The Sourcing Revolution - Market Informed Sourcing

The Sourcing Revolution

Market Informed Sourcing
Peter Smith
September 2013

Spend Matters UK/Europe
©ALL RIGHTS RESERVED - Confidential

Agenda
1. Introduction
2. Traditional Procurement and Category
Management
3. What is Market Informed Sourcing?
4. How does it work – and why is it valuable?


Part 1 - Introduction
The Real World Sourcing Series is a series of 6 sessions covering hot topics
for procurement professionals.
The Real World Sourcing Series is promoted and supported by
BravoSolution, and developed by Peter Smith (Spend Matters) and Guy
Allen (Real World Sourcing Ltd.)
Peter Smith started his procurement career with Mars Confectionery, then
was CPO for Dun & Bradstreet Europe, the Department of Social Security
and the NatWest Group. He is now a consultant, author, non-executive
director and editor of the Spend Matters website. He was President of
CIPS in 2002/3.


Part 2 - Traditional Procurement
• A requisition comes into the procurement department
OR
• The factory requires something, usually specified by the line manager
or engineering, design, R & D...

In both cases, procurement is told – with some precision in most cases –
what it should go out and source / buy from the market


Category Management
• Procurement (maybe with stakeholders) defines a set of categories,
sub-categories

• Takes a pro-active approach to determining the best way of purchasing
each category
• Procurement analyses the market, relates that to the internal
requirement
• Procurement approaches the market – or a few suppliers – with a welldefined requirement in terms of quantity, specification, etc.


Strengths :
• Proactive
• Links business needs to market and suppliers

• Considers aggregation and leverage
• Well-structured and repeatable process

BUT...
• It assumes that the buyer understands how to frame the requirement
better than the market


Market informed sourcing - exercise
• You are buying fresh tomatoes for Milano Foods, who use them in a
number of finished consumer products, made in a number of European
factories
• Production is all year round, but varies month by month in terms of
quantity

• What are the variables you might wish to consider in your specification
and in suppliers’ responses?


Buying tomatoes - What are the variables?
•
•
•
•
•
•
•
•
•

Volume needed
Number and location of production sites
Usage quantities / schedules
Number of suppliers (is dis-aggregation allowed?)
Shelf life
Delivery dates / times – inc. collection options
Quality – specification and substitution variables
Price – basic, volume related, delivery size etc.
Conditional price factors (“if / or”)


Buying tomatoes - What are the variables?
• The complexity of the requirement is evident!
• That means we tend to drive towards a standard solution that the
suppliers can make offers against
• That enables us to handle the multiple variables and make rational
assessment of the alternatives


Why do we use Category Management?
• If we allowed suppliers to suggest alternatives, we simply couldn’t cope
with the complexity in terms of the responses from multiple suppliers

• We would not be able to analyse the sheer amount of data, and the
options it would contain
• So we apply Category Management – we second guess the market
through research and strategising
• We then decide in advance how many suppliers we want, delivery
quantities, timings, the quality levels, specifications, max / min
volumes and other parameters


• But this is not the best way of doing things!
• It restricts suppliers’ flexibility to offer alternatives – part-offers,
alternative specifications, time constraints – which might provide value
• But we limit this because doing so is just the only way we can run
manageable and fair sourcing exercises

• BUT... There is now an alternative, which is generating savings of 20%+
even for firms who have done CatMan well for years!


Questions we may need to answer:
•
•
•
•
•
•
•
•
•

Insourced/outsource options
How to define the scope of the category or the tender
Whether to consider a prime contractor solution, or multiple suppliers, and
how to bundle the total category requirement
How many suppliers are required (or commercially ideal)
The geographic spread of the requirement and of the market solution
The phasing and any seasonality aspects to the requirement
The length of contract, including any options for termination or extension
The core product or service specification
Acceptable options for bundling, volume discounts, or conditionality


Part 3 – What is Market Informed Sourcing?
• I can supply 100 tonnes of tomatoes each month between March and
October but only to your two factories in Spain and France, at an “A”
quality level.
• I am happy to supply a minimum of three months (consecutively ) but I
will not contract for just one or two months.
• I can deliver and here are my rates depending on delivery size to each
factory – on top of my ex-farm price. OR you can organise shipment if
you prefer.
• If you contract for the whole 1600 tonnes I will offer an additional 2%
discount. If you buy 500 tonnes of peppers as well, there is an
additional 1% on the table.


