Part 1 of this blog series introduced common supply chain challenges and resulting spend management opportunities for companies of all sizes. The article then went into the philosophical and functional differences (if any) between the “spend management” and “supplier relationship management (SRM)” monikers. Further discussion was about what exact functional parts of this software category small and medium enterprises (SMEs) might need.

The real question should always be, “Do we manage spending and, if so, what solutions do we use to do it?” To my mind, sourcing, procurement, and spend analysis capabilities cover most of the spend control needs for midsized enterprises.

Sourcing (Global and Strategic)

Generally speaking, sourcing is the process of identifying a company that provides needed goods or services. APICS Dictionary further defines strategic sourcing as “The development and management of supplier relationships to acquire goods and services in a way that aids in achieving the immediate needs of a business. It is entirely aligned with the sourcing portion of managing the procurement process.”

In other words, strategic sourcing is the continuous evaluation of preferred suppliers, goods, services, price, and non-price attributes to achieve the optimal mix of all parameters. The group of (preferably electronic) “request for” documents collectively called “RFx,” which entails requests for quotation (RFQs), requests for proposal (RFPs), and requests for information (RFIs), facilitates the supplier evaluation efforts.

Actual buying or selling (sourcing) takes place via a number of auction events that will be described shortly. Purchases can be direct or indirect, depending on whether they entail direct or indirect materials.

Direct materials are materials that become part of the final product in measurable quantities. These are raw materials for manufacturers, and finished goods and components for distributors. Conversely, indirect materials are materials used in manufacturing that are not normally charged to finished production, such as cutting and lubricating oils, machine repair parts, glue, or tape.

Indirect materials also include maintenance, repair, and operations (MRO) supplies, or items used in support of general operations and maintenance such as maintenance supplies, spare parts, and consumables used in the manufacturing process and supporting operations. Office supplies, computer equipment, professional and temporary services, catering services, facilities services, travel, internal suppliers (e.g., computer, telephone), and so on are other examples of indirect purchases.

There is a third kind of sourcing/purchase, spot purchase, which is a purchase made for standard off-the-shelf material or equipment, on a one-time basis (”on the spot”). Spot purchase could apply to non-catalog items requisitioned through the procurement module and also to single sourcing events for large purchases that warrant competitive bidding. In the first case, the sourcing module logically must be integrated with the procurement counterpart.

The sourcing process starts from an actual requisition for a certain material or service that follows the creation and posting of an event, bidding, evaluation of bids, selection, and approval of the winner, and transmitting the actual purchase order (PO) or contract to the winning supplier.

(A Plethora of) Sourcing Auctions/Events

In sourcing, one can distinguish between two main categories of events (auctions): forward events and reverse events. A forward event, also called a seller-centric event (because it is posted by a seller), offers products or services for sale. A reverse event, or a buyer-centric event, is a request to buy products or services from suppliers.

Within these two types of events, commercially available sourcing products typically support the following event mechanisms (in addition to an event pack, which is a group of individual events):

• Posted offer (forward “for sale”) and posted bid (reverse “wanted to buy”) events are similar to advertisements in the classified section of a newspaper, with the discretion of the seller to sell (or not) to whomever they see fit.
• An English event is an open ascending-price event; as time goes on, the price is bid up by buyers who are willing to pay more than other bidders. In contrast, a reverse English event is a descending price event because the price is bid down by sellers willing to sell for a lower price than a previous bidder.
• A Dutch event is an open descending-price event, while a reverse Dutch event is an ascending-price event. In a forward Dutch event, a seller posts a description of the item to sell, along with a starting price (traditionally set above the item’s true value) and the minimum acceptable price, which is the lowest price the seller is willing to sell the item for. The price continues to decrease by a seller-specified amount at seller-specified intervals until either a buyer stops the event by bidding at the currently displayed price, or the price drops below the minimum acceptable price, in which case there is no winner.
• A uniform price auction is a mechanism used to sell a fixed quantity of identical items, and derives its name from the fact that all event winners pay the same amount, but the highest bidder is eligible for his/her desired quantity (and so on until everything is sold). The price is dependent on the least best bid amount up to the total quantity of items available. If the event owner has specified a reservation price, then the amount paid depends upon whether the nth highest bid (where n = the number of units for sale) is above the reservation price and whether the seller uses the all-or-none option.
• A discriminatory price auction is quite similar to the uniform price event, except that all winners pay exactly what they bid. Higher bidders buy the first available items.
• A first-price sealed-bid (FPSB) auction is an event (either forward or reverse) where the bids (or quotations in reverse events) are hidden from everyone during the bidding process (until the event expires).
• A Vickrey, also called a second-price sealed-bid event, is a forward event that is operationally equivalent to the sealed-bid event except that instead of the highest bidder paying what he/she actually bid, he/she pays the second highest bidder’s price (unless there is only one bidder, in which case he/she pays the reservation price). This sort of event is a demand-revealing event because it entices bidders to bid what they value the item to be worth.
• Weighted request for bid (RFB) sourcing allows the creation of reverse requests for RFQs and forward RFBs with user-defined weighted attributes. These features could be special qualities or factors that could drive the selection of a buyer or seller by means other than price alone. Some examples of attributes are proximity of manufacturer, lead time, color, ISO compliance, delivery speed, options, manufacturing and engineering tolerances, etc. What this kind of sourcing auction does, in effect, is give the event owner a way to ask questions of bidders and have those answers electronically and impartially evaluated.
• A batch event is one in which a seller posts a quantity of identical items with a pricing step function. As the number of items that have been bid on increases, the individual item price drops as a function of the quantity. While the actual steps are not shown on the bidding page, event owners have the option of revealing their price function in the event’s details field.
• Dynamic events are an enhanced version (and combination) of the above-mentioned English and weighted-attribute events. Like an English event, a dynamic ascending event is an ascending price event because as time goes on, the price is bid up by buyers who are willing to pay more than other bidders. Similarly, like a reverse English event a dynamic descending event is a descending price event because as time goes on, the price is reduced by sellers who are willing to sell an item for less than other bidders. But also like the weighted-attribute event, dynamic events allow for the creation of user-defined weighted attributes (special qualities or factors that can drive the selection of a buyer or seller by means other than price alone).
• Single-price RFBs and single-price RFQs are respectively forward and reverse events that use only one predefined weighted attribute of price.
• Finally, sourcing RFB and sourcing RFQ events are those in which sourcing agents are called upon to assist in the actual purchase or sale, or to provide defining information. Agents can, in turn, create another event from the original one as needed. Frequently, companies use this event type when they are unsure about exactly what it is they are buying or selling and they need some assistance defining it. In a manner of speaking, TEC is sn example of an agent helping companies source enterprise applications.

