The Key Benefits from Sourcing Optimization

August 7, 2014

Alan Holland

In the final installment in a three part series, we explore what the key benefits of sourcing optimization are. The first post appears here: Sourcing Optimization - A Definition , with the second post appearing on this page: Why Sourcing Optimization is Finally Taking Off?

So what are the key benefits of Sourcing Optimization?

Sourcing optimization starts from a strategic perspective. The approach is grounded in ensuring the tender exercise is designed upfront in a manner which is likely to secure the best downstream outcome for the purchaser.The more open and expressive competition format is designed to increase the competitive tension amongst suppliers, while also enabling suppliers to: hedge their risks; make reasoned bids; play to their strengths. Allowing suppliers to signify capacity constraints also lets them bid on more work than they can service, increasing competition across all lots. Hence a smaller supplier can bid on 20 lots, but limit their exposure by capping the number of lots they can win at the appropriate capacity level.Hence key benefits include the ability to:

1. Elicit savings without ‘squeezing suppliers

The approach focuses on eliminating waste (in an economic context) by ensuring more efficient sourcing. As Peter Smith of Spend Matters claimed :“I know firms that believed they had executed category management well for years and that there could not possibly be more gains to be made. They introduced Market Informed Sourcing [aka Sourcing Optimization] – and saw a further 10 to 20% cost reduction, as well as other benefits (including happier suppliers, interestingly – one of the not uncommon outcomes we have seen from the process).”

2. Save time on evaluation

Sourcing optimization applications like Keelvar’s rely upon a powerful evaluation engine designed to compute the best outcomes in a matter of minutes. Without evaluation engines it would be impractical to evaluate all permutations via Microsoft Excel. Similarly, by automating the evaluation process the risk of error is also reduced significantly.

Demo Video: air freight

Sourcing Air Freight with Keelvar Sourcing Optimizer from Keelvar on Vimeo.

3. Allow greater control over outcomes with business constraints Private sector sourcing has greater flexibility compared to the public sector, and hence can leverage a range of additional business constraints/ features designed to enable buyers to invoke everything from anti-cartel deterrence mechanisms to scenarios which assess the costs associated with incumbency switching. Want to assess the trade off’s moving from 2 to 3 to 4 suppliers? Run a scenario taking the cost of the additional admin headcount, and switching costs into consideration.

4. Use without training While this series of posts does not assess the main sourcing optimization players, it is evident that newer players like Keelvar (Disclosure: which I work with) are very focused on creating easy to use Software-as-a-Service (SaaS) solutions that do not require training. I suspect many of the other players are also headed this way as users increasingly demand B2C levels of design and intuitive software interfaces.

Where does Sourcing Optimization work well?There has been a common misconception that sourcing optimization is exclusively the preserve of the largest of companies with the most complex sourcing requirements. However, this is not the case, as most exercises, can benefit from its use, provided the buyer is content with split award contracts (where they contract with more than one supplier). After all, the approach is based on creating competitive tensions amongst suppliers. It is therefore important to adapt a 'lotting approach' at the start where demand is broken down into granular lots/ line items/ routes as described in the previous article.Its application is particularly powerful where there is some geographical dispersion, so perhaps multiple suppliers serving different locations including facilities management, transport, logistics, retail, domiciliary care, travel, pharmaceuticals and so on. See for more details on the benefits of sourcing optimization.

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