eSourcing

=> White Paper

Strategic sourcing is the process of identifying opportunities, evaluating potential sources, negotiating contracts and continually managing supplier relationships to achieve corporate goals. In a recent e-Sourcing study by AMR, the companies surveyed reported 10 to 15 percent in direct goods savings costs and 20 to 25 percent in indirect goods and services savings, as well as reductions in sourcing cycle times.

Strategic sourcing requires a holistic process that automates the entire sourcing process, including order planning, RFQ creation, bid evaluation, negotiation, settlement, and order execution. The promise of this process is to reduce total acquisition costs, while improving the total value. The key to realizing cost savings is to aggregate the total procurement spending over the enterprise (through order planning) and leverage the size of this spend to negotiate better pricing (RFQ creation and bid selection). A fundamental shortcoming of sourcing tools today is their inability to allow the creation of complex RFQs that allow for a variety of bid structures that exploit complementarities and economies of scale in cost structures of suppliers.

For example, procurement of direct inputs is usually very large (in total quantity and the dollar value) and requires the use of special price negotiation schemes that incorporate appropriate business practices. Typically, bids (in response to an RFQ) in these settings have the following properties:

• Transaction volume tends to be large and suppliers often provide volume discounts;
• Suppliers often provide all-or-nothing bids on a set of items with a special discounted price; and
• Items may have multiple, non-price attributes need to be traded off against price attributes.

After receiving such bids the buyer needs to identify the set of bids that minimizes total procurement cost subject to business rules such as:

• The number of winning suppliers should be greater than a certain number (to avoid depending too heavily on just a few suppliers), but smaller than a certain number (to avoid too much administrative overhead);
• The maximum amount purchased from each supplier is bounded to a certain limit;
• At least one supplier(s) from a target group (e.g., minority) needs to be chosen; and
• If there are multiple winning bid sets, then one needs to pick the set that arrived first.

Decision Support for eSourcing - Solving Real-World Problems

Decision support capabilities are essential to facilitate the creation and evaluation of such complex RFQs and bids. Identifying the cost-minimizing bid set subject to these business rules is a hard optimization problem and difficult to do by hand (as is a common practice today). In addition, the buyer is required to specify a scoring function that specifies the tradeoff of the non-price attributes against price. This is difficult to do in a consistent manner without a rational process to elicit the tradeoffs.

IBM Research has developed a suite of decision support tools, called MAP (Multidimensional Analysis Platform) that consists of:

• Tools to elicit a buyer’s preferences for multi-attribute bid evaluation based on conjoint analysis and advanced decision analysis techniques;
• A visualization tool to compare multiple bids across different attributes;
• A bid evaluation engine that uses optimization techniques to identify a cost minimizing bid set subject to various business rules; and
• A set of tools for spending analysis including commodity mapping and price estimation.