In addition to dozens of out-of-the-box event types that can be created via wizards and templates, companies can occasionally use an event pack as a bill of material (BOM) of a sort. Event packs allow users to send out each line item (individual event) to vendors and suppliers in the manner (i.e., auction type) the companies see it fit.

More Sourcing Features and Potential Benefits

Other typical and useful sourcing features would be supplier scorecards, online collaboration and negotiation, graphical bid analysis, wireless notifications and mobile bidding, personalization (in terms of alerts and notifications), and the ability to split awards. In general, sourcing capabilities help enterprises identify and negotiate with qualified suppliers and thus reduce sourcing process costs.

In addition, one can reach out to a wider range of products and services and enhance collaboration and knowledge sharing, with a win/win value proposition for both buyers and suppliers. Typical reported sourcing benefits are shorter sourcing cycles by up to 30 percent, time-to-market cycles reduced by 10 to 15 percent, and negotiated average unit price reductions of up to 25 percent. Looking back at the five supply challenges mentioned in Part 1, sourcing can help in large part with the first three.

A separate article will analyze why the concepts of strategic sourcing and sourcing optimization are generally lost on smaller and mid-market companies, and why a different approach might be needed there. Namely, a single capital expense purchase for a sourcing software seems to outweigh (in mid-market customers’ minds) the potential benefits.

They are often wrong, since if there is one tool that should clearly demonstrate payback it would be sourcing, which can sometimes pay for itself in one successful event. Ariba points out the potential business benefits of its on-demand offerings. These individual software-as-a-service (SaaS) spend management solutions could be appealing to SMEs because they integrate the expertise needed to create effective markets.

What about Procurement?

APICS Dictionary defines procurement as “the business functions of procurement planning, purchasing, inventory control, traffic, receiving, incoming inspection, and salvage operations.” In other words, the “reach, speed, and control” mantra that characterizes procurement actions provides the best way to meet all the five supply challenges mentioned in Part 1.

“Reach” means that companies need to link and communicate with suppliers. In other words, companies cannot really control suppliers if they cannot reach out to them.

Mobile access is critical to this, since order approvals via personal digital assistant (PDA) devices help mobile users to complete their jobs with greater efficiency. Also critical is the efficiency of desktop e-mail approvals by providing purchase order details in approval notification messages.

There is also the need to create multiple catalogs for a single supplier and to log and trace supplier and purchase order notes. Manufacturing companies additionally need improved direct materials purchasing processes via the following:

• a Web-based interface and workflow for inventory management;
• real-time visibility of available (on hand), committed (allocated), and ordered stock;
• the ability to generate purchase orders to stock and stock transfer requests;
• the ability to restock multiple locations from a central warehouse or commissary, as well as track inventory at each remote location; and
• the ability to addresses market needs for industries that manage direct materials in many locations.

“Speed” means that enterprises must reduce the time and effort required to do procurement the right way. To that end, modern procurement suites offer enhanced user experience via supplier icons, two-click printing, and robust order-search capabilities. One can often find enhanced buyer consoles, simplified entry techniques of split distributions, and intelligent tool tips for order lists.

Finally, “control” means cutting the deals and making the rules, and then letting the system enforce compliance. Helpful in that regard are advanced workflow options for non-catalog items and order changes. For example, line-item level approvals and disapprovals permit more granular decision making that keeps the process moving with reduced effort by all participants.

Also helpful are tools and rules for secured catalog item price overrides and enhanced support for purchasing cards (p-cards) such as the ability to approve individual line items or to assign a temporary ghost p-card to a supplier. Integration with enterprise resource planning (ERP) back-office systems goes without saying, especially via a multi-channel framework for enterprise application integration (EAI) that can leverage Web services, flat file databases, e-mail messaging, etc. Some nifty procurement products provide visual business process modeling (BPM) tools and out-of-the-box procurement process flow diagrams that use extensible markup language (XML) and Web services.

The final part of this blog series will showcase one incumbent mid-market product, Epicor SRM. Until then, what are your views, comments, opinions, etc. about the current economic climate in your region/industry and about your approach to curbing spend? What are your best sourcing and procurement practices, as well as your experiences with particular SRM or spend management applications?