I am often asked by companies unfamiliar with sourcing optimization why it’s different to ordinary eSourcing tools and why it costs more. There are many standard eSourcing solutions that come with ERPs and some other independent vendors that offer standalone eSourcing solutions. These solutions are fine for small and medium sized businesses where there isn't a large spend you wish to leverage and you're simply a price taker and need a basic system to operate a process in a simple setting. Big businesses with spend volumes in the billions of dollars need something more powerful.I use the analogy that eSourcing is like a bicycle where you must provide all the energy and the top speed isn't very high whereas Sourcing Optimization is akin to a car. I use this analogy because eSourcing doesn’t have an engine even though it’s a useful means to organise data and give simple feedback. Large businesses need more power and must also gather richer inputs to truly leverage economies of scale so you generate savings but also execute complex processes much faster.Sourcing Optimization has an engine that allows sourcing teams to gather much richer data and builds a mathematical model in the background that permits nuanced communication of conditional bids and is powerful and flexible enough to capture almost any process you should require. But it also allows you to do things you’d never be able to do in face to face negotiations or Excel based data gathering exercises because you’d be quickly overwhelmed by options to consider without an engine to search all the combinations imaginable.A summary of the key differences is listed below:
But the biggest difference between both technologies is that you receive more competitive and innovative offers from bidders. When game-theoretic strategizing is applied by suppliers, they use the option to offer alternative or combination bids (and they know their competitors have that weapon in their arsenal too) to bid more aggressively on desirable packages of Lots because contingent discounts offer them a form of free insurance against unattractive bundles. This drives win-win outcomes and allows for efficient operations for suppliers. This is why top sourcing teams in companies such as Schneider Electric, Coca-Cola, Siemens, McKesson, AB Foods, Drewry and others use sourcing optimization. Experts know that buying a bicycle for eSourcing is a false economy and motorized transport comes with a higher initial investment but the return on investment is almost immediate.The staff profile of eSourcing and Sourcing Optimization vendors is very different too. Keelvar's engineering team are a balanced mix of PhDs in AI and Optimization, experienced Engineers, customer focused professional services team members and UX/UI experts that strive to make power, flexibility and ease of use central to our SaaS solution.And finally, to answer the opening question of why it costs more: if you’re smart at sourcing then you look at the total cost of ownership (TCO) of a solution and the TCO for eSourcing is actually quite high because every event that misses out on richer bid capture, insightful scenario analysis and intelligent feedback options with smart outlier detection wastes 3-10% in spend under management for that event. This is the hidden cost of using suboptimal eSourcing.
Sourcing Optimization has possibly the highest return on Investment of any SaaS solution that a procurement team could buy so its a simple decision for well informed sourcing teams. Furthermore, once familiar with sourcing optimization, the process itself can be automated. So if you're a large company with spend under management that exceeds $1bn, then it is essential that you apply Sourcing Optimization for cost savings, speed of execution, control over incumbent switching and scenario analysis that finds the best value for money trade-off between cost and non cost objectives.