25 May

3 Steps for Cutting Costs in Business – Step 2: eSourcing Tools

Posted in (General)

After accomplishing the step for Value analysis, the second most effective step for achieving your annual cost reduction target is ‘eSourcing’. eSourcing tools are basically online negotiation tools that help you negotiate with your suppliers effectively. Purchase heads across the globe, strive and train their personnel to ensure they do not leave money on the table once they are at negotiating terms with their suppliers. It is an effective and pragmatic way to address this long known problem.

eSourcing, is an online reverse auction that takes care of your RFPs, RFQs, negotiation, supplier award and order management stages of the strategic sourcing process. Industry estimates suggest that, in indirect categories of procurement, organizations can save up to 20% of their current purchasing expenses. The saving figures get drastically rationalized for direct procurements and are estimated at roughly 8-10% of transaction value.

One however needs to understand that eSourcing solutions cannot be used for all categories and items purchased by your organization. The following 3 major points are to be considered before arriving at a decision regarding sourcing an item using an eSourcing tool:

Frequency of Purchase:
- The purchase frequency should be monthly, bimonthly or quarterly.
- This is an optimal time when price fluctuations in the market for the(above) commodities can be leveraged to take advantage using eSourcing.
Value of the Item:
- Preferably, the value should be high.
- Typically, an A-class or a B-Class item is a best fit for an eSourcing project.
Competition (Suppliers available for the item):
- In case of domestically sourced products, the item should have enough competition in the market (say 5-6 suppliers).
- In case of imported supplies, the number of qualified suppliers and TCO (or Landed Cost) should be considered with no restriction on qualified suppliers.

Modern eSourcing service providers have modified their solutions to suit the diverse needs of the procurement organization. For example, if you are interested in getting the best price for your items, you can use the tool as a “negotiation engine”. If you wish to compute the impact of delivery date, taxes, incremental charges, etc. you can use the eSourcing engine as a weighted scoring auction, discounting these factors, against the responses by your suppliers, giving you a system calculated comparative analysis of the bids, same as your cost comparison sheets.

The implementation of eSourcing in your organization should not be a predominantly ‘cost-reduction’ measure, but a process improvement exercise. Stereotyping such activities as ‘cost cutting’ measures, hampers employees’ perception towards the same. The same then may have a spillover effect on the supplier and there is a serious chance of the procurement organization rejecting the initiative as ‘unsuitable for your organization’, no matter how beneficial it would have been. Furthermore, as your ‘communicated objective’ of eSourcing was ‘cost reduction’, it becomes even easier to nail the thought.

Change management and process innovation become key drivers for successful project implementation. Selecting a right product mix, right time and quantity, supplier flux and designating futuristic personnel on the assignment would definitely help you realize benefits on eSourcing in the long run. Yet another annual cost reduction measure accomplished!

Watch out for the third article in this series…

Go to Step 1

Go to Step 3

Article author - P. Mane

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