eSourcing

e-Sourcing - A White PaperAlison SpackmanSummary

In the current constrained economic climate many businesses are looking to cut costs and make savings, particularly within their procurement functions. Any savings in procurement costs have a direct impact on the profit of the organisation with clear benefits to their bottom line. On the flip side to this, many supplier organisations are battling to hold margins and reduce their costs of sales through developing and maintaining good customer relationships. To date, the majority of procurement savings have been achieved through the indirect procurement function and the procure-to-pay process introducing costly Enterprise Resource Planning (ERP) solutions. Many of these solutions have failed to address the sourcing requirements that form the heart of any procurement strategy, and strategic sourcing is now heading in to the spotlight with significant savings achieved through the introduction of efficient electronic sourcing and contract management.

This paper sets out to demonstrate the importance of strategic sourcing, the contribution it can make to the savings agenda and the foundations it can give to the core procurement function. In particular, the paper looks at the introduction of efficient electronic sourcing and the benefits to be gained from the effective use of Due North’s e-sourcing suite of products.

The Changing Face of Procurement

The objective of Procurement is:

To satisfy the business requirement by providing the right product or service, at the best price, on time with excellent quality.

Traditionally the sourcing function has been viewed purely as an administrative process that adds cost to a business with relatively low strategic importance. However the drivers (and with them attitudes) are changing and one of those is the impact of e-sourcing on the fast moving nature of business supply chain.

It is important to recognise that only the strategies and mechanisms of the sourcing process are being changed and the overall objective for the procurement process remains as above.

The following table illustrates the limitations of traditional sourcing compared to e-sourcing:

Yesterday’s Limitations Today’s BenefitsTime-inefficient

• Even with the advent of email, correspondence exchanges are time consuming

Time-efficient• Redundant data maintenance avoided• Reduced processing time

Email, word & excel• The creation & exchange of tender and evaluation documents using email, word and excel can form up to 70% of procurement sourcing activity.

Web-based• Easier to use for both the buyer and supplier.• Speedier, more accessible and flexible• Hence short learning curves

Manually driven and loose human interfaces between systems using phone, email and face-to-face communication:

• Greater incidence of human error and interface failures• Slower

Workflow-driven and tight, seamless inte-gration

• Accuracy: Single source of information • Speed: Optimised tender cycle-times• Automation: Seamless process data exchange

Purchasing department centric• Focus on departmental functions and transactional tasks• Insufficient focus on strategic procurement

Supplier Centric• Focus on sourcing activities and strategic supplier management• Buyers spend more time early in the process developing specifications and requirements

High Market Intelligence costs• Time consuming analyses of market conditions.• Limited ability to widen the supply market

Lower market research costs• Use of e-auctions across the supply base• Ability to collaborate with other organisations

Some of the key drivers for e-sourcing are for businesses to:

• Adapt to global convergence of markets• Operate in new and niche markets that were previously out of reach (due to cost, product differentiation, geographical location, logistical problems or national trade barriers)• Increase capability to meet new norms of rapid product and service development and customisation, hence:

- Matching unprecedented competition expected from new and existing competitors and alliances- Meet shorter product life cycles

• Form relationships and alliances with other companies through:- New channels- Tenders advertised via the internet- Collaboration with other organisations

To effectively demonstrate the key benefits available from the introduction of e-sourcing, it’s important to understand the activities involved in the process. There are 4 headline elements in the sourcing process: Analysis of Spend; Tender Management; Supplier Management and Contract Management.

The cyclical nature and interaction of these 4 elements are highlighted in the diagram below.

The cyclical nature and interaction of these 4 elements are highlighted in the diagram below.

Spend AnalysisThe first step in any procurement exercise is an analysis of expenditure across the business to demonstrate the spend profile for procurement categories and to identify any maverick, or off-contract, purchasing. Key statistics needed for the development of a procurement strategy include; total spend by category, number of suppliers per category, number of contracts per category, number of invoices per category and average invoice value.

Tender ManagementThe tender management process involves the advertisement of the tender opportunity, expressions of interest, publication of specifications, terms and conditions, the receipt of supplier bids and electronic auctions. Within public sector organisations there is the additional burden of the publication of OJEU (Official Journal of the European Union) notices in line with EU procurement legislation.

