Category Archives: Sourcing Innovation

What e-Sourcing Is Not – A Necessary 7-11 Update!

Twenty years ago we wrote a post on e-Sourcing Resistance and what e-Sourcing is Not. In that post, we began by referencing “The 7 Myths of e-Sourcing” by the great Tim Minahan (before he went over to the dark side), where he tried to dispel the myths.

Since the original myths still persist today, we’ll start by reminding you of those — and then address the new myths that have arose / are arising so you don’t lose the path.

Tim’s Original 7. e-Sourcing is NOT about

  • lowering prices: it is about getting the best, fair, price you can get on a product, or service that meets your needs, but not about squeezing supplier margins so thin they go out of business
  • unfairness to suppliers: it’s not about forcing out or limiting to preselected suppliers, but creating an open, level, fair playing field
  • unfairness to incumbents: it’s not about forcing incumbents out, it’s just about ensuring they also play on a fair, level, playing field
  • keeping suppliers out: it’s not about making business more difficult to win, but easier to win
  • sales cycle lengthening: it’s about making sourcing processes right-lengthed
  • supplier burdening: it’s not about adding costs, technology, or resource requirements — but minimizing the burden on the supplier
  • eliminating relationships: it’s about finding the right supplier to build a relationship with

but with the rise of technology, and, AI, in particular, a new set of myths has arisen and needs to be dispelled ASAP. E-Sourcing is NOT an excuse to:

  • turn every Procurement event into a(n) (e-)Sourcing Event: just because you can, doesn’t mean you should … most procurements should be off existing contracts, most tail-spend should be spot-buys, and when the volume/cost is enough, simple RFQs; e-Sourcing is for goods and services that are strategic or custom, not tactical or commoditized
  • use AI to draft RFPs: with AI, you can draft RFPs, and incorporate as much as you want into those RFPs, and ask as many questions about as many things as you want — this might make your life easier, but it unfairly burdens suppliers when you ask for details you don’t need (at least until you are going to seriously consider them) — plus, AI will hallucinate, ask wrong questions (and then force a follow-up request later when it’s discovered) and waste time on both sides … RFPs need to be human drafted — they should be based on templates (and assembled using non-LLM AIs), and AI should be used to judge completeness, clarity, etc — and even recommend gaps to fill in (because, when well trained, 90% accuracy can be useful), but AI should never lead
  • use AI to conduct events agentically: AI should be used to automate the tactical, but humans need to be engaged at every decision point
  • use the same process for every event: some events should be simple one-shot mini-RFPs just to verify key product/service requirements; some events should be moderate two-stage RFI/RFPs to ensure the suppliers meet mandatory organizational requirements; others deep three-stage RFI/RFP/RFQ processes to first verify suppliers, than products and services, then BAFO pricing so complete information is known before a decision is made

e-Sourcing is about right-sized efficient execution of strategic sourcing events for both sides, nothing more, nothing less.

The Great Thing About Optimization: You Can Cost Constraints and Solve for Them!

The Sourcing Optimization Grand Master Paul Martyn, as part of his ongoing Sourcing Excellence, published two great posts on how The Most Important Constraint Is Often Left Unspoken and The Real Problem Is Usually Context.

In Part 16, Paul notes that:

Sometimes the most important part of the decision never gets discussed directly.
Nobody says: “We don’t trust ourselves to manage the transition.”
Nobody says: “If this fails, I own the fallout.”
Nobody says: “We’d rather pay more than explain a disruption.”

But they poison the model by insisting on:

Extra incumbent weighting.
Requirements that narrow the field.
Timelines that make supplier change almost impossible.
Risk language that quietly points one direction.

Which ensures that the “optimal” solution is one that keeps the incumbent, even though it’s far from the optimal solution.

Then, in Part 17, Paul notes that context is the harder problem. That while the sourcing team can model price, lead times, freight, capacity, payment terms, supplier performance, etc., the data doesn’t capture:

  • a plant manager [who] still remembers a shutdown tied to a supplier change
  • marketing does not want packaging changes during a seasonal launch
  • finance is suddenly focused on working capital
  • operations is protecting uptime
  • an incumbent relationship [that] carries more internal support than anyone says out loud

And this is what leads to the insistence of constraints and inflated switching costs in the model that mathematically ensures the “optimal” solution is the one where nothing changes, even though the CFO can clearly see that costs are 5% above market averages with no real explanation as to why the organization has to pay that much to minimize risk, ensure supply, yada, yada, yada.