What is Market Informed Sourcing?
•

We close options down not because it is the best way of managing the
sourcing problem

•

We do it because otherwise we just don’t know how to cope with the
complexity of the alternative


Supplier A

Supplier B

Supplier C

Supplier D

Contract 1

100

114

113

108

Contract 2

100

114

110

No bid

Contract 3

100

115

108

110

Contract 4

100

115

110

108

Contract 5

100

110

112

98

Contract 6

100

106

110

No bid

Maximum no. of contracts

3

3

3

2

Discount for > one contract

0

10%

10%

5%

What is the lowest cost option to fulfill the requirement?


Supplier A

Supplier B

Supplier C

Supplier D

Contract 1

100

114

113

108

Contract 2

100

114

110

No bid

Contract 3

100

115

108

110

Contract 4

100

115

110

108

Contract 5

100

110

112

98

Contract 6

100

106

110

No bid

Maximum no. of contracts

3

3

3

2

Discount for > one contract

0

10%

10%

5%

Answer: Contracts 1 and 6 to supplier B; contracts 2, 3 and 4 to supplier C,
contract 5 to supplier D


Why is market informed sourcing different?
• Market informed sourcing / optimisation / advanced sourcing is
perhaps the biggest advance in procurement since Category
Management
• Allows the market (suppliers) to offer a whole range of alternative
propositions. The technology then analyses and optimises the data to
provide a best possible solution
• The buyer can they do “what if” analysis – and see what effect that
has on the overall cost.
• The technology “instantly” assesses each option

Particularly powerful in complex sourcing situation with many variables


Defining complexity
•
•

•

•

The size and nature of the supply market - a greater number of suppliers, or a wider
geographic spread, will potentially increase the complexity of the process.
The number of ‘lines’ or items that need to be purchased; so a finished product with
many individual components, or a transport contract with many ‘lanes’, has intrinsic
complexity.
The scope or spread of the requirement in terms of the purchasing organization; so
if we need the item delivered to 45 different company offices or factories situated in
47 various countries from Australia to Peru, then the activity is intrinsically more
complex than a single delivery point.
The number of users or stakeholders internally; as their numbers increase, so too
will the likely complexity or breadth of the requirement, and the need to align a
wide group of people with the process and the outcome of the procurement.


Defining complexity (continued)
•

•

•
•

•

The potential for dis-aggregation of the requirement i.e. whether suppliers can
offer some of the entire requirement rather than the totality; if there are multiple
items, is it feasible for suppliers to offer a subset of the total package?
The timescale over which the purchase is to be made. So a single one-off purchase
is easier to source than an item or service that will be delivered in lots or
continuously over an extended time period.
The potential for substitution; can suppliers offer alternatives to the goods or
services specified by the buying organisation?
Supply chain dependencies or critical paths; if items A and B are needed in order to
produce item C, then I may have to consider that critical path . There may also be
the option to consider disaggregating that supply chain rather than going for an
integrated single supplier approach.
Supplier-created dependencies; situations in which a supplier can make
conditional offers; for instance, ‘I can only offer you this price on item A if you also
buy item C from me’.


Defining Complexity
A major food company runs an annual European logistics tender.
The basic parameters are:

• 1,000 Routes
• 90,000 Movements
• 200 Hauliers
• 60 Factories
(Other criteria – quality, green issues, speed of response – also taken into account).


Another example…
A firm requires a complex printed product; a catalogue, brochure or similar
perhaps. Assume the quantities are such that one or more major printing suppliers
will be required. The product is required in large quantities across 30 countries; it
then needs to be delivered in batches to over 100 locations in those countries.
So, while the product itself is relatively easy to specify, the supply chain has a
number of different elements, principally:
•
The base paper required for the product
•
The printing process – ‘ink onto paper’
•
Assembly and binding of the product
•
Intermediate storage and stock-holding
•
Delivery to the final customer locations
How would you approach the market?


