Strategic Sourcing through Private E-Marketplaces

by Bradley Mattick
Christopher Brousseau, Accenture

April 14, 2001

E-procurement systems and reverse auction-based services have proved the validity of applying technology to purchasing and sourcing.

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Introduction

Business leaders continually evaluate new methods to improve the profitability
of their companies. They achieve these improvements by increasing revenues and
decreasing costs. This paper analyzes how companies can significantly increase
their profitability by implementing a strategic sourcing solution to reduce
costs.

Strategic sourcing focuses on improving how companies purchase the goods and
services they rely on to remain competitive. It is a cost saving measure that
can dramatically improve profitability by exerting downward pressure on sourcing
costs. The value proposition of strategic sourcing is that it enables buying
organizations to obtain the highest quality of goods and services needed, with
a predictable supply at the lowest total cost. Total cost is defined as more
than just the cost of a good or service. It also includes ancillary costs that
vary based on the buying organization’s industry and the type of demand being
fulfilled. Examples of these ancillary

costs include: shipping, holding, and cost of capital. The results that this
type of program can have on a company’s bottom line are quite compelling.


Table 1 demonstrates how a relatively small percentage savings on sourcing
can have a significant effect on a company’s profitability. In contrast, companies
attempting to match this improvement by increasing revenues would have to increase
their sales volume dramatically in a very short time. This example is illustrated
below with real case studies.

Table 1 – Strategic Sourcing Saving Potential

Strategic sourcing is a robust methodology that defines a complex buying process.
As with any intricate process, further value may be derived by automation through
a best of breed software tool. Modeling the strategic sourcing process in a
private electronic marketplace enhances the value delivered to both buying and
selling entities through clearly defined processes, reduced cycle times and
objective decision support. As case studies below demonstrate, a Moai
customer saved over $100 Million (15% of spend) in less than a year of production
with this type of sourcing solution.

This paper discusses:

  • Buy side and sell side strategic sourcing e-marketplace value propositions
  • Trends in the strategic sourcing space
  • Strategic sourcing solution options
  • Characteristics of a strong strategic sourcing solution
  • Real-world case studies

This paper covers the entire spectrum of strategic sourcing. The value proposition
for buying and supplying organizations is covered first, explaining why this
phenomenon is important for companies. Then, trends in the sourcing space are
covered to add context to future models and requirements. The paper then covers
strategic sourcing solution deployment options, serving as a guide for how companies
can implement a solution. Following this description is a detailed investigation
of the requirements for a system that can be used to power a sourcing e-marketplace,
defining what companies should be addressing when choosing a solution. Finally,
real-world case studies are provided with in-depth analyses of actual savings
achieved from strategic sourcing initiatives.

Demand Side Value Proposition

The most compelling aspect of the strategic sourcing value proposition is the
reduction in costs for the buyer sourcing goods and services. These savings
come from increased information on market pricing for products being sourced,
informed supplier selection and supply aggregation. The Aberdeen Group believes
that companies leveraging a strategic sourcing process will save between 5%
and 20% on all commodity types. As detailed in case studies below, these percentages
can translate to hundreds of millions of dollars in savings. Table 1 illustrates
the significant potential for savings in a strategic sourcing e-marketplace
and the resultant impact to companies’ bottom-line profitability.

In addition to the direct cost savings achieved through strategic sourcing,
companies that automate the Request for Quote (RFQ) creation and negotiation
process find further savings in the reduction of administrative overhead and
process costs associated with sourcing. In many purchasing organizations today,
RFQ creation, distribution and review is a tedious process that requires a manual,
paper-based human-intensive effort. Much of this tactical work is performed
by purchasing professionals who are experts in the products and services being
sourced, as well as the process to extract the best value from the supply base.
Shuffling, revising and routing paper takes time from these individuals that
could be better spent working with new suppliers or increasing their knowledge
of a particular sourcing need within their organization.

