Note: This is the first of a two-part blog series focused on the evergreen sourcing questions related to incumbent suppliers. Read part two here.
The most successful procurement leaders are acutely aware that in order to remain competitive, they need to integrate and collaborate effectively with the core suppliers that play a critical role in meeting their business goals and reducing risk exposure. Alongside the many current challenges confronting sourcing teams and their global supply chains, it is also important to explore and recognize new supplier opportunities and to identify when current supply lines have become stagnant.
Certainly, there are many comforts that come from working with those who know your business well and whose performance you can measure. But looking beyond those existing vendors could yield some net-new areas of benefit not yet untapped – such as finding innovations, improved resiliency, or more flexible contract terms through a more diverse supply base.
One of the major advantages of using a modern sourcing optimization solution is that it lets teams build and evaluate dozens of different supplier awarding scenarios in mere minutes so that it’s easy to weigh incumbents alongside potential new suppliers.
For example, in Keelvar’s Sourcing Optimizer, scenario rule options can leverage nearly any of the data collected within a sourcing event. As users layer in rules that the optimizer must adhere to (such as: "award at least 20% of the spend to these two incumbent suppliers"), it displays the cost impact of the rules overall.
In this two-part blog series, we’ll look at different types of incumbency scenarios our customers typically evaluate in Sourcing Optimizer. The first two covered in this post are:
1) Benchmarking Incumbents Against Historic Rates
2) Assessing Tolerance for Switching/Retaining Suppliers
Let’s now review more details on why each is important and how optimization easily and transparently helps with decision making…
Scenario Set #1: Benchmarking Incumbents Against Historic Rates
“How much will it cost to stay with my current suppliers?”
Incumbents recognize that buyers don’t like churn and often build in a buffer on their pricing. For example, if the cost of churn is 10%, suppliers might try to build in a price increase of 5-8% knowing that there is still an incentive for the buyer to stick with them (especially when other benefits exist beyond just price).
In this typical scenario, you assess the cost to renew incumbents by comparing today’s bid pricing to their historic contracted rates. This scenario is useful for two reasons:
- It gives you an opportunity to read changing market conditions and price increases. Buyers often prefer to minimize change and provider switching, as long as the price increase falls within a reasonable ‘inflation’ increase and the supplier’s service has met a good standard. With this scenario, it can become more apparent which incumbent suppliers are keeping pricing in line with the market and any who may be leveraging their position to push pricing even further.
- It allows you to identify bidding red flags from incumbents and their competitors. This scenario can also very quickly reveal if any existing suppliers didn’t bid as expected on lots, or items and have left coverage gaps. It could signal an error by the bidder, a change in the supplier’s ability to deliver, or a poor specification on the item – and in any of these cases, you likely will want to investigate further.
Also, a dramatic price change by an incumbent could signal there is a defect in the historic rate data being used, or that there is an error in the bid from that supplier. And it can also highlight bid differences between incumbents who are already familiar with your business needs and their competitors; any drastic undercutting by a new supplier should be treated with caution.
Scenario Set #2: Assessing Tolerance for Switching/Retaining Suppliers
“What happens when incumbency restrictions are added?”
Very often, the cost of onboarding a new supplier is a deterrent to switching providers, and there is also an inherent risk that a new supplier may simply not be up to the task. Additionally, the consequences of switching can depend on the strategic nature of the category – for example, containers left at a dock can have a huge impact on business continuity, but a retail site’s groundskeeper missing a month, maybe not so much.
In some circumstances, it may be necessary to take a serious look at new options outside of your incumbents -- but to what extent? Risk-tolerant buyers may not apply any incumbent retention rules in their award analysis to see what new savings or other value may be revealed. The more risk-averse buyers will normally try to reduce churn by capping the number of new suppliers or maximizing incumbency allocation.
Optimization makes it fast to run a variety of scenarios that play with different incumbency restrictions or relaxation rules. For example, the buyer can apply rules that award a portion of overall spend or item count to an incumbent or incumbents, such as “what is the difference if I retain 65% vs. 50% of incumbents?” These types of scenarios are particularly useful in allowing you to find optimal savings, even at the item level, while maintaining a retention threshold.
Two helpful tips when setting up rules for incumbency retention/switching scenarios:
- It is recommended to set a minimum spend volume if you want to look at having a retention threshold. You don’t want to set up a scenario such as “retain 10 of my incumbents” and then a sourcing optimization tool may retain all 10, but only give each 1% of the business, or 10% total, and the remaining 90% to new bidders.
- Keep in mind that with the more rules you add in, savings are reduced and coverage options start to constrain. That will become apparent as you start to model different scenarios in the optimizer.
In all of these scenario examples, you can look at more than just cost and compare incumbents against new suppliers along with attributes such as payment terms, delivery or lead time, sustainability, product alternatives and innovations, and much more.
The great news is that a tool like Keelvar Sourcing Optimizer is designed to make this work easier and faster to adopt and centrally track, especially when it’s time to collaborate with your internal stakeholders to make the final award decisions.