Limits of Sourcing - Part Deux. PI gets e-sourcing tool.

Back a couple of weeks ago I was thinking (and posting) about the limits of strategic sourcing. How small can a company's spend be and still benefit from sourcing? The challenge was to source for a client with less than $10M in SG&A across all categories.

The obvious constraint is the cost to source versus the benefit, and the relative market power generated by volume versus market knowledge. If one is trying to improve productivity deploying technology is an obvious solution. In this case, e-sourcing technology, "e-auctions" or "reverse auctions" is the technology of choice.

For those who are either not procurement types, or if you've been sitting in a three-bid cave for a few years here are some indications of the growth of e-sourcing technology.

* OGC, the UK government's "management board" is providing e-sourcing across many of their departments:

41% cost reduction in IT hardware costs.
http://www.theregister.co.uk/2006/06/08/public_sector_eauctions/

Here some background info on the OGC program.
http://www.ogc.gov.uk/documents/cp0025.pdf

* GSA, the US government's "management board" is also providing e-sourcing for the US government.

Fed-bid was awarded a five year contract to perform e-auction
http://www.fedbid.com/dictator/media/68/200701_general_overview.pdf

Here they announce they have conducted their 10,000th auction.
http://www.fedbid.com/news/46/ 10,000th reverse auction.

* Aberdeen, the analyst firm, has just released a report on advanced sourcing. Here's a quote "With an adoption rate within the Fortune 500 approaching 100%, eSourcing is a widely accepted business practice that can generate compelling benefits for its users."
http://www.aberdeen.com/c/report/research_briefs/RB_Advanced%20Sourcing_AB_3804.pdf

* ELP, European Leaders in Procurement, the magazine, explains why e-sourcing is good for suppliers.
http://blog.europeanleaders.net/procurement-blog/2006/10/4/why-e-sourcing-is-good-for-suppliers-part-i.html

* Here's a press release from my old boss. Minister Fortier bucks the trend of the UK government, the US government, and the vast majority of the Fortune 500 by making e-sourcing off-limits (ignoring the fact that the Canadian government has been conducting e-sourcing for close to ten years).
http://news.gc.ca/cfmx/view/en/index.jsp?articleid=237679

* Supply Chain Digest, the magazine, identifies e-sourcing as the #1 strategy for supply chain management in 2007
http://www.scdigest.com/assets/Reps/SCDigest_Top_10_Strategies_2007.pdf

Back to the $10M sourcing problem at hand. Let's assume for a minute that 30% of SG&A in 12 categories is addressable for sourcing - leaving $3M - and with a savings estimate of 10% that means the company could enjoy $300,000 in savings if sourcing can work on this small scale. What will it cost to use e-sourcing to attack those twelve categories?

For an industry that is fundamentally about pricing transparency to drive competition, it's remarkably difficult to answer this question. My own experience suggests that you can easily negotiate prices in the $2,000-$10,000 range for a single event. At the low end, this could work for the client ($24,000 cost against $300,000 benefit). At the high end, the benefits would appear in out-years. Alternatively, you could try and run it on one of the "supplier pay" models such as www.sorcity.com, though the low spend may not be attractive for the auction provider.

And finally, the approach I'm taking a hard look at. Tender System has released an open-source e-sourcing tool. I've just installed it on the Procurement Investor web site and will be configuring it over the next few days. I'm intending to also make it available to Procurement Investor readers in the near future.

Cheers,

David Rotor