But here’s the thing, if the real issues are surfaced BEFORE the event begins (and the model built):

  • Even though the plant manager is scared of a shutdown, the probability can be computed and the cost can be quantified — as the cost per hour/day/week is known
  • The cost of extending the current contract just through the launch can be quantified and the cost of keeping the supplier for the whole contract term vs. just the launch and then switching to a new supplier can be computed
  • Up front vs. over-time costs can be modelled and the cost of solutions that require more investment up-front vs. later can be compared and contrasted
  • The on-time expectancy per supplier and carrier can be modelled and accounted for
  • The true cost of the incumbent preference can be modelled

The great thing about strategic sourcing decision optimization with what-if scenario support is that all costs and constraints, if properly expressed, can be modelled and the true cost of a preferred, vs. market, scenario computed. If the cost difference is inconsequential, then you go with what the people want. If it’s significant, then some real discussions need to happen and some real decisions need to be made.

Sourcing and Procurement Are NOT The Same

And they are definitely NOT interchangeable, as per a recent article by Paul Martyn (the Sourcing Optimization Grand Master) on LinkedIn.

As per his article,

  • sourcing is strategic
  • procurement is transactional

And this is why they are not only not the same, as per Paul’s article, but not interchangeable.

In the age of AI (Hype), this is distinction becomes doubly important!

As technology advances rapidly, humans become less and less important in Procurement as rapid advances in automation allow more and more of the tactical process to be completely automated (as ARPA allows exceptions to be learned and future manual intervention requirements to be eliminated) but more and more important in sourcing as Gen-AI repeatedly proves just how Astonishingly Inept modern Artificial Idiocy is.

Many will argue that sourcing is tactical because modern software can assemble RFXs from existing specs, automatically select suppliers from your SXM and/or ERP, automatically distribute them, automatically validate the returned RFXs, eliminate vendors who don’t meet absolute requirements, analyze the responses against market data for validity, build and execute multi-objective models, and recommend and award. And while that certainly sounds like sourcing, it’s not. It is sourcing execution. The tactical part that has to be done to support the strategic, but NOT the strategic.

The strategic is creating the specs, identifying the real organizational requirements, determining the requirements for supplier inclusion, validating the suppliers, determining the proper (multi-round) event type, validating the generated RFXs, analyzing the responses for hidden risks and traps and idiosyncrasies, defining the right trade-off models, selecting and modifying the right award scenario, overseeing the negotiation, etc. Every part of the process that requires an actual decision with Human Intelligence.

This is because, as Paul points out, a dumb machine doesn’t understand:

  • lowest cost vs resilience
  • incumbent vs challenger
  • standardization vs innovation
  • savings vs service
  • global leverage vs local agility

Or any other trade-off that can’t be completely quantified and captured in fail-safe rules.

Systems can, and should, support all tactical bit-pushing — especially since we were promised they would do so over 40 years ago when the big push was made for every person and business to adopt them — but, like IBM said in 1979, a computer should never (EVER) make a decision. And that most definitely includes Sourcing decisions!

Operationalizing the Pocket Cube for Exact Purchasing Part IV

A few weeks ago, we not only told you that Exact Purchasing is a Pocket Cube, but we broke it down and defined each octant for you, as well as indicating which categories of goods and services were most likely to fall in each octant (with the disclaimer that there is variation between industry and sometimes even companies in the same industry based on size and focus).

This was a great start, but once you understand the breakdown, the next step is understanding how you go about sourcing and procuring the categories in each octant. Today we conclude our deep dive into the core technologies you will use with the Governance focussed-octants.

High Complexity, Low Risk, Low Impact: Spend Governance

Low risk and low impact means it’s almost a prime category for automation, except that high-complexity requires a fair amount of human oversight as not just any product from a catalog (or any service from a random service provider) will do. However, as long as humans are in the loop to approve the providers and the products, this is another category where a lot of automation can be employed, especially if the right technology is available.

This is another category where decision optimization needs to be employed as part of the strategic sourcing process, where continual compliance (as well as risk) monitoring needs to be employed as well as manual verifications of all suppliers and products before they enter the autonomous sourcing process and of all specs and obligation requirements before the contract is inked.

  • (Strategic) Sourcing: Autonomous Strategic Sourcing with Decision Optimization that balances cost and compliance
  • Supplier Management: APLs and Compliance Monitoring
  • Catalog Management: AVLs
  • Contract Management: Auto-Creation, Human Review of Specs and Obligations, Auto-Sign
  • Procurement (Channel)*: Goods PO (Catalog), Framework PO, Consignment PO, Service PO
  • Monitoring: ACK, ASN, Receipt in the Procurement System; Lead Time, Delivery, Quality Trends in the Inventory Management and Production Systems;

High Complexity, Low Risk, High Impact: Relationship Governance

High complexity and high impact is tough. Not as tough as when risk is also high, and you need full supply chain architecture that you’re manually sweating through every step of the way, but tough enough because while shipments will mostly be assured, if they aren’t up to spec, that’s just as bad as a missed shipment.