Companies can save a significant amount of time and money by automating these
processes and freeing up purchasing professionals to perform their most value-added
tasks. The Harvard Business School found that automating the Request for Proposal
(RFP) creation and negotiation process has saved companies 15% of the total
amount of spend (HBS whitepaper #9-598-109, February 1998). A great deal of
this savings is due to the additional time available for the purchasing professionals,
which increases their ability to manage more suppliers throughout the negotiation
process.

Software applications that automate the sourcing process are a tool to help
the purchasing manager. By managing much of the creation and routing of RFQs
and bids, they allow the purchasing manager more time to analyze new prospective
suppliers. In addition, the inherent scalability of such a system allows the
purchasing manager to invite appropriate new suppliers to bid on a particular
RFQ. These types of systems not only scale in the invitation and negotiations
with suppliers, but also assist in evaluating competitive bids. An online sourcing
solution provides an easy mechanism to manage more suppliers than was previously
possible, which aggregates supply, reduces reliance on individual suppliers
and leads to lower total costs.

Buyers find further value by reducing the time required to complete the RFQ
creation and negotiation cycle for a particular sourcing need. This reduction
arises from implementing and automating the strategic sourcing process. The
entire sourcing process is accelerated (for both the buying organization and
the suppliers) by implementing a system that centralizes the administration,
standardizes the content of an RFQ and (optionally) publishes the decision-making
criteria. Cycle time can be reduced by more than 50%, providing purchasing managers
with opportunities to focus on their core responsibilities.

Supply Side Value Proposition

Strategic sourcing and its automation provide a strong value proposition to
the suppliers who sit on the other side of the negotiation table as well. Many
supplying organizations have heard stories of suppliers being beat up on price
through an automated reverse auction. In a strategic sourcing e-marketplace,
more complex bidding enables the supplier to prevent this price only comparison,
and provides a host of compelling benefits to suppliers.

Suppliers must understand and believe in the value of such an offering before
they become willing to participate. This is especially important when rolling
out a private electronic marketplace-based sourcing implementation, which can
turn the one-to-one, human-to-human negotiation process into a one-to-many,
human-to-marketplace negotiation. It is typically the responsibility of the
buying organization to communicate the value of such an e-marketplace to its
suppliers before implementation.

As with buying organizations, suppliers’ sales representatives find process
efficiency improvements in an automated strategic sourcing event. In a manual
negotiation, the supplier has to accept, prepare and return RFQ documents by
phone, fax, and mail. In an automated sourcing e-marketplace, RFQs, bids and
responses are all centralized in one location, and prepared through a structured
interface. Suppliers are thus able to focus their energy on executing their
sales strategies, dealing with new prospects and increasing competitiveness,
rather than wasting precious time ‘pushing paper.’

Often times the buying organization will publish the negotiation rules and
process flow into the e-marketplace for each type of product or service being
sourced. This information may encompass what parameters will be negotiated on,
what the minimum levels are for certain parameters, and how decisions will be
made. The supplier may then use this information to formulate a sales strategy.
This enables all suppliers to compete on a level playing field and formulate
their sales strategy based on the same information. Concerns over collusion
and partiality based on non-business related factors can thus be eliminated.

Rules for negotiation must focus on more than just price: these are not just
reverse auctions. Complex real-world negotiations that touch on subjects such
as quality ratings, conformance to standards and delivery terms must also be
implemented in a strategic sourcing e-marketplace. This non-trivial negotiation
enables supplying organizations to differentiate themselves based on their core
strengths, rather than just on the cost of products and services, and helps
prevent commoditization, which often leads to rapid price decline.

E-Procurement and Strategic Sourcing

E-procurement systems that manage the process of requisition-to-purchase were
among the first successful applications of Internet technology to improve the
sourcing process. By increasing efficiency, eliminating maverick buying and
reducing manual workload, companies greatly reduced the cost of generating a
purchase order. In recent times, it has become increasingly apparent that e-procurement
systems focus primarily on non-strategic, indirect materials. While still significant
in their contribution in driving process efficiencies and reducing tactical
cost, these systems unfortunately failed to address the more significant half
of the sourcing paradigm that represents the greater savings opportunity: sourcing
vendor contracts.

