What is eSourcing?
Ensuring Optimal Negotiation of Contracts with Suppliers - Online
Sourcing is the business process of finding, evaluating, selecting, and collaborating with current and potential suppliers.
eSourcing simply moves the process to a web-based platform, which is the standard in digitalized procurement.
eSourcing software administers all aspects of sourcing strategy from negotiations to contract lifecycle management. Buyers collect information about suppliers including their products, services, and pricing.
The information is then organized, normalized, and compiled by the e-sourcing software to make viable comparisons of vendors based on what buyers need.
The Sourcing Process
eSourcing tools are applicable when using a variety of the the traditional seven-step sourcing process. The steps that need to be completed are no different when using e-sourcing software. The difference is how you complete each step.
As a sourcing specialist or category manager, you should select the tools that best fit your business objectives. Understanding which tools to use and when requires extensive knowledge about all the tools in the toolbox. In the sourcing process below, e-sourcing tools are inserted under the applicable steps.
Sourcing vs Procurement
Although sourcing is a part of the procurement process, sourcing should not be confused with the absolute definition of procurement. Sourcing platforms ensure optimal negotiation of contracts with suppliers while procurement platforms secure the optimal flow of goods and services.
Sourcing
The Sourcing Process
eSourcing tools are applicable when using a variety of the the traditional seven-step sourcing process. The steps that need to be completed are no different when using e-sourcing software. The difference is how you complete each step.
As a sourcing specialist or category manager, you should select the tools that best fit your business objectives. Understanding which tools to use and when requires extensive knowledge about all the tools in the toolbox. In the sourcing process below, e-sourcing tools are inserted under the applicable steps.
Procurement
Procurement Software Platforms
Procurement software platforms administer everything from ordering and paying for goods and services to delivery. Companies can track purchases made by all departments and enforce compliance standards. For example, an employee might need a new laptop. He or she could go to the store, buy the laptop and submit the invoice to the purchasing department for reimbursement, but such purchases are difficult to track. With a procurement software platform, the purchase would run through an approval workflow and be purchased using the correct supplier contracted to provide that product at a specified price.
Sourcing Tools - eRFx Formats
A buyer may choose an RFI, RFP, RFQ or some combination of all three depending on their specific category or purchase. A typical three-stage eRFx process will include:
A Request for Information (RFI) is distributed to seek information about suppliers' capabilities or goods and services, and the pool of candidates can be narrowed down based on responses.
2. Next, a Request for Proposal (RFP) is distributed among those selected in the RFI process. Detailed information is requested from the suppliers and often include a comprehensive questionnaire.
3. Finally, a Request for Quotation (RFQ) is distributed to final candidates asking for supplier pricing on the requested goods or services.
It is not uncommon to start with 50 or more suppliers in an RFI and narrow the pool of potential suppliers to 6 or fewer in the final RFQ.
Request for Information (RFI)
Requests for Information (RFI's) are used by buyers to collect and evaluate a broad base of suppliers at a high level. They are typically focused on suppliers' capabilities rather than specifics about the product or service or pricing. An RFI is the tool to use when you are looking for new sources of supply and want to see what’s out there.
Request for Proposal (RFP)
Suppliers who pass the qualification standards in the RFI can be invited to the Request for Proposal (RFP). In the RFP, buyers specify what they are looking to purchase and ask suppliers to provide fulfillment details. RFP's will typically seek one of two things:
- A Buyer-Defined Solution (e.g. I need to buy this particular product with these specifications)
- A Buyer-Defined Outcome (e.g. I need to solve this business problem, and I need you to recommend a solution)
RFPs generally ask for specific responses about the company, product or service offering, and pricing. An RFP is the tool to use when you know what you want and need suppliers to tell you how they will provide it.
Request for Quotation (RFQ)
A Request for Quotation (RFQ) is typically the final step in the sourcing process. The buyer negotiates price and final terms of agreement. In some instances, an RFQ can solicit bids on items other than price such as payment terms, service requirements or quantity discounts. An RFQ is the tool to use when you are comfortable with all suppliers bidding but want to get the best deal.
Sourcing Tools - Auction Types
An e-auction is considered a type of RFQ and best-practice solution for strategic sourcing teams as an improved way to negotiate with suppliers. With sourcing technology today, buyers and suppliers connect online to buy and sell products and services globally. In an e-auction, buyers will invite pre-qualified bidders to compete on final components of a negotiation with price being the primary data element collected. Virtually every industry can utilize e-auctions to obtain the best value on a variety of products and services.
Reverse Auction
With Reverse Auctions, bidders are given a starting price to which all participants agree. Bidders then compete against each other by lowering their bids. The bidder with the lowest price wins, and the buyer selects that supplier.
Dutch Auction
With a Dutch Auction, pricing begins at such a low level that no bidder would typically agree to sell their product or service. Price levels tick up at pre-determined intervals, and the first bidder to accept the new price wins.
Japanese Auction
With Japanese Auctions, prices start so high that all bidders would accept it. Bidders then have to signal their acceptance within a specified time frame as pricing ticks down. If a bidder does not signal their acceptance, they are removed from the event. When the price reaches a level where only one bidder has signaled their acceptance, the event will close, and the last one standing wins.
Direct vs Indirect Sourcing
While direct procurement focuses on securing supplies that are processed and delivered to customers, indirect procurement deals with the supply of goods and services required to maintain internal operations.
Direct categories are characterized by complex specifications with a low number of qualified suppliers and focus on Total Cost of Ownership (TCO). Direct procurement requires careful pre-qualification and more advanced e-auction types and/or functionalities.
Indirect categories are characterized by standard specifications with a high number of qualified suppliers in a strong competitive environment and focus on costs. The need for pre-qualification is low, so the buyer can often move straight into a Reverse eAuction with ranking enabled, which often generates high savings.