This is another category where sourcing can only be semi-autonomous as you need to verify the model, employ multi objective decision optimization and award review, review the specification, obligation, and risk management aspects of the contract in detail, and monitor the compliance, quality, and timeliness of the delivery. And monitor the compliance continuously.

  • (Strategic) Sourcing: Semi-Autonomous Strategic Sourcing with Decision Optimization that balances cost and compliance with Award Analysis and Review
  • Supplier Management: APLs, Compliance and Performance Monitoring
  • Catalog Management: AVLs and regular review and approval of new product options and regular automatic identification of potential products for review
  • Contract Management: Auto-Creation, Human Review of Specs and Obligations, Auto-Sign
  • Procurement (Channel)*: Goods PO (Catalog), Framework PO, Consignment PO, Service PO
  • Monitoring: ACK, ASN, Receipt in the Procurement System; Lead Time, Delivery, Quality Trends in the Inventory Management and Production Systems; Financial Status, Litigation Monitoring, Sanction Monitoring, News, Event, and Sentiment Monitoring;

This concludes our initial series on operationalizing the pocket cube of Exact Purchasing!

* Unless the Channel-Master Joël Collin-Demers says otherwise.

Operationalizing the Pocket Cube for Exact Purchasing Part III

A few weeks ago, we not only told you that Exact Purchasing is a Pocket Cube, but we broke it down and defined each octant for you, as well as indicating which categories of goods and services were most likely to fall in each octant (with the disclaimer that there is variation between industry and sometimes even companies in the same industry based on size and focus).

This was a great start, but once you understand the breakdown, the next step is understanding how you go about sourcing and procuring the categories in each octant. Today we continue our deep dive into the core technologies you will use with the Risk (Monitoring) focussed-octants.

Low Complexity, High Risk, Low Impact: Continuous Market Monitoring

If it wasn’t for the high risk, this would be a transaction category. As a result, this is one of the categories that is heavily automated. In fact, the only human intervention that is needed is human review and approval of suppliers and products (and organizational requirements). Once these are defined, autonomous systems can be set up to completely manage the (re) sourcing process.

The main difference between this category and the transaction category is the extent of signals that need to be monitored to detect, and respond, to risk (related) events in (near) real time and ensure the supply chains keep supplying on time. The monitoring has to cross Procurement, Inventory, ERP, and External (News and Event and Financial) (Data Feed) systems and keep tabs on all relevant signals so that any relevant signal is captured and automatically responded to.

  • (Strategic) Sourcing: Autonomous Dual (Region) Sourcing with Near-Equal Splits
  • Supplier Management: AVLs with strong Compliance and Risk Management
  • Catalog Management: APLs
  • Contract Management: Auto-Creation and Auto-Sign
  • Procurement (Channel)*: Goods PO (Item Master), Framework PO (Fixed Delivery Schedule), Non-PO Invoice (Emergency Replacement), PCard (Seasonal Purchase)
  • Monitoring: ACK, ASN, Receipt in the Procurement System; Lead Time, Delivery, Quality Trends in the Inventory Management and Production Systems; Sanction Monitoring, News and Event Monitoring;

Low Complexity, High Risk, High Impact: Market Risk Management

This category isn’t just high risk, but high impact. As a result, while this is one of the categories that you want to heavily automate due to low complexity, it’s a balance between automation and human intervention. Unlike our last category, additional intervention is required before award and upon every significant alert, to see if a relationship, market, mitigation, or re-sourcing/re-purchasing action is needed.

The main difference between this category and our previous continuous market monitoring category is that the high impact nature of this category means that simply re-sourcing is not enough of a risk management strategy and mitigation options need to be pre-defined so they can be quickly executed if a risk is detected.

  • (Strategic) Sourcing: Semi-Autonomous Dual (Region) Sourcing with Near-Equal Splits, Human Award Analysis and Review
  • Supplier Management: APLs and Performance Monitoring
  • Catalog Management: AVLs and regular review and approval of new product options and regular automatic identification of potential products for review
  • Contract Management: Auto-Creation, Human Review of Obligation and Risk Mitigation Clauses, Auto-Sign
  • Procurement (Channel)*: Goods PO (Catalog), Framework PO (Fixed Delivery Schedule), Non-PO Invoice (Emergency Replacement), Consignment PO (VMI)
  • Monitoring: ACK, ASN, Receipt in the Procurement System; Lead Time, Delivery, Quality Trends in the Inventory Management and Production Systems; Financial Status, Litigation Monitoring, Sanction Monitoring, News, Event, and Sentiment Monitoring;

* Unless the Channel-Master Joël Collin-Demers says otherwise.