Strategic sourcing solutions focus on the initial part of the purchasing process
that traditional e-procurement systems do not address; they facilitate reducing
the total cost of goods and services that a company requires. In a 1999 survey
conducted by Aberdeen, it was found that nearly 80% of the cost of an end product
is established during this period. The core value proposition of these systems
is to create significant cost savings that help drive companies’ profitability
as well as fuel the complete development of an end-to-end, sourcing-to-requisition-to-pay
solution.

The diagram above illustrates the entire sourcing process, with strategic sourcing
activities on the left and e-procurement on the right. While both types of sourcing
applications offer different paths to achieving significant savings, there is
an obvious synergy between them. Once a negotiation tool has driven down the
total cost for a good or service, and the terms have been captured in a contract,
that contract can populate an e-procurement catalog. Users across the enterprise
may then order products and services against that catalog.

Market Trends in Strategic Sourcing

The notion that the world is becoming increasingly smaller, faster and smarter
is not a new concept, especially when it comes to business. Technology has been
a major factor and the Internet is fueling the trend. Unlike expensive private
networks, the ubiquity and ease of Internet access provides an unprecedented,
low-cost channel of communication between trade partners. As a result, corporations
have been given the power to exchange large amounts of information in real-time,
which makes possible the coordination of design, distribution, production and
selling activities across many companies, whereas only a few years ago this
type of collaboration was extremely difficult even within the confines of just
one company.

These trends apply equally to strategic sourcing. Once constrained by geographic
reasons to ally strategically with localized vendors, corporations are now able
to source directly from global vendors. With trade partners aligned more closely
and sharing information electronically, cycle times for corporate decision-making
and transactions are compressing. Materials and services that used to take six
months or more to source are now taking half that time to source. In addition,
corporations are continuously improving upon and getting smarter about their
sourcing activities. Over the past five years, companies have invested heavily
in rationalizing vendors, aggregating demand across disparate business units
and evaluating the total cost of purchasing goods and services before selecting
which vendors to award with contracts. These programs are all aimed at the same
objective: making smarter and more cost effective sourcing decisions, and they
have proven to be very successful.

The common misperception of online structured negotiation is that it is a new
type of procurement program to replace therequisition-to-pay process. The reality
is that structured negotiation is a tool that recognizes that strategic sourcing
programs represent the greatest opportunity for savings in the supply chain.
Viewingstructured negotiation as a decision support tool that enables sourcing
professionals to make better informed decisions on what to purchase, in what
proportion and from which vendor(s) is a helpful way to understand the opportunities.

As little as five years ago, when a company had a desire to source a material
or service, the process was labor consuming and time intensive. Essentially,
a procurement professional would sit at a table across from a sales representative
from a potential vendor and they would negotiate, face-to-face, all the specifics
of their relationship. Eventually sourcing professionals improved on the process
and began to implement more fact-based negotiations. In fact-based negotiations,
sourcing professionals sought to understand all aspects of their spend and the
cost structure of various suppliers. Armed with this data, they were in a far
superior position to negotiate better terms. The process, however, remained
face-to-face. Today, sourcing professionals can publish all information regarding
a potential sourcing contract and interact with numerous trade partners synchronously
across vast geographic areas.

Strategic Sourcing Solutions

Sourcing solutions have evolved to meet the changing needs of purchasing professionals
and suppliers. The first sourcing solutions focused on the corporate-wide MRO
procurement process. These solutions were designed to effect process savings
in repeated non-strategic buys. In contrast, strategic sourcing solutions focus
on the initial phases of the sourcing cycle where potential savings are greatest,
as outlined above. More information on the differences between these types of
solutions may be found in Figure 1.

Figure 1 – The entire sourcing process, with strategic sourcing activities
on the left and e-procurement on the right.

From Reverse Auction to Structured Negotiation

True strategic sourcing applications began with reverse auction powered e-marketplaces.
A reverse auction is a supply-aggregating event that lowers the price of goods
for a buyer.

The initial push in automating the direct materials negotiation process was
with highly standardized products, or near commodities. Typically, these offerings
differ little from one vendor to the next, and there are usually a large number
of vendors from which to choose. Given the highly competitive dynamics, these
products tend to be price and time sensitive commodities. As a result, reverse
auctions are an effective tool to implement price control by aggregating demand
and increasing competition among suppliers.

