The 2nd Sourcing Innovation Series – Let’s Get Analytical!

Spend Analysis. Decision Optimization. Cost Modeling. Almost since the beginning, these have been the six dirty words of strategic sourcing. Study after study has found that these techniques easily save 8% to 15% for just about any organization that spends more than 500M a year, but yet, on average less than one fifth of companies out there have tried these technologies, and less than one tenth are using them. It’s like they’re taboo. Well, in the not too far off future, the tables are going to turn, and instead of being the six dirty words, Spend Analysis Based Cost Modeling Decision Optimization are going to be the seven words of saving grace for tomorrow’s sourcing organization that wants to survive beyond the next decade. But the technology of tomorrow is not going to be the technology of today. But first …

Why? There are numerous reasons that this will happen, including negative returns from reverse auctions from early adopters, the forthcoming fall-out of the majority of first-generation supplier networks and marketplaces that still remain, and the eventual realization that contract management is not the holy grail if you don’t have a good contract in the first place, but the primary reason this will happen is the G-Word. Globalization. The effects we’re starting to see now are nothing like what’s going to come, especially since the majority of companies are unprepared!

Tactical job loss to outsourcing, rampant inflation in raw materials due to skyrocketing demand from developing countries, quality issues, and CSR (Corporate Social Responsibility), or should I say CSI (Corporate Social Irresponsibility), issues are only going to compound in the coming years. And, without recourse, this is only going to push costs, as they say, through the roof of the nearest skyscraper!

The only way companies are going to be able to maintain costs, yet alone achieve savings, is by getting a firm handle on costs and, more importantly, by identifying and achieving savings opportunities not previously explored. This is going to require an improved understanding of the cost drivers of what you are buying (cost modeling), and understanding of where variability exists, either within past buys or against market indices (spend analysis), and what the best award scenarios are (optimization).

But it won’t be three applications at three different stages of the sourcing process, it will be one, and it will be at the beginning, center, and end of the sourcing process. Think about what CoExprise is doing for the management of contract manufacturing – integrating the important PLM, Sourcing, and Procurement aspects of complex assembly sourcing – it will be something like that. But instead of an AravoIastaKetera¬†union for a specific domain, it will be an AprioriCombineNetBIQAkoya union for the generic product domain. And it will look like nothing you’ve seen before. Sourcing tomorrow will be quite different than sourcing today. The only question is, who are the brave souls that are going to lead the way?

The future’s coming hard and fast … and I’m gonna be on the freight train that meets it head on!