The past three decades years have brought a whirlwind of advancements to procurement globally. Gains and losses brought many lessons: some learned, some still being learned.
In this blog I will outline what I have seen in my years within this industry (what some would now call the history of e-sourcing) how it influences procurement processes today, and how it will shape the future.
In today’s procurement world, few realize that it was only in 1990 that organizations like the ISM and CIPS advanced the concepts of strategic sourcing and category management. It was for about five years that this discipline was exercised without the benefit of any of the tools that are so omnipresent and familiar to us today, that have been brought about by the internet.
These quick five years inspired many, and in 1995, a company called FreeMarkets was established. FreeMarkets introduced the internet mediated reverse auction. This was one of the most phenomenally successful and quickly diffused business process innovations in history. Within the following five years, over 80% of Global 1000 companies were using them in one form or another. However, just as it became popular, its defects quickly came to light.
At the time, many suppliers depended upon selling goods and services not necessarily at the lowest price, but with the appeal that they were provided with higher quality, more reliably, and in a competitively timely fashion. These suppliers felt that the price centricity of these reverse auctions ignored their competitive differentiators. Reverse auctions were, in fact, having a significant chilling effect upon participation of suppliers. Many suppliers simply withdrew, stating ‘We can’t win this game; this is not going to work for us."
With this change, companies were encouraged (and put under pressure!) to work on making the reverse auction more fair by adding a way to fix mistakes. Among those were Emptoris, CombineNet (the company that I led), and Trade Extensions. All three introduced features that made it possible for decision makers to balance cost with other important supply considerations. Sourcing optimization was born.
For suppliers, sourcing optimization brought back some of the expressiveness of face-to-face negotiations by allowing volume discounts, package pricing, and quid-pro-quo offers for mutual benefit.
Sourcing optimization also made the internet's effects on the size and speed of global trade even bigger. It simply was not practical before the internet to do business with suppliers across time zones and continents as routinely and easily as we do today. With sourcing optimization and the internet, it became possible to do so on an even broader scale, with dozens or hundreds of suppliers, across SKUs and diverse services around the world. It was only at this point, with the power of optimization, that sourcing events on this scale became conceivable.
The extended supply chains that are commonplace today are the direct result of these technological changes.
Looking back, much that appears obvious to us today, and much that is part of our conventional wisdom in procurement, was not widely accepted 25 or even 15 years ago. It had to be demonstrated through a disciplined practice of strategic sourcing aided by technology, on a scale that drew attention to the new rules.
- Over the course of two decades, we learned that e-sourcing benefits extend far beyond cost reduction. This prompted the development of more sophisticated tools for risk management, collaboration with suppliers, and leveraging innovation through procurement.
- As supply chains grew more extended across the world, involving more suppliers, more complexity, and unparalleled dependency on air and ocean transportation, we learned that increased risk often accompanies expanded supply opportunities. Hurricane Katrina in the United States (2005) provided a wakeup call to many companies who sourced raw materials exclusively through the port of New Orleans. In its aftermath, they learned how to use their eSourcing business rules to diversify their supply chains. Sourcing optimization esourcing tools enabled them to perform a trade-off analysis, to balance the cost of using more ports or more proximate but costlier suppliers against the potential cost of another natural disaster. I think this is one lesson learned during this period that now forms part of our conventional wisdom.
- Another key discovery of this period was that collaborative relationships with suppliers enabled companies to innovate and stay on top of their industry. Fast-moving consumer goods (FMCG) companies (CPG companies for our American readers) who source a very wide spectrum of products were among the first to recognize how important it was to learn from their suppliers about changes in materials and production processes which not only lowered costs but improved the products they were marketing.
The first two decades of e-sourcing have had lasting significance and have led us to a multifaceted world of practices and benefits. However, we also have to recognize that the roadblocks to getting there were numerous, and surprisingly persist in many ways, even to this day.
One roadblock that is often cited is that the technical skills to use more advanced e-sourcing tools are lacking. However, what I think is probably more lacking (more often than perhaps we care to admit) is the importance of the knowledge of when to use them and why.
I believe that sourcing optimization applications have gotten a bad rap. One of the common complaints you will often hear is that these are complicated tools created by PhDs for use by PhDs. I think that's nonsense, frankly.
I have seen the UIs, I know they are usable, but you have to approach them with the clear knowledge of what you want to achieve. You must have a sense of your desired outcome and the business steps needed to get there, and then how to use the tool effectively will be readily apparent.
Unfortunately, sourcing practitioners (and their managers) with the background and judgement to do that today are sometimes in short supply.
Another roadblock to the development, use, and benefit of esourcing technology has been the reaction to the aggregation of spend it permits across the divisions of corporations. This has often disrupted lines of authority and decision-making that have held for decades. Naturally, whenever you do that, you encounter resistance.
Companies like CombineNet and Trade Extension had to repeatedly challenge corporate decision makers to break down silos and foster collaboration in the interest of the larger organization. While there has been progress to date, this is a roadblock that persists in many companies today.
Finally, virtually all companies over the past 30 years or so have wrestled with the problem of getting adequate data to support the use of powerful technology tools. That roadblock hasn't gone away, but there now exists greater sophistication in taking poor quality data and improving it. While the tools have improved, data quality is likely to remain a challenge for years to come.
I advise those who are contemplating sourcing optimization: please do not permit a data quality problem to stop you. It will be one of the things that you need to address along the way, but it should not be an excuse for failing to implement more powerful e-sourcing techniques in your business.
So much for the history and lessons, where have we arrived? Despite all the effort by procurement professionals, technology providers, and all the progress achieved, there remains a serious lack of capability in our procurement organizations. Whether for a lack of understanding, skills, tools, or some combination of these, organizations charged with driving benefits "straight to the bottom line" have substantial room for improvement.
What are the steps toward improvement?
As is normal for technology, one outcome of the now lengthy history of e-sourcing is that the tools we have used to make progress in the past have grown old. Ultimately, any technology provider today must balance the effort required simply to maintain and renew its technology base, addressing what is known as "technical debt," with the effort required to extend the functionality it offers, adapting to changes in the marketplace and the demands of the customers who use it.
No doubt, current processes and technology signify that it is time for another technology revolution in e-sourcing software today. We don’t have to look far to know where that revolution is likely to originate. Artificial intelligence promises not only to address aging technology tools but also the paucity of skilled sourcing professionals able to use them.
Sourcing Automation is the technology revolution we need now: look out for part two of this blog series, which explores the future of e-sourcing with sourcing automation.
About the author: Dr Rich Wilson is a non-executive director at Keelvar. He is the former CEO of CombineNet and founded and led operations research at USAir. Rich also held the role of transportation consultant at Oracle.