As powerful a tool as reverse auction has proven to be, not all sourcing events
can be reduced to a single decision factor such as price. For most strategic
spend categories the deciding criteria depend on the strategic needs of an organization,
such as the continuity and consistency of supply, collaboration in product design
and/or willingness to make relationship-specific investments to improve the
supply chain. This multiplicity of decision factors does not diminish the relevance
and importance to a firm in lowering costs. Companies require a solution that
allows them to balance real world requirements such as creating close strategic
relationships with key sourcing (or trade) partners with the ability to negotiate
for the best possible “total cost” for strategic materials and services.

Until recently, the constraint had been trying to map the complexity of real
world sourcing issues to an online negotiation capability. Standard reverse
auctions are relatively easy events to manage and tend to be very good at price
discovery. However, they tend to be less successful when buyers and sellers
also need to agree on shipping logistics, payment terms, quality tolerances
and so forth. A new type of negotiation is needed: structured negotiations.

The core capability of a structured negotiation is enabling purchasing professionals
to define how they want to buy, and then use a strategic sourcing e-marketplace
to centralize negotiations. In these e-marketplaces invited suppliers participate
by joining in structured negotiations with buyers. More information on the definition
of structured negotiations may be found in “Structured Negotiations” sidebar
below.

Deployment Options

Purchasing professionals, business managers and IT architects are presented
with a wide array of strategic sourcing solution deployment options. Should
they outsource, partner or purchase technology? Currently, many companies are
hedging their bets and doing all three.

Table 2 outlines the advantages
and disadvantages of each strategic sourcing solution deployment option available
today.

Table 2 – Strategic Sourcing Deployment Options
(See Larger Image)

Solutions

To deliver on the promise of online strategic sourcing, a solution must support
existing negotiation practices while streamlining processes and adding value
through technology. Across all industries and deployment models, the following
high-level tasks must be supported:

  • Analysis of a company’s spend
  • Supplier selection
  • Developing a Request for Quote or Request for Proposal (RFQ/RFP) with specifications
    of what goods or services are needed and points of negotiation
  • Approving the requirements and amount of spend from one or more managers
    within the organization
  • Selecting new and existing suppliers to participate in the negotiation
    and distribution process
  • Negotiating back and forth with the qualified suppliers
  • Deciding which suppliers “win” the business and how to distribute the spend
    among one or more suppliers
  • Mining data from the negotiation event and integrating event results with
    other applications after the negotiation is complete.

Each of these steps can be improved upon by using an effective strategic sourcing

solution. Selecting the best application involves determining which solution
meets purchasing professionals’ requirements in each step; the best of breed
solution will address each of these.

Analysis of Spending Patterns

The first step to effective strategic sourcing is gaining a thorough understanding
of company spending. With potentially multiple departments sourcing independently,
and most likely using many of the same vendors, there are inherent inefficiencies
that develop. Online sourcing solutions provide better visibility into total
company spend on specific goods, total spend with a given supplier, and are
flexible enough to provide a number of views and reports to understand spending
patterns. Gaining insight into these aggregated spending habits provides buyers
much better leverage when sourcing new goods.

Development of an eRFQ/eRFP

When strategic materials or services are sourced, a detailed requirements document
must be created and distributed to prospective suppliers. This document helps
suppliers understand what is needed and how to plan their negotiation strategy.
Online strategic sourcing solutions can streamline this document creation and
distribution process.

In the ideal solution, RFQ/P “wizards” provide significant time-savings in
creating requirements documents. Wizards direct buyers through a series of selections
and questions that are then used to automate the creations of the final requirements
document. For example, when multiple negotiation points need to be included
such as delivery time, quality of goods, or financing options, the document
author simply selects the appropriate parameters along with any specific criteria
(such as acceptable delivery times). These selections will be included in the
requirements document.

For materials that are repeatedly sourced, or for sourcing events that are
similar in nature, templates can be created that include specifications from
pre-existing RFQs. Effective solutions also allow uploading of a complex Bill
of Materials (BOM) to quickly input sourcing information for multiple line items
and additional supporting documents such as images or complex engineering documents.

