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Sourcing and Procurement Comes of Age

Before the cloud - before the commercial internet - there were communications networks that linked manufacturers with their suppliers. How effective they were is another matter entirely.

Sourcing and Procurement Comes of Age

In those pre-World Wide Web days, the primary means for managing procurement and strategic sourcing was electronic data interchange (EDI), a format that has definite plusses and minuses. On one hand, it made possible a huge leap forward in the use of technology to tie trading partners together, by facilitating the transmission of key documents in a paperless fashion. On the other, it was expensive to implement and maintain, did not allow for real-time communication, and was marred by disagreement over the best set of messaging standards. Remember the battle between ANSI X12 and EDIFACT?

Richard Waugh, vice president of corporate development with procurement services vendor Zycus, recalls those days. He launched General Electric’s Trading Process Network, reportedly the first online marketplace for sourcing and procurement. In the late 1990s, GE was doing business with more than 40,000 trading partners over the TPN. The venture was said to have cut in half the length of the bidding process for GE’s lighting division. It was a success story for its time.

But the problems inherent in managing relations with a global army of suppliers were by no means solved. The original EDI-driven system was “crude,” says Waugh. It required the distribution of client software to enable trading partners to connect.

After leaving GE, Waugh co-founded B2eMarkets Inc., an early sourcing venture based on the software-as-a-service (SaaS) model. (The company was acquired by BravoSolution in 2004.) He came under pressure from venture capitalists to alter the business strategy and build a vertical market exchange. But his experience at GE steered him away from that approach.

Given the level of competitive differentiation that a trading-partner network can bring, “the last thing you’d want is a bunch of companies in the same space sharing technology,” he says. “The leaders in industry recognize that their ability to succeed is based on how they compete in their supply chains.”

After that came a wave of supplier portals that seemed to promise a new era of procurement efficiency. In many cases, they were tied to an auction model, whereby suppliers bid for the right to serve manufacturers. Not surprisingly, most of those ventures turned out to be all about price, and suppliers were reluctant to participate. The portal concept, at least in its initial form, died a quick death.

The picture is different today. The rise of the internet has allowed for more direct connections, many of them real-time. Systems have become far less cumbersome, promoting the widespread adoption of new sourcing and procurement applications. “We’re finally emulating the ease of use you see in the B2C [business-to-consumer] space,” says Waugh.

The need for efficiency and visibility is greater than ever. The dispersion of supply-chain partners over a wider area, as networks become more globalized, has heightened the risk of disruption. Older systems were built on a regional model, assuming that suppliers were physically closer to manufacturers. “You could keep tabs on them more easily,” Waugh says.

Then there was the Great Recession of 2007-2009, which woke companies up to the necessity of tightening the reins on suppliers. Countless vendors went out of business, with virtually no warning. As the economy began to recover, manufacturers sought to shore up relations with the survivors – while keeping a close watch on their continued viability.

It makes sense, of course, to pare back one’s roster of suppliers to the fewest that are needed to get the job done. But a sole-supplier strategy for key commodities is, in most cases, going too far. While companies are looking to shift a good portion of their business to the most trusted (and least-cost) vendors, they need to keep some alternative sources in their portfolio.

The unexpected has a nasty way of rearing its head at the most inopportune times. “You can’t predict a natural disaster,” says Waugh, “but you can plan for it.” A good contingency program will spread the supply base over multiple regions.

Where to start with an effective procurement strategy? Waugh recommends the use of spend analytics, which tell you exactly what you’re buying and from whom. Absent that intelligence, you can’t begin to rationalize a supplier base or pursue effective category management.

A major problem for companies at the outset is bad data. Purchasing information tends to come from multiple systems, many of which don’t easily talk to one another.

“When it gets down to the transactional level, it’s incomplete,” says Waugh. “You can’t tell exactly which categories or products are being purchased from which suppliers.” The lapse weakens one’s position at the bargaining table.

Armed with accurate information, companies can proceed to fashion category strategies and construct total-cost models for all markets. Having identified the best spend opportunities, they can automate (and greatly speed up) the request-for-proposal process. Finally, they can track and measure supplier performance, and automate replenishment. We’ve come a long way from the use of EDI to send purchase orders and acknowledgments.

Today’s supplier portals are nothing like the auction-based models of the early internet age. They focus not only on price, but on supplier quality and reliability as well. They contain vital information such as a supplier’s capabilities, production volume and distribution. They allow suppliers to report on their own performance. (Supplemented, of course, by information from other sources, such as third-party financial reports and news about mergers and acquisitions.) And they ease the process of onboarding new vendors.

In addition, suppliers can receive immediate feedback in the form of scorecards that are tied to pre-set thresholds for sales volume and location. “From the moment a supplier registers,” says Waugh, “it can get a quick read to see if it really meets [your] profile.”

Buyers and suppliers today have more information on hand – along with the capability to transmit it on a real-time basis – than ever before. Manufacturers can draw on a single source for all relevant data, giving them unprecedented control over the procurement process.

“It’s important to have an integrated view,” says Waugh, “so that they can really shift the balance of power back to their side of the table.”

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