The Sourcing Innovation Series: Part VI

Yesterday was a prophetic day for the future of sourcing. Both Jason “The Prophet” Busch of Spend Matters and Eric Strovink, President and CEO of biq, chimed in with their thoughts.

Jason started off by taking a different approach. While the other bloggers took a technological, process, or relationship perspective, Jason took an old-fashioned (or should I say new-age) approach in his post Sourcing Innovation: Securitizing Direct Materials. In his posts, he suggests that the future of sourcing might involve securitizing future capacity (e.g., future machine time and the costs of the other underlying components such as materials and labor) which would not only allow a company to book a certain amount of capacity over a given time frame, but allow them to start to trade it on the options side of the equation as well, which could benefit all parties.

This is a very interesting proposal, and if you read my weekend series posts over on eSourcing Forum last month (I: An Introduction, II: Risks and the Need for Resilience, and III: Managing Risk) on Supply Risk Management, you’ll notice that one of the mechanisms I advocated for combatting risk is the reservation of capacity to ensure it is there when you need it. So I certainly agree with the underlying concept of securitizing capacity from a risk management perspective, but I have to question the feasibility of trading capacity on an open market. After all, how do you qualify, or should I say, quantify quality on a generic scale that can be used by all parties relative to all products that a given plant can produce? After all, not only might a given plant produce products of different qualities, depending on its strengths, but what I rate a “9” out of 10, you might rate a “7”. I believe this could definately hinder trading on an open market. However, the idea might work in a closed exchange, where all parties buy and sell the same types of products in the same markets and use the same ratings systems. I hope Jason’s post receives a large number of comments … I am very interested to find out what the masses think on this one.

Of course, if a large, trusted organization maintained control of a generally agreed upon common ratings systems, the idea might be more viable. The fundamental problem is that finding the right part in a global exchange with thousands of suppliers and millions of SKUs is almost as hard as trying to find the right song. (Did you think Doug Hudgeon was the only rock and roll fan? And yes, I too prefer Pandora.) If you look at the music industry, though it has seen drastic changes in recent years, what has remained constant is the fact that most listeners still find their music with the assistance of a filter: a reliable source that sifts through millions of tracks to help them choose what they do (and don’t) want to hear. (The Pitchfork Effect, Wired 14.09.) In order for Jason’s concept to take off, an exchange that can help buyers find compatible suppliers, and determine what capacity securities they can make use of, will be required. That’s why I think a closed exchange might work while an open one may not.

Eric took a results-oriented perspective in his predictions which were, in brief:

  1. With respect to consulting, the end of “credenza-ware” is in sight.
  2. As a corollary to (1), gain-share compensation models will become more widespread.
  3. Price erosion in e-sourcing and e-commerce software will continue, driven both by decreased tools costs and by a new generation of rapidly-maturing and far less expensive solutions.
  4. Knowledge is the dog; software is the tail.
  5. In-house sourcing consulting services at e-sourcing and e-commerce vendors will be hard to maintain.
  6. Compliance will become a more important source of savings.
  7. Demand reduction is an under-utilized savings mechanism that will become increasingly important.
  8. The Balkanization of sourcing by category will accelerate, and highly specialized approaches will evolve in key commodity areas

Or, in more succinct terms:

  1. Knowledge-based win-win consulting relationships will become the norm.
  2. Accuracy will become the key savings driver.
  3. Specialized approaches for key commodities will become the norm as e-sourcing tools improve and drop in price.

And I agree completely – although I must add the caveat that although I expect gain-share compensation models to become more widespread, they may never become the norm.

On a different note, my extended weekend series on optimization finished yesterday over on eSourcing Forum. In this series I discussed the benefits (A Powerful Tool), the reasons for its late arrival (Why it was Relegated to the Shadows), why it is here to stay (Why its time is finally here), and the advantages and disadvantages of integrated and specific standalone optimization solutions (POE or BoB). Considering that one of my major predictions for the coming years is a shift towards optimization-based platforms, this is probably one of the most important weekend series of the summer.

Remember to check out Spend Matters again today to see if anyone commented on yesterday’s post yet (and to see if he continued the discussion today – I’m sure Jason is just getting started) as well as eSourcing Forum, as I am fairly certain today is the day David is going to post.