E-Sourcing Opens Doors to New Suppliers – and Better Prices

John P. Mello Jr. -- Expert Business Source, 2/16/2007 12:45:00 PM

Your company can’t command the clout of Wal-Mart to wring the lowest prices from suppliers, but you can use the Internet to reduce the costs of doing business. Doing so requires some forethought to ensure that you take full advantage of the inherent efficiencies of online purchasing, or “e-sourcing.”

Online procurement can be used to acquire a range of business products and services, from retail inventory to office supplies to IT or telecommunications services. A common type of e-sourcing is the reverse auction, in which a buyer posts an item it wishes to purchase, and suppliers compete for the bid. The benefit to buyers is access to a much broader array of suppliers competing for your business.

For companies with e-sourcing savvy, the rewards can be substantial, according to Jemin Patel, CEO and president of HedgeHog, an e-sourcing solutions company in Carmel, Ind. Retailers can pare costs by as much as 32 percent and reduce purchasing cycles by as much as 80 percent, Patel estimates.

E-sourcing, he says, reduces costs by:

·Simplifying the time-consuming communication cycle – traditionally a mix of phone calls, e-mails and faxes – and reducing the time required to source goods and services

·Helping retailers form global networks of reputable suppliers and gain access to a new world of suppliers, including those in low-cost regions

·Standardizing and streamlining the bidding and negotiation process, ensuring that retailers find the best products from the best suppliers at the best prices.

A successful e-sourcing program, however, often requires more than simply posting an RFP (request for proposal) online. “Companies have to think holistically,” explains Andrew Bartels, a vice president with Forrester Research, Inc., in Cambridge, Mass. “They want to use sourcing tools to set up better deals with suppliers, but then they need contract management tools to turn the deal into an actual contract, and procurement tools so they get the savings they expected to get.”

Companies considering an e-sourcing program should adhere to the following best practices:

• Make sure e-sourcing makes sense for your business. David Bush, vice president for business development of Iasta, an e-sourcing company in Carmel, Ind., suggests that business owners ask themselves two questions before embarking on online purchasing. First, is the market competitive? That is, are there multiple suppliers in the market that can provide your product at the quality and service level that you want? Second, do you have the flexibility to switch to a new vendor? If a supplier is providing you with a specialized product, your e-sourcing options will be limited.
• Clearly define your purchasing specifications. “Everything has to be clear between you and your suppliers so you’re bidding apples to apples across your entire supplier base,” observes Bush.
• Evaluate suppliers on more than just price. Patel notes that online procurement is ideal for bringing together groups of suppliers and evaluating them based on multiple factors, not just price. Those factors include reliability, quality and value-added services, as well as geographic location, brand preferences, years in business, revenue, references, certifications and delivery options.
• Determine the proper bidding environment. Negotiations can be “open” or “closed.” Open negotiations allow suppliers to see everyone’s bids. Closed negotiations allow suppliers to see where they rank in the process, but not what the actual bids are.

Although e-sourcing has many fans, it has its detractors, too, especially when it comes to reverse auctions. “Reverse auctions offer a lot of promise, but there are many problems surrounding them,” contends M. L (Bob) Emiliani, an associate professor of manufacturing and construction management at Central Connecticut State University in New Britain, Conn.

The only way for a supplier to compete in one of these auctions is to reduce its profit margins, he explains. “That creates downstream problems,” he says, with suppliers potentially raising prices on future business to make up the shortfall in the initial bid.

John Mello is a freelance business and technology writer.