RFQ document creation may also be facilitated through integration with information
from online catalogs. For frequently sourced items listed in standard catalogs,
detailed information on the goods can be transferred out of the catalog into
an RFQ document automatically, saving significant time in re-inputting that
information.

By replacing a traditional fax or mail distribution mechanism with an Internet-based
strategic sourcing solution, buyers can circulate the eRFP/Q documents to suppliers
quickly and easily. This automated activity saves buying organizations substantial
amounts of both time and money and provides a practical means of reaching global
suppliers.

The combination of wizards, templates and effective upload tools, along with
faster distribution mechanisms reduces the amount of time to create and circulate
the requirements documents. Using an online sourcing solution, the US Army reduced
the time to negotiate computers to 13 days, a significant improvement over the
30 to 60 days the process historically took to receive the same goods. (Business
2.0 article, Oct. 10, 2000)

Workflow

Within purchasing departments, typically one or more managers must review and
approve the RFQ to either confirm the specific requirements or give approval
over certain spending levels. An effective online sourcing solution provides
facilities to route documents based on business rules for approval. For example,
once an RFQ is completed and submitted, a purchasing manager may receive an
email containing a link back to the document. The manager simply clicks on the
document link to review, edit, or approve the request. At this point the next
manager in the chain is notified as needed. This type of document approval workflow
streamlines the authorization process providing considerable time-savings, and
also ensures that approvals are enforced before items or services are sourced.

Supplier Management

The next step in sourcing involves choosing which suppliers should be invited
to bid and negotiate on the selected products or services. Supplier selection
is another activity where companies benefit by implementing their own private
e-marketplace with suppliers, rather than turning to a third party e-marketplace.
Maintaining relationships with key suppliers is critical for corporations whose
vendor relationships provide competitive advantage in the e-marketplace.

Feature rich online sourcing solutions provide a number of ways to manage suppliers.
A company will generally have supplier information already available in its
existing systems, such as a database or directory of suppliers. Companies should
require that the strategic sourcing solution integrates with existing supplier
databases.

In addition to the selection of suppliers, notification and security are key
considerations. An effective solution provides a number of means to notify selected
suppliers that a negotiation event is going to take place. At a minimum, customized
emails should be sent to suppliers automatically and include relevant information
and a link to the e-marketplace where the negotiation will take place. There
should also be a straightforward integration path to more advanced technologies
such as notification via wireless devices that are becoming increasingly prevalent,
as well as legacy technologies, such as facsimile. To ensure that only selected
suppliers may participate in the negotiation, a security model must be part
of the system that controls which participants can view information and bid.

Effective Online Negotiations

The most significant product differentiator in an online strategic sourcing
solution is the ability to model complex negotiations that encompass factors
beyond price. These capabilities are defined in the “Structured Negotiations”
sidebar on page 133.

Here again, a company that creates its own e-marketplace for suppliers gains
an important advantage over participating in an independent e-marketplace. By
operating its own online sourcing market, a company can completely customize
the parameters that will be used in negotiation, how many stages of negotiation,
how long the event will take place and more. This control allows the buying
company to continue using its existing sourcing methodology, rather than settle
for a constrained system that puts it on equal ground with competitors.

Communication between buyers and sellers is also facilitated through online
tools such as chat software for real-time communication either before or during
the sourcing event, and discussion forums where suppliers post questions and
purchasing department personnel post answers for all suppliers to review. A
full-featured solution also should provide tools for monitoring and graphing
bids and negotiated parameters while the negotiation event is occurring. These
mechanisms provide immediate feedback to the purchaser while negotiations take
place.

Post Negotiation Functionality

Once a negotiation is complete, a number of useful tools exist for evaluating
bids and mining information from the e-marketplace. With complex negotiations
or multiple lines of bidding, decision support tools provide a means of evaluating
the tradeoffs between supplier offers. For example, a buyer can assign weighted
scoring to each parameter in a negotiation. Price could be assigned as 60% of
the decision, delivery time 30%, and quality of goods 10%. The weighting of
each negotiation parameter is based on the buyer’s priorities, which can include
the total cost of working with a supplier as opposed to just the cost of goods.
Once all the bids are entered, an online sourcing solution automatically sorts
the bids based on this custom defined total cost for each bid.