Supplier ManagementSupplier management covers market research, evaluation of potential suppliers and their registration within the organisation’s market place. Once the supplier has been evaluated through the tender process, agreements must be finalised and performance managed to improve the on-going relationship.

Contract ManagementContract agreements represent all commitments, interactions and transactions that have taken place through the evaluation and tender process and these form the backbone of effective contract management. Enhanced compliance and reporting enables further streamlining of this administrative process

Benefits and ROI ModellingThe benefits of implementing e-sourcing can be felt both internally within the procurement community and externally by the supplier market. Internally, procurement professionals have more time for strategic activity and senior management have greater visibility of procurement activity and contracts. Procurement is improved in the business, releasing cost savings that directly contribute to the bottom line. Externally, suppliers benefit from having the ability to view opportunities and tender documentation on-line using a single registration with less duplication of documentation. Procurement teams have more time to devote to the specification and requirements documentation which has the knock-on effect to suppliers of minimising misunderstandings within the tender process.

The overall benefits are reduced cycle times and reduced tender costs to buyers and suppliers with improved control over procurement activities and speed of access and transparency of information through the supply chain.

It is possible to measure the success of an e-sourcing implementation through the use of key performance indicators (KPI) including:

• Improved business partner satisfaction with quality of information• Improved customer satisfaction with quality of products/service supplied• Ease of use of systems• Savings in administrative activities• Savings in office space/storage requirements through elimination/reduction of paper• Improvements in business processes, information sharing and knowledge management• Improvements in morale and motivation that can arise in employees having more time to work on strategic activities and less time spent on mundane administrative tasks.• Maximisation of compliance to standards• Minimisation of maverick spend through non-preferred sources

Additionally, the benefits can be included in a quantitative analysis by assigning financial value.The most measureable benefit from the introduction of an e-sourcing solution is through e-auctions. Although not appropriate for all categories of spend, when used, significant savings have been achieved. For example, through 10 auctions, Due North customers have achieved over £2m savings on £10m of procurement spend across procurement categories including stationery, hardware, telecoms and office furniture.

Business process savings have also been demonstrated through the introduction of Due North’s e-sourcing solution. One customer calculated a 33% reduction in tender process costs equating to a £425 saving per tender resulting in a software payback period of less than 3 months.Any saving in procurement costs directly improve the net profit of businesses. To achieve comparable returns through sales would require a significantly higher percentage increase in sales. This is demonstrated below.

Company XTurnover: £50mNet Profit: £6m (12%)Procurement overhead: £3.5m (7%)Procurement savings achieved: £0.175m (5% of procurement overhead)

In the example, to achieve a comparable return through sales would mean that the company would have to increase sales by 2.92% (or £1.46m).

If the cost of investing in an e-sourcing solution is £150k, ROI in the first year would be well over 100% and payback periods would be just over 10 months. This is without measuring other benefits such as greater control over maverick buying (and its resultant costs), reductions in errors on input, improved supplier relationships, greater transparency of costs and better management information for decision-making.

e-Sourcing technology providers

There are a number of providers of e-sourcing solutions in the market place and this paper focuses on the suite of products developed by Due North.

Founded in 2002, Due North has extensive knowledge and experience of working with organisations by helping them to reduce costs and improve their procurement processes with strategic procurement solutions.

Benefiting from over 9 years of client input and experience gained from more than 200 live operational sites, Due North’s sourcing, supplier and contract management solutions offer a mix of functionality and knowledge to address the key challenges faced by procurement operations today, including improving efficiency, reducing costs and minimising risk.

Due North is part of Access Intelligence, a group of Software as a Service (Saas) businesses that deliver compliance solutions for the public and private sectors. Their strategy is to buy growth businesses in target industries and build value through organic growth and acquisitions, providing industry expertise and investment know-how.

The SaaS methodology enables customers to use the Access Intelligence companies’ services without the need for additional hardware and software via an internet browser and secure networks. This approach means Due North can deliver cost efficient strategic procurement solutions to the market.

