Blog

Sourcing's Dilemma With Spot Buying

Keelvar

August 26, 2022

After 2021 was filled with uncertainty, organizations came into 2022 hoping for some relief to at least some of their biggest supply chain and business challenges. That didn’t happen.

In fact, the first two quarters of the year brought with them an onslaught of new problems, including (but not limited to) the Russia-Ukraine crisis, deeper semiconductor chip production issues and new Covid lockdowns in major production and port cities.

Today, procurement leaders have all but learned to live with this “new normal” operating environment, with ongoing disruptions coming from new and different sources. It’s difficult to predict how things might unfold, and – as a result – in many cases the annual RFP has been replaced by frequent spot buying events.

Seeing Spots

Traditionally companies would go to market once a year and run a tender and say, “these are the 500 lanes,” or provide origin-destination ports that the goods move between. They would also signify the 500 lanes in 500 rows on a bid sheet (based on historical demands) and ask the carrier to provide the best possible prices for them.

After several rounds of negotiations, the carriers would design a package of lanes and offer a discount for the long-term contract. The company would pay fixed, locked-in prices and you operate based on those prices for the next 12 months. The same process can be used when procuring materials, packaging, temporary labor, IT hardware or other necessities.

The problem now is that the 12-month cadence that historically worked for suppliers and buyers doesn’t work anymore. This is because carriers are dealing with their own fluctuating costs, with changes occurring so quickly that if they commit to a price, three months later they may be telling the buyer,“sorry, we actually have zero margin on this anymore, so we can’t live up to these contracted rates.” Then there’s a dispute and a disagreement and the buyer has to go back out to market anyway.

The Dilemma With Spot Buying

Although reactive spot buying has long been part of freight procurement’s mix even in “normal” times, a fundamental problem with spot bidding is that it tends to be a very inefficient and expensive exercise that emphasizes a quick award decision to reduce risk to supply flow and the business.

It’s also not uncommon that these bids are negotiated offline outside of a formal e-sourcing process and that even when data is collected, it’s purely rate-focused. This becomes time-consuming for the buyers at scale, increases rogue spend with non-approved suppliers/ carriers, and it’s not ideal for managing and tracking spend.

Another reason teams historically did not conduct sourcing events with greater frequency and with smaller, more focused spend, is because of a concern for how this would impact the buying team’s workload and priorities – not to mention the suppliers and carriers seeking an efficient way to bid on the business: leveraging volume to negotiate for the best deal has been the status quo.


How Sourcing Leaders Meet The Challenge of Spot Buying

Facing a volatile and changing market with little means of predicting where turbulence will strike next, many buyers were left to rely on spot buying to meet demand. By implementing an intelligent eSourcing solution with optimization and automation, sourcing leaders have been able to more easily switch from traditional, cycle-based sourcing to dynamic market-based sourcing, freeing up their time, elevate their quality of work, and improve their bottom line.

The savviest of procurement professionals have moved into dynamic mini-bid monthly/quarterly cycles with adjustments made throughout the year to accommodate shifts in capacity or material scarcity.

This move has been called a ‘sourcing refresh,’ and it allows for a fair and transparent process to run events at the cycle needed to lock in rate and capacity. The annual events remain in place to align business requirements, while off-cycle events are used to fill gaps and confirm market rates:

Is it the End Of The Annual RFP?

Not quite. Our recommendation is don't abandon your annual RFP, instead, use it as the time to adjust your business terms, change strategies or make big shifts in your business. Monthly and quarterly strategy updates might allow you to account for market trends, deal with capacity issues and ensure your business remains operational. Looking at your overall process as a continuous refresh process enables you to better actively manage risk along with your supplier and carrier relationships.

When it comes to managing spend, stay in the driver’s seat by using the annual RFP as a potential reset point for your supply chain: use it to change payment terms and introduce new lanes or products to your network. Or, simply use it as another opportunity for small, incremental changes to your business as with any quarterly update. It can be a good opportunity to collaborate with carriers and reduce risk for everyone.

Summary

Much like today’s market, the bidding process can be complex and unpredictable – especially when buyers are no longer in a position to drive down costs. With the current boom in spot buying, leveraging human labor to manage sourcing events and rates is particularly inefficient.

To combat the influx of challenges, procurement teams have turned to sourcing technology such as Keelvar's to add value and solve problems in new ways. Optimization allows sourcing teams to balance cost and speed objectives, give suppliers flexible bidding options and go beyond the “lowest price wins” award model. With the right esourcing solution, teams are provided the capability to handle everything from spot bids to large-scale RFPs, with a supplier-friendly interface that improves your award decisions.

Many leaders are also looking to procurement automation to establish spot bidding and mini-tender events within minutes. Up to 90% of this work can be automated, improving scale and efficiency. Talk to our team today to learn more about making Keelvar's solutions work for you.

Keelvar customers following a dynamic market sourcing strategy are outperforming the competition to get better rates and capacity  – read more in our latest eBook.

Contact us for a demo

Related resources

No items found.
No items found.
No items found.
No items found.

Request demo

Ready to see how our sourcing optimization compares to other e-sourcing tools?

About us

Get a background on our company, our vision and values, and leadership team.