Esourcing At Work

Updated: Jan 25 2003, 05:30am hrs
The global sourcing, supply chain and material management community today has the unique opportunity of making a lasting and significant impact on their organisations by using new Internet technology tools and services. One such distinctive opportunity that the sourcing community can harness to make a credible and material impact on their companies is e-Sourcing.

What is eSourcing
Some of the best purchasing organisations in the world are registering exponential success by employing e-sourcing as a driving strategy. The unbeatable combination of expert knowledge and advanced technology, enables these companies to do the following. One, make the best possible decisions about sources of supply. Second, streamline and better control purchasing processes. Third, reduce purchasing cycle time (thus shortening the time to market). Fourth, reduce cost of goods sold. It is necessary to sieve through the scepticism surrounding e-Sourcing and realise the inherent merits of the concept. The more closely you examine eSourcing, the more compelling and clear its benefits become. Today, leading companies across virtually every industry, are spending billions of dollars less for goods and services, than they did before adopting eSourcing. This is not just a tactical reaction to a soft economy.

Done right, eSourcing results in permanent strategic improvements in a companys purchasing department and the company at large. e-Sourcing involves the use of Internet technology, plus specialised methodologies and expertise to make the discovery, qualification and selection of business-to-business suppliers more efficient and competitive. Advanced e-Sourcing solutions enable buyers to optimise other elements of their supply relationships that contribute to overall costs. These include things like speed of the sourcing process, payment terms, quality levels, supplier flexibility, delivery logistics, and warranty parameters.

The global economy has faced recessional trends for the past two years. Increasing financial pressures are forcing companies to focus on sourcing, with a clear realisation that it offers a rupee-for-rupee bottom-line impact. Take for example, a Rs. 500 crore company with 5% net profit margin or Rs.25 crores in net profits and 60% (or Rs.300 crores) as cost of goods sold. A 10% savings on 20% of the Rs.300 crores spend is Rs.6 crores, i.e., 10% of Rs.60 crores. However, to get an additional Rs.6 crores in bottom-line, the company must add Rs.120 crores in sales (@5% net profit margin). This is nearly impossible in a downtrending economy where, to hold the top-line is a challenge! Strategic sourcing is the ongoing, long-term procurement of materials and services. These materials and services may be used as part of the companys supply chain, or they may be intended for the business end use. At the heart of strategic sourcing lies cross-functional problem solving, with the objective of reducing total system cost, and not just the unit cost of purchased components.

In the quest of strategic sourcing, companies have traditionally focused on the following:

* Establishing a new sourcing leadership group

* Shifting the focus of the purchasing function to include tas-ks that have a strategic impact, e.g., supplier partnerships

* Developing and upgrading purchasing/sourcing staff

* Integrating purchasing with the rest of the organisation

* Instituting new measures of performance

Te advent of technology and the Internet has taken strategic sourcing to new levels.

Next Generation eSourcing
Reverse Auction and cost consulting services provide the opportunity for real improvement for many Asian businesses. Reverse auction experts, have pointed out that the process can help major purchasers save money - directly by finding low-price suppliers, and indirectly by improving and rationalising their internal processes. Reverse auctions, as of date, typically deliver between 10% and 20% in sustained procurement savings, which can come as a welcome relief to Asian manufacturers operating on todays scant margins. According to AT Kearney, Asia-Pacific e-business transactions will cross US$120 billion by 2004 across 12 countries. An estimated couple of hundred companies have tested waters with eSourcing in India, sourcing over Rs.4, 000 crores to date. Some benefits of eSourcing include:

* Making better decisions: eSo-urcing is far more than just rev-erse auctions online bidding events and lower prices. The more advanced solutions allow buyers to specify and weigh ma-ny decision factors other than price. Buyers use sourcing pro-cesses (including software and online bidding events) to gath-er systemic market information on multiple important factors.

* Lower price per unit: Companies using just the auction element of an sourcing solution can be more confident of having approached the best price the market has to offer. However, except in high technology markets, savings of 5 per cent to 20 per cent, may be more difficult to achieve the second, third, or fourth time that a contract is put out for a bid.

* Intensify competition among suppliers: (take key points from page 4 in the Gartner Report)

* Speed up the sourcing process: In search for the lowe-st cost, some organisations lose sight of the day-to-day volatility in price on many supply items. In stable times, simple, long-term contracts mean less risk, but today, constant vigilance, agility, and involvement in spot markets are essential to staying on top of supply costs. Similarly, as product cycles shorten in most industries, the flexibility to quickly re-formulate requirements and quickly find competitive sources of supply is at-least as important as the lowest absolute price.

* Lower the overall cost of sourcing: One of the more enduring benefits of adopting an eSourcing solution is a streamlining of processes and reduction in overall costs, which often is not usually the initial motivation for most buyers. Michael Hammer, in the September 2001 issue of Harvard Business Review, writes Streamlining cross-company processes is the next great frontier in reducing costs, enhancing quality, and speeding operations.

* Discover new vendors and features: Until recently, all but the largest manufacturer of industrial goods, and even raw commodities were insulated fr-om potential customers in rem-ote locations. In many markets, eSourcing has been exceptionally good at allowing new suppliers to show their best face, if only to motivate incumbents to raise their game. Buyers should therefore look at eSourcing not only as a money saver with existing suppliers, but as a strategic lever for product development, spend visibility, global supplier outreach and using state-of-the-art technology to achieve operational efficiencies in their organisations procurement processes. Ultimately eSourcing helps organisations create competitive advantage and staying at the leading edge of industry innovation.

What does future hold for eSourcing
In the last three years, several elements of sourcing have become the norm: multivariable eRFx, reverse auctions and an orientation towards buyers. In the next two years, companies will introduce new features and benefits in the hope of differentiating themselves again. Tracking all the parameters of an order, making sure that the goods get delivered to the correct locations at the contracted times, at the contracted price, and at the contracted level of quality is considerably more difficult. Eve if the vendor is one that the buyer has worked with before, there must be systems in place to prevent what one sourcing provider calls contract leakage. Therefore eRFx providers must acknowledge that the sourcing process does not end with the auction and neither does their role. For contract management to work, buyers must be able to integrate their sourcing solutions with whatever systems they use to track raw materials, work in progress, finished goods inventory, capital assets, assets services purchases or whatever else is being bought. Moreover, this integration will need to include disparate systems: local plants inventory management programs and enterprise wide ERP installation and solutions. Pro-viders will be developing integration capabilities for their clients. The technical and business challenges above may lead many eRFx solutions providers to focus on a few specific industries and develop targeted vertical solutions. Focusing on specific industries will enable solutions providers to focus both their product development and marketing efforts.

Consistent with analyst vi-ew, next-generation enterprise sourcing is not about a flurry of features and functionality or brilliant technology, but about a truly unique combination of technology and consulting, which is cost-effective, practical, systemic and sustainable.

(The writer is Country Manager, FreeMarkets India)