Daily Archives: October 10, 2017

Sourcing the Day After Tomorrow Part XIII

In this series we are doing a deep dive into the sourcing process today, and, in particular discussing what is involved, what is typically done (manually), and whether or not it should be that way. We have already completed our initial discussion of the initial project request review phase, the follow up needs assessment, the strategy selection phase, the communication phase, and the analysis phase. Now we are in the negotiations phase. At first glance, it looks like this is the most strategic and human-driven phase there is — as it is us who do the negotiations, figure out our BATNA (best alternative to negotiated agreement), and determine what facts we will use in our negotiations, but we have been fooled before.

We are now discussing the negotiations step, which has the following steps that have to be completed every time (and not just sometimes):

  • Format Selection (online, offline, hybrid)
  • Fact Prep
  • BATNA fallback
  • Audit Trails

Let’s start with format selection. Sure, it’s the buyer who selects the format, but, like strategy selection, the selection of negotiation format also depends on should cost analysis, market costs, supply vs. demand market trends, and previous performance of options in similar situations — all of which could have changed since the initial event was kicked-off. Depending on the expected savings or value expected, it may not be worth the in person negotiations. And who’s better at computing the costs, computing the trends, computing the variance of current supply market context against previous contexts, extracting the differential savings between contexts, and generally at doing hundreds, thousands, and millions of calculations. The machine. In this phase, the platform could do all of these calculations, apply a few probabilistic models, and come up with a ranked list of the best options under a well-defined set of assumptions. Most of the time, especially when market costs and trends change slowly, the buyer will be able to review the options, validate the assumptions, and choose one of the best options and have the system automatically generate a report that validates their format selection. It’s a strategic human decision, but one that can often only take a few minutes after the machine takes days (or weeks) of work away.

Now let’s move onto fact prep. In this phase, once the senior buyer has selected the format for the negotiation, and revised their expectations, they need to gather all of the facts in one place that they expect will assist them in their negotiations. Besides deciding what they need, this is a very tactical phase of information gathering and consolidation — which is something the machine is best suited for. In addition, based on all of the decisions made to date, if previous events were captured as well as materials selected and used, the machine can also apply probabilistic models in this step to determine which facts will likely be most useful to the buyer and auto-generate a suggested “fact-book” (outline) that the buyer can update with minimal effort. Then, with one press of the button, all of the information they want in the negotiations is at their fingertips.

Before negotiations actually begin, the buyer will finalize their BATNA. While the best buyers will actually start outlining this during the strategy selection phase (as it will need to be executed as soon as the strategy fails, which typically won’t be until negotiations, but if the event tanks in the communication phase (not enough suppliers respond to the RFQ, prices don’t decrease from initial bids in the auction, etc., it may be sooner — and if its sooner, the phases between failure and BATNA get skipped), they won’t finish until just before the first volley of negotiations get underway (as market dynamics can change significantly between the start of a complex project and the negotiations, even with a lot of machine assistance, because the need to involve a lot of stakeholders can draw an event out and the reality that an unexpected mine or factory closure can happen at any time can flip market dynamics on a dime).

So how does one determine a BATNA? One way is to select the next best strategy (extend the current agreement, spot buy — possibly with an auction, use an alternative product design that would allow for a new event, etc.), and as we know from Part VII, the machine can help greatly in this step as it is capturing all the knowledge to run probabilistic models to rank the next-best alternatives under current assumptions.

And last and not least we have unalterable, secure, always queryable audit trails. We all know most modern enterprise systems were made for this. Nuff’ said.

In other words, the more we explore the sourcing process, the more we find out how truly tactical, or at least automatable, the majority of it is. But we’re still not done, so in our next two parts we will explore the last phase — creating and signing the contract.