Due North have developed a suite of 10 e-sourcing modules. The following diagram highlights the 4 elements of e-sourcing combined with the Due North modules to demonstrate the functional overlap with the 4 headline elements:

ProSpendAutomated data feeds are taken from the finance system to provide a highly advanced graphical analysis of spend via simple interfaces.

ProNotice An online notification solution that simplifies the process of creating an opportunity notice and provides potential suppliers with an auto alert once the notice is published.

ProTenderA comprehensive online tender process between buyer and supplier from the issuing of pre-qualifying questionnaire (PQQ), request for quotation (RFQ) and invitation to tender (ITT) documentation, supplier submission to a secure lockbox and evaluation of responses.

ProAuctionAn online auction tool enabled for both automatic reverse and transformational auctions, offering a transparent, real time bidding facility.

ProQuestA dynamic, online application which is used to define any type of supplier questionnaire including PQQ’s and ITT’s in a secure environment saving time and increasing efficiency.

ProEvaluateAn advanced evaluation tool to control and monitor the evaluation process with the ability to independently score multiple sections simultaneously and aggregate to a single mean score.

ProControlAn online record of supplier accreditation, including Health and Safety and Security Clearance. The software notifies the buyer when a certificate expires and when a review of accreditation is required.

ProRegisterA first point of reference for visibility of existing contracts. It facilitates the recording of details relating to awarded contracts and framework agreements across one or multiple organisations.ProMonitor - A facility to monitor and measure vendor performance against predetermined KPI’s. Savings can be tracked and automatic alerts inform buyer and supplier of key dates such as reviews and expiry dates.

ProLegalA single central repository for all legal agreements, enabling users to quickly and easily search for particular documentation and key terms within those. Contract terms and supplementary information, such as change control and exclusivity provisions, can be recorded to give internal legal teams access to commercial information.

ImplementationThe implementation approach is dependent on the size of the business but in general a phased implementation has the least risk. A handful of key purchase categories are initially implemented through a small number of key suppliers. In this case it is therefore relatively simple to establish the e-sourcing processes and scale these to wider purchase categories and suppliers over time.

Change PlanningDuring change planning the detailed scope of the project is determined and agreed. This activity draws on the objectives and the existing business processes in line with the business case. Once scope is agreed the detailed planning of the programme takes place, commencing with the structuring of the projects and agreeing the component governance structures, project controls, project management, risk management and issue management processes and tools.

Solution DesignSolution Design is concerned with developing, producing and documenting the integrated business design in terms of processes, organisation, technology and data/information based on the requirements captured through the previous phases. This involves analysis and redesign of sourcing processes and points of contact with e-sourcing technology.

RealisationThe design is brought to life through the implementation of a pilot process. It includes the development and testing of all components of the solution as well as the handover for implementation. Configured working systems are provided as well as the associated process supports, including end-user documentation, documented business policies and a fully developed education and training programme.

Support and Continuous ImprovementIn the period immediately following full implementation, on-going support is offered to the users to review and improve performance if needed. This optimisation of performance can then deliver the full realisation of the change objectives and the delivery of the benefits.

Components of costThe components of the cost of implementing e-Sourcing are:

• Due North’s software suite – fully managed Software as a Service (SaaS). Note capital costs are minimised as there is no requirement for additional hardware.• Implementation consultancy, including change management if required• Content provision

The main driver of cost is:

• Numbers of users

Conclusion

Research by various industry analysts has consistently reported that significant strategic and monetary gains can very quickly be achieved from e-procurement and e-sourcing in particular. This paper has explained some of the components and benefits of e-sourcing and specifically Due-North’s suite and given a brief summary of how to plan and execute these changes to business processes.

E-sourcing has the potential to dramatically impact the bottom line whilst radically transforming the sourcing function from a tactical and transactional focus (creating costs) to a strategic sourcing role (creating value). Due North’s e-sourcing suite saves companies money and increases efficiencies.A manual, labour intensive workload is transformed into a fast efficient and controlled process, saving money by reducing time spent and reducing off-contract or maverick buying.

E-sourcing is the next wave of change through e-business and e-procurement. Some businesses have spent time and effort to meet the wave early and are reaping the benefits, giving them a competitive advantage over their more conservative rivals. Businesses that are slow to react may struggle to catch up.