Online strategic sourcing events provide a wealth of data on supplier behavior,
product and service costs, and supplier performance. Reporting tools should
be included that allow graphing and mining based on a variety of factors. This
data can then be used to set the starting point for future negotiations or to
understand changes in the cost of goods over time. The access to data is another
area where ownership of the e-marketplace is a valuable asset to a corporation-
the buyer maintains ownership of the important market and supplier information,
rather than an independent third party.

The other major aspect of post negotiation functionality that online strategic
sourcing must support is integration with existing backend systems. Ideally
the solution supports industry standard interfaces such as XML and/or Java API’s.
This support allows a company’s IT resources to quickly understand how to integrate
the online strategic sourcing solution into their existing infrastructure. Often
times Enterprise Application Integration (EAI) tools can be used to accelerate
this process. Integration points include moving order information into Supply
Chain Management applications or using the negotiation terms to provide input
into contract development applications.

Case Studies

Across industries, companies are realizing the vast cost savings and process
efficiency improvements possible in the implementation of a strategic sourcing
solution like the example discussed in the previous section. Internally run,
private e-marketplace solutions are helping companies reduce the total costs
of the products and services that they depend on to operate, while also strengthening
their supplier relationships. The following three success stories detail how
Global 2000 companies have leveraged in-house strategic sourcing solutions to
save money and improve their purchasing processes.

Fortune 50 manufacturer saves over $100M and strengthens supplier relationships
with a private strategic sourcing solution

A manufacturer of industrial power products wanted to reduce its purchasing
costs without adversely affecting its critical supplier relationships. With
80% of its $1B annual spend coming from direct goods, the company saw the potential
savings inherent in adding efficiency to its direct purchasing process but did
not want to forgo control of its supplier relationships to a third party hosted
e-marketplace. After realizing 80% cost savings through an internally-run, trial
online structured negotiation to source fasteners (nuts and bolts), the manufacturer
established a permanent organization dedicated to online strategic sourcing
with Moai‘s solution, and has saved $110M
to date!

On average, supplier contracts range from 1 to 3 years and involve the intricacies
of dealing with both domestic and international suppliers. As a result, price
is only one of many variables considered in negotiations. Because the direct
materials sourced are integral to the end products that are manufactured, quality
concerns and time of delivery are also critical to the purchasing process.

The existing sourcing process required time and resources dedicated to complex
negotiations with an average of seven suppliers for each product. Negotiating
offline with seven suppliers demanded time-consuming phone calls and faxes that
hindered the sourcing process. To add efficiency to its sourcing process, the
company elected to utilize a private online e-marketplace, limiting participation
to pre-approved suppliers. With its highly customized solution, the buyer lowered
its costs and was able to allocate its spend across more suppliers than before,
thus decreasing the risk associated with supplier dependence. The online structured
negotiations allowed the manufacturer to determine what percentage was allocated
to each supplier based on the overall competitiveness of each bid.

In the first online negotiation event, the price of fasteners fell from $1.4M
to $280,000 as a result of competitive bidding; the company achieved 100% ROI
on its first event! This first-time savings of 80% has leveled out to 15% across
all products. To date, the company, which now holds 25-30 negotiation events
each week, has put about $750M in spend through the e-marketplace, equating
to direct savings of over $100M.

Global Airline maintains supplier relationships while saving over 30% on purchases
of PCs and stationery through a private exchange

Strategic sourcing in service-based industries is often focused on products
that are classified as indirect materials. When sourcing for a $64 billion global
airline, for example, the cost of indirect goods quickly adds up and can severely
impact a company’s bottom line.

Looking to improve its overall procurement process, one global airline sought
to:

  • Reduce costs of Personal Computers (PCs) and stationery purchases
  • Simplify negotiation for tactical, indirect goods
  • Increase time spent on core competencies and strategic activities

With the help of Accenture, the airline altered its purchasing process by automating
the time-consuming steps that reduced efficiency, while also educating suppliers
as to how the new process worked.

