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E-Sourcing Best Practices: Lay the Groundwork for Automated, Integrated Procurement

by Carolyn A. Beal | SAPinsider

April 1, 2007

E-sourcing -- the Web-based process of selecting product or service suppliers -- is a strategy that most companies already embrace. Many companies, however, still need to take a more holistic approach to e-sourcing to fully reap its benefits. Discover whether your business could be enjoying large returns through e-sourcing, and learn the tried-and-true methods for creating a successful sourcing strategy.
 

Procurement teams are under constant pressure to deliver value to the business. Traditionally viewed as paper-pushing cost centers within the organization, procurement teams can look to sourcing as a solid starting ground to change that perception and add real value to the business by converting loosely structured, one-off sourcing activities into an efficient, collaborative, money-saving process.

Procurement teams would be well served to reconsider their enterprise sourcing (e-sourcing) strategy and make sure it's positioned for success — or to develop such a strategy if one doesn't already exist (see sidebar below).

A majority of companies are currently using some sort of e-sourcing application — whether it is an online auction tool, an RFP application, or a full e-sourcing suite — to overcome the pain points of cumbersome, manual procurement processes (see "The World Before Automated Sourcing" sidebar below). But a more widespread, holistic approach to e-sourcing arms your procurement team with significant growth and cost-savings opportunities. According to a 2006 ASUG/SAP joint benchmarking study, top-performing companies are reducing annual purchase costs by 11.8% and experiencing a 30% growth in operating income.2

The keys to their success? A strategic approach to e-sourcing, a broadened view of procurement's role within the organization, and an integrated technology platform that's easy to use and that supports cross-department collaboration.

What Is E-Sourcing? Get Back to the Basics

E-sourcing is a systematic, Web-based process used to formally select a supplier or suppliers that will provide products or services. It encompasses the following online processes:

  • Expenditure analysis (also known as spend analysis): A process that identifies what is being purchased, by what group in the organization, and from which suppliers.

  • Supplier identification: The process of locating suppliers to include in sourcing events.

  • Negotiation events: The formal processes the procurement group uses to obtain goods and services from suppliers. Negotiation events include:

    • Request for proposal (RFP): A specification document that the buying organization creates to provide a comprehensive overview of the good or service being put up for bid. Suppliers respond to this document with detailed information about their capabilities. Related documents include requests for quotes (RFQs) and requests for information (RFIs).

    • Reverse auction: A live, online event that takes the supplier selection process a step further, enabling a buyer to collect and compare price and bid information from two or more suppliers in a real-time, open bidding environment.

  • Supplier management: A process that involves keeping a detailed record of supplier contact information, performance history, and bid/award history.

  • Contract management: The process of creating, managing, and leveraging an enterprise's supplier agreements; more and more, contract management is linked with e-sourcing.

Each phase of the e-sourcing process (see Figure 1) represents an opportunity not only for automating workflow, but for integrating important sourcing information into your enterprise applications and backend systems.

Figure 1
The e-sourcing process continuum: Each stage of the process — from plan to analyze — flows into the next

The Benefits of an E-Sourcing Program

A solid e-sourcing strategy can change the game for procurement departments, encouraging other departments to view procurement as a value-adding group that provides — and doesn't hinder — substantive organizational benefits.

After existing for nearly a decade, e-sourcing is now a well-established process for procurement professionals. According to analyst firm Aberdeen Group, more than 80% of Fortune 1000 companies and nearly half of midmarket companies have tested online negotiation capabilities.1

Greater Cost Savings

The most obvious benefit from e-sourcing is greater cost savings. Through enhanced visibility into expenditures, procurement groups can better leverage economies of scale through consolidated buying and can identify areas of "maverick" (i.e., ad hoc, unauthorized) spending within the organization. In short, you can save money through wiser sourcing decisions.

Online RFP and reverse auction events are also crucial to lowering costs. There is nothing more exciting than witnessing the declining price curve during a live auction event. In addition, with the ease of adding new suppliers to bid on these events, there is a greater probability of getting a lower price on goods or services.

Reduced Sourcing Cycle Time

E-sourcing drastically reduces the time it takes to negotiate and sign a contract with suppliers. A survey of customers using SAP solutions for e-sourcing3 found that cycle times dropped between 30% and 75% as a result of implementing and using e-sourcing applications (see Figure 2).4

Figure 2
KPIs that demonstrate the benefits of e-sourcing

Key processes are automated and standardized, and different phases of an RFP or auction event automatically progress at predetermined times. Through templates, sections of questions in each RFP document are used again and again. E-sourcing enables procurement teams to weight and score RFP responses and then quickly aggregate scores for award allocation.

Prior to e-sourcing, the procurement group was reactive rather than proactive. Most procurement work was done only after a business unit stakeholder requested to purchase a good or service for a one-time buy.

Centralized Best-Practice Repository

In addition to reducing the time needed to run a sourcing event, templates also provide a centralized best-practice repository. Buying teams can create RFP or auction templates to reuse in future sourcing events, preventing any sourcing knowledge from leaving your organization along with outgoing procurement staff. While creating templates does take effort, the resulting benefits of a consistent sourcing process are substantial.

Collaborative Environment for Buyers and Suppliers

E-sourcing applications provide a centralized area to easily collaborate on sourcing events from both the buy and sell sides. For example, many e-sourcing applications enable cross-functional collaboration for supplier-response scoring.

