the event. When the price reaches a level where only one bidder has signalled their acceptance, the event will close.
There are multiple other formats and within these, there are many permutations and exceptions based on specific scenarios and goals.
The real “secret” to success in eAuctions is not that much of a secret at all
- First, do your homework by making sure that everything is clear and understood. Any uncertainty or ambiguity will lead to poor results.
- Second, pay attention to how you set up the eAuction. There are many different settings that can be used to change the dynamics of bidding, lotting, visibility and communication. These all matter and can have a significant impact on results.
- Lastly, create a level playing field where all bidders have the same information and the same chance at success.