The revamped process included the following steps:

  • Identify product to source
  • Communicate bidding process to internal sourcing team
  • Distribute RFP to selected suppliers with description of negotiation process
    electronically
  • Train suppliers on sourcing system
  • Hold negotiation event
  • Select winner(s) based on total cost

The key changes to the existing process came in automating the negotiation
and selection steps of the procurement process. By keeping the entire process
in-housewith an online negotiation software tool, rather than outsourcing it
to a public e-marketplace, the airline maintained its key supplier relationships,
while also finding the best market prices available for PCs and stationery.

For its first online negotiation, the airline sent out an RFP to its existing
supplier base (8 suppliers) for the purchase of stationery. The bidding started
at $1.4M. After one hour, 49 bids had been made, with each bid declining an
average of $46,000. At the end of the auction, the airline paid $920,000 for
stationery that previously cost $1.29M. By automating their strategic sourcing
process, the airline saved 30% compared to the historic price that they paid
for stationery.

Using the same mechanism, the airline also ran a negotiation for PCs . In this
event, 9 suppliers were invited to bid. During the one-hour process, 46 bids
were placed, with each bid declining an average of $106,000. Historically, the
airline paid $2.6M for similar PC purchases; this time, it paid only $1.6M,
saving 37%.

In both of these events, the airline eliminated the time-consuming phone calls
and faxes that it previously employed to source products. As a result, its purchasing
managers could focus on more strategic activities such as finding additional
ways to improve the company’s purchasing processes.

European construction e-marketplace uses best of breed strategic sourcing
solution with existing MRO focused e-procurement application.

E-procurement initiatives such as online catalogs have helped many companies
streamline and gain control over their MRO purchasing activities. The associated
time and cost savings have demonstrated exactly how the Internet can be utilized
to cut costs by adding efficiency to basic purchasing processes.

Today, companies are beginning to explore the potential savings available through
online direct materials sourcing, which are significantly greater than the returns
for MRO process changes. However, direct sourcing is also much more complex
than MRO procurement and, as a result, requires a more sophisticated solution
for success. While MRO purchasing can often be moved online via a fixed-price,
electronic catalog, direct sourcing negotiations are often characterized by
complex specifications that include parameters such as delivery time and cost,
payment terms, product or service quality, as well as price. In addition, dynamic
pricing and negotiation capabilities are often required in order to reach a
final agreement for direct materials and services.

One European construction e-marketplace supplemented its existing MRO solution
with a best of breed strategic sourcing solution to provide a comprehensive
e-procurement and eSourcing platform for its customers. Rather than using a
“one-stop-shop” solution, the e-marketplace realized that it could only achieve
the complex features and functionality it required by using separate, best-of-breed
solutions for MRO and direct materials.

As a result of its e-procurement and eSourcing initiatives, this European construction
firm established the first comprehensive online platform in its industry, offering
transactions and services that encompass the entire range of construction industry
purchasing needs, including direct and indirect materials and services. Buyers
and sellers benefit from online negotiations and auctions for construction materials
and equipment, while also eliminating the time and money consuming processing
tasks of indirect material procurement.

Direct materials and services can be negotiated for through the site’s eRFP
service, which allows for bidding on complex specifications including construction
plans and schedules, not to mention supplies. If a contractor needs to build
a brick wall, both the bricks and the labor can be acquired through the e-marketplace.

Conclusion

Early attempts at applying technology to companies’ sourcing needs have provided
quantifiable returns. e-procurement systems and reverse auction-based services
have proved the validity of applying technology to purchasing and sourcing.

New tools that address the complex requirements of the strategic sourcing process
are now available that extend and enhance these initial benefits. These tools
facilitate business processes that are inherently more strategic and challenging.
Through the implementation of a private e-marketplace enabled with structured
negotiations for strategic sourcing, companies may source faster and smarter.

For more information about the strategic sourcing space, please see http://www.moai.com/solutions/stratsource.htm

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