Additionally, by making it easier to work with procurement, you can increase the effectiveness of spend management by expanding into new categories. For example, you can begin working with departments such as human resources and marketing to source complex services. According to Aberdeen Group, each new dollar put under procurement's control yields a 5% to 20% savings.5

The World Before Automated Sourcing

Do These Pain Points Still Exist in Your Organization?

Prior to e-sourcing, the procurement group was reactive rather than proactive. Most procurement work was done only after a business unit stakeholder requested to purchase a good or service for a one-time buy. Also rampant were business owners asking the procurement group to negotiate a contract after it was already signed — a task of almost Herculean proportions since the supplier had zero incentive to meet any of procurement's demands.

When developing RFP documents, procurement teams "re-created the wheel" every time since there was no central repository to review what others had done before. Knowledge was trapped in pieces of paper on employees' desks, stuffed inside desk drawers, and tucked away in filing cabinets. The procurement group had to conduct hours of research to determine the most appropriate questions to ask each prospective supplier.

RFPs were then snail-mailed to suppliers. Since this process was so lengthy and unwieldy, procurement professionals tended to invite a small, known group of suppliers to bid for business. Hence, opportunities to include new suppliers for a more competitive bidding environment were few and far between.

The fun really began once suppliers returned the completed RFP documents. It was up to the procurement team to thoroughly review the responses and identify discrepancies. All responses were entered into a Microsoft Excel spreadsheet or, prior to Microsoft Office, into general ledger sheets.

Only after manually tallying up the RFP scores was the procurement team able to identify the best supplier to award with their business. The resulting contract was then filed away, perhaps never to be seen again. Any best practices garnered along the way were essentially lost as well.

How to Move Beyond a Tactical Program

First and foremost, if you haven't done so already, invest in e-sourcing technology. The benefits are tangible and will move your organization away from tactical activities, freeing up more time to focus on strategic activities, such as sourcing more complex spend categories or managing strategic suppliers.

Make sure that other business units buy into the process. To ensure e-sourcing success, organizational alignment is essential. According to analyst firm Gartner, "Organizations must develop formal and structured collaborative processes and relationships to coordinate process design, execution, and management across groups responsible for requisitioning, sourcing, procurement, quality control, settlement, and day-to-day management of suppliers."6 Also important here is having a solid technical infrastructure for collaboration between departments. An e-sourcing platform fosters collaborative work between business units and, as a result, provides more visibility into your spend.

Start with a small group of quick-win categories, such as office products, laptops, promotional products, or other commodities, in which you can immediately start saving money so you can demonstrate procurement's significant value to the process. Early successes get other groups within the organization excited, and you can build off this momentum to expand beyond "low-hanging fruit" into new categories.

Invest in e-sourcing technology. The benefits are tangible and will move your organization away from tactical activities, freeing up more time to focus on strategic activities.

Develop a strong procurement mandate within the organization. Once you secure departmental buy-in and can demonstrate e-sourcing's value-creating potential through quick wins, you have to broadcast the strategy and enforce its use. If you have an e-sourcing solution but not everyone uses it, you'll miss out on cost-savings opportunities. For example, you might negotiate a contract with an airline. You need to make sure that your entire company knows to book tickets through this particular airline, or you may lose a rebate opportunity or face a penalty for breaking your contract.

Consider the professional development of procurement staff. With the increased productivity resulting from e-sourcing, your procurement staff will have more time to focus on strategic activities, such as building strategic supplier programs, sourcing more complex categories, and expanding into a global supply base, to bring added value to your business. You must ensure that your procurement staff has the training, skills, and knowledge to move beyond tactical measures.7

The biggest procurement trap companies can fall into is conducting e-sourcing in isolation from other business processes.

Conclusion

The biggest procurement trap companies can fall into is conducting e-sourcing in isolation from other business processes. E-sourcing is an evolution and an extension of traditional, requirements-driven procurement, and it can touch nearly every department or division with your organization — from legal to finance. A more strategic sourcing approach can foster collaboration and drive huge cost savings across a company.

Newcomers to e-sourcing, as well as those currently using a mishmash of automated and non-automated sourcing solutions, might consider employing this holistic strategy to drive real savings for specific procurement projects. Your goals should include a full source-to-settle process on a single platform. For example, you could conduct an e-sourcing event, then push operational contracts from that application into an ERP system. This gives you greater control over and deeper insight into expenditures, and lets you reconcile purchase orders with contracts. This full-circle approach, based on a single technology platform, enables you to provide ongoing, measurable value to your enterprise.



1 “The CPO’s Agenda: Strategies for Procurement Transformation,” Aberdeen Group (March 2005).

2 ASUG/SAP benchmarking study (2006).

3 Please see www.sap.com/solutions/business-suite/srm/index.epx for more information on SAP solutions for e-sourcing.

4 Frictionless Commerce customer survey (2004).

5 "The CPO's Agenda: Strategies for Procurement Transformation," Aberdeen Group (March 2005).

6 Carl Lehmann, "SRM Best Practices, Part 1," Gartner, Inc. (December 31, 2004).


Additional Resources

www.sap.com/solutions/business-suite/srm/index.epx

"SAP Solutions for E-Sourcing: Enabling Procurement Transformation," a solution brief available for download at www.sap.com/solutions/business-suite/srm/e-sourcing/index.epx

Carolyn A. Beal is a member of SAP's SRM Solution Marketing team. She has 10 years of experience marketing enterprise solutions to companies. Prior to working at SAP, she held product marketing and marketing communications positions at leading high-tech companies. Ms. Beal holds a bachelor's degree from Boston College. She can be reached at carolyn.beal@sap.com.

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