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Re-Evaluating Incumbent Suppliers Via Sourcing Optimization (Part 2 of 2)

August 30, 2021

author:
Chris Walsh

Note: This is the second part of a two-part blog series focused on the evergreen sourcing questions related to incumbent suppliers. Read part one here.

In part one of this blog series, we looked at two incumbency scenarios that customers typically evaluate using Keelvar’s Sourcing Optimizer, emphasizing the technology’s ability to factor in non-cost attributes when finding optimal outcomes in complex settings.

In the second part of this series, we will look at some more advanced scenarios for managing incumbency. These scenarios will show how buyers use sourcing optimization to guide their decisions around supplier retention or switching.

As outlined in part one, most buyers will begin by imposing some event-level restrictions on supplier retention, for example, ensuring that a certain percentage of overall volume, lots (items), or spend is retained by the incumbent. This is a somewhat flexible approach given that any individual item or lane can change hands as long as the overall retention target is satisfied. 

Savings are normally favorable in this setting (providing the buyer's tolerance for switching is sufficiently high) because the Optimizer is allowed to redistribute the subset of items that yield the best possible savings. The downside of this approach is that it fails to address the fact that a buyer's tolerance for switching may be tied to the strategic significance of a lane/item/lot and not just the cost.

In recognition of this problem, buyers will often complement these event-level restrictions with additional item-level restrictions (for example, “overall retention targets aside, I must retain the incumbent on the following items.”) This is done on a targeted basis where items that serve some strategic purpose are singled out. 

As discussed in part one, the more constraints placed on the award scenario, the less flexible the award possibilities. More constraints can translate to a more robust outcome but ultimately, lower savings. The buyer’s appetite for risk and exploring opportunities presented by new suppliers will influence how they approach what can be a challenging and multi-faceted problem. 

Let’s now take a closer look at more types of sourcing optimization scenarios that can be run to analyze award allocation options, based on modeling more specific, fine-grained incumbency preferences. (Scenario types #1 and #2 were found in this previous blog post.)  

Scenario Set #3: Defining incumbency at Event Level

 “How do I restrict the number of new suppliers?”

New suppliers can introduce the potential for new savings but it can also mean more risk– for example, what if this new supplier has an inferior product or is incapable of fulfilling our requirements at times of peak demand?

Buyers will look to mitigate this risk by imposing restrictions on the number of new suppliers or by capping the amount of volume or spend that can be assigned to a new entrant. To accomplish this goal, we introduce the concept of  ‘global’ incumbency, wherein the supplier will be marked as an incumbent at the event level.

Scenarios that look at retention based on the ‘global’ definition of incumbency will focus on restricting new entrants but items can otherwise move freely between incumbents. This tends to be particularly relevant to ocean freight or another domain where service quality is unlikely to vary much between providers, but where the desire to cap overall supplier count is important. 

Again, the savings potential for these scenarios will depend on the buyer’s risk appetite, for example, allowing for two new suppliers will likely outperform the option for one new supplier and allowing 20% of volume to go with a new supplier will outperform a 10% option. Sourcing optimization allows you to run these scenarios in seconds and find the outcome that best suits your needs.

Note that this high-level definition of incumbency does not preclude the buyer from defining incumbent suppliers or historic pricing at a more granular level as we will see in subsequent sections.

 

Scenario Set #4: Defining Incumbency at the Lot/Item Level

“What if I am more sensitive to changes on individual items?”

Global incumbency and its related scenarios can be an effective way of driving high-level supplier retention goals but the lack of control on individual items or lots can be an issue for some buyers. Enforcing additional restrictions at the lot/item level can help alleviate concerns around excessive switching or switching on lots or items that are more strategically significant.

“What if I choose specific items for which to retain incumbents?”

This type of awarding ensures that a certain incumbent is retained on a specific item or set of items as favored by the buyer. Savings are typically lower in this scenario because the buyer is constraining the award on the most valuable items, so the optimization tool has less flexibility.

This scenario is useful for two reasons:

  1. Retain Incumbents on High-Value Items: You may want to strategically ensure proven, established suppliers handle your most valuable items or cargo. This scenario removes any savings that might come from competitive bidding on those items as a trade-off for reducing the potential for business risk.
  2. Try New Suppliers on Other Items: For the remaining items, you can look at the competitive bids and possibly consider new suppliers in those areas. It may be a strategy to onboard new suppliers with lower-value items first, as they establish a track record to be considered greater awards in subsequent sourcing decisions.

Item-based restrictions tend to indicate that the buyer is more sensitive to supplier change on individual items – such as a manufacturer of specialized components – and while a new vendor could potentially take over, there is a risk involved. Supplier consolidation is still a consideration here, but the risk of change to lower quality products or service is the main driver. 

Similarly from a supplier’s perspective, retaining a buyer’s business may be the primary concern but managing churn on the items/lot supplied may also be desirable. 

For example, in road freight one buyer’s lanes may provide backfill opportunities that help improve the efficiency of a supplier’s network, high churn in lanes serviced can undermine these efficiencies and result in increased cost.

Item level restrictions have a tendency to further restrict the potential award opportunities particularly when these constraints are applied across a wide range of items and/or focused on high-value items. Here the buyer forfeits savings potential in favor of maintaining stability.

Note that lot/item-level incumbency is often used in tandem with global incumbency restrictions and can be used to fine-tune your allocation. Items level incumbency does not prevent the user from specifying multiple incumbents on an item.


Scenario Set #5: Splitting Allocation at Historic Share Level

“What if I am open to new suppliers on these line items but I want to limit my exposure?”

 Share-based restrictions are for users who want really fine-grained control at the lot/item level. In this case, the supplier will be marked as an incumbent on a specific lot/item/lane, and additional information will be provided for the share that they were awarded historically. 

Share-based restrictions can be used to relax or tighten incumbency requirements. For example, they can impose strict retention rules by insisting incumbents retain the exact same shares as last year. 

Alternatively, they can provide opportunities for new suppliers by allowing them access to minority shares on otherwise strategically significant lots. This can be a very effective way of vetting new suppliers, availing of new savings opportunities whilst still mitigating some of the risks of a full switchover.

In this example, it’s not uncommon to see distinct historic pricing per supplier, with an additional price indicating some sort of weighted average. 


Summary

A key advantage of using a modern sourcing optimization solution such as Keelvar’s is that it lets teams build and centrally evaluate dozens of these different supplier awarding scenarios. When it comes to uncovering innovation, at times there might be a tendency to bypass emerging suppliers rather than risk jeopardizing relationships with incumbents. 

But at the end of the day by using optimization technology over legacy software, buyers are able to easily and rapidly compare offers from all types of bidders for alternative products, creative production processes or sustainable logistics in a structured way and make a much more informed award decision overall.

Want to see how optimization technology works? You can request a demo to see how we can help you model your scenarios in the Keelvar Sourcing Optimizer platform.

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