It’s always been a mystery to me why so few organizations use sourcing optimization. Yes, it can be complex to use but there is so much value to get from it. And, if you set up a center of excellence (as discussed in this previous article) you will quickly build up the expertise necessary to support the organization — even one or two experts can make a huge difference.
According to our recent research, only 15% currently use optimization-based eSourcing. Among these 15%, many only use it for specific categories of spend, almost always transportation and logistics. But it really should be used for more spend categories. I would go as far as saying that any eSourcing event of significance should be reviewed by an optimization expert to see if optimization can bring additional value. I guarantee that it can in far more cases than you think.
Some will argue that their sourcing events aren’t complex enough to warrant the investment. But even seemingly simple sourcing events can benefit from optimization. So, let’s look at a couple of cases that highlight why sourcing optimization should be used more often.
Expressive Supplier Bids
In these times of inflation (even if the worst seems to be behind us) getting the most out of your suppliers is important. Asking everyone to just submit pricing for items/services on a standalone basis is unlikely to accomplish this. Giving suppliers the opportunity to submit alternative conditional pricing will often lead to lower costs. Examples include:
1) Bundling — If supplier “X” gets awarded both item A and item B, they will be able to give a discount.
2) Straight-up volume discounts — If supplier “Y” gets awarded more than a specific amount or number of units, they will give a discount. This gives suppliers the opportunity to leverage their own strengths and opportunities based on machine setup, locations, fixed costs spread over more items, etc.
When evaluating different suppliers against each other where some are using bundle discounts (worst case, on item bundles) and others are using various volume discounts, it can be nearly impossible even for small sets of items without optimization support.
Scenario Modeling
Risk management and ESG are priorities that have climbed the CPO agenda in recent years. Sourcing optimization allows you to create different scenarios to show the cost of different choices and make informed decisions.
From a risk management perspective, you can set up different constraints to compare the landed cost of single source, dual source, nearshoring, onshoring, and similar scenarios to make informed decisions on what’s the appropriate balance between risk and cost. Similarly, on the ESG side, scenarios weighing emissions vs. cost can be created to support decision-making.
This is just scratching the surface of what you can do. Talk to Archlet, Coupa, JAGGAER, or Keelvar which offer some of the most capable sourcing optimizers in the market, or experts like Moneyball CPH which can provide countless other examples.
And as always, Ardent Partners is always here to answer any questions you might have.