Another example...
•
•
•
•

So what is the best way of structuring the supply chain?
How aggregated or dis-aggregated should it be?
What is the right number of suppliers?
How about location of suppliers?

A perfect problem for an optimisation / market-informed
sourcing approach
Allow the market to suggest the “best” way of doing this


Part 4 - How does it work?
A request is presented to the market, with as many options and variables
as required.
That might include supply to different factories by month / quantity /
specification; or quotes for different routes (lanes) and load sizes / types in
a logistics situation.
Suppliers respond (electronically) and the platform then runs the
optimisation calculation using complex mathematical algorithms.

The optimal solution is calculated, which can then be further interrogated.


How does it work?
After the initial optimisation analysis, the user can then look at different
scenarios. For instance:

• Reduce the number of suppliers
• Spread the geographic risk e.g. Country of origin
• Spread the supplier risk – maximum share of volume

• Maximum suppliers per country / site
• Preferential treatment for incumbents
• Preference for SMEs, minority owned businesses
In each case, the system can assess the premium that would be paid
against the initial optimal solution


The Results
• Leading adopters have seen average 15-20% saving even where
category management has previously been well implemented

• Understanding of supply chain and opportunity to widen the supply
base e.g. SME participation
• Supplier perceptions improved – they feel they are being given the
chance to express different options and contribute their ideas
• So although it has some of the ‘toughness’ of auctions (and can even
be combined with elements of auctioning), it supports good
collaborative relationships and supplier innovation
• Transparency is also very strong


Market informed sourcing
• Some users are going beyond “just” sourcing and using the technology
for wider issues

• That can include production planning, manufacturing optimisation,
supply chain and related issues
• For example, internal production capabilities can be built into the
calculations along with external providers so make / buy decisions can
be included in the analysis


Not suitable for...
•
•
•

•

•

Very simple contract requirements or categories may not justify the time or
effort needed to run a MIS process.
If the requirement is very clear and there is no possible benefit in opening
options up to the market, then clearly MIS is not justified.
MIS may not be suitable if there may be reasons above and beyond the normal
commercial objectives that mean, for instance, an organisation wishes to
develop a partnering relationship with a particular supplier.
Even where MIS is worth using, judgement still needs to be applied in terms of
how many options are considered. So you wouldn’t look to dis-aggregate your
FM requirement to the level where you asked for pricing per floor of every
building for the cleaning element of the contract.
There will need to be careful thought around how MIS can be used in the
public sector, but we see no intrinsic reasons why that is not possible; for
instance, within a Competitive Dialogue process.


The Role of Procurement
• Skills needed by the procurement executive change
• Less focus on market analysis and structuring a very definite tender

• Identification of the key variables and understanding of the market in
order to know how to frame the enquiry and the alternative criteria for
responses is key
• Understanding of the “what if” questions post event and the ability to
look at options creatively whilst meeting business goals


Market informed sourcing – Summary
• MIS does not replace Category Management, but it changes the
fundamental nature of the CatMan / strategic sourcing process and
requires a different process to be adopted by buyers
•

MIS allows the procuring organisation to open up options to the
market, instead of narrowing down which is the core of traditional
CatMan. That enables the market to reflect back true economic factors
in a manner that can benefit the buyer.

•

Market-Informed Sourcing is the most significant development in core
procurement practice since Category Management


Exercise
• What other areas/ categories can you think of where this sort of
approach might be interesting?
• Can you think of any public sector examples where it would be
interesting?



THANK YOU!
Please feel free to contact me on
psmith@spendmatters.com


The Sourcing Revolution - Market Informed Sourcing

Recommended

Recommended

More Related Content

Similar to The Sourcing Revolution - Market Informed Sourcing

Similar to The Sourcing Revolution - Market Informed Sourcing (20)

More from BravoSolution

More from BravoSolution (18)

Recently uploaded

Recently uploaded (20)

The Sourcing Revolution - Market Informed Sourcing