Manufacturing and Direct Materials Sourcing: A Planning Guide for the Next Decade (Part 2)

In part 1 of the 5 part series on Manufacturing & Direct Material Sourcing, we saw how commodity forecasting, planning and true visibility into savings tracking and budgeting impacts form the nucleus of newer procurement initiatives. In part 2 of the series we will have a look into the second key tactic organizations are deploying — Smarter Negotiation Tactics — The Reverse Auction Quadrant Gets Smaller

One of the major trends for the next decade in direct materials procurement, will be that reverse auction usage will increase for laggard companies that trail the market in overall sourcing performance. Although electronic negotiation formats are here to stay, but on an increasing basis, leading manufacturers are beginning to factor a total cost understanding into sourcing strategies that consider not only their idealized specifications, but also variability in supplier offers based on specific advantages amongst competitive vendors and potentially lower tier suppliers. This is leading to what we sometimes describe as a new type of “information asymmetry” in sourcing processes. Organizations that have better information than any other party in the supply chain based on several data points gathered both in the upfront sourcing process plus the ongoing life-cycle and contract management areas stand to thrive. For example, this might allow a procurement organization to spot that a supplier has mispriced the value of a contract that locks in raw material prices for six months (versus their offer for three or 12 months).

Enabling this new type of data gathering and decision support capabilities are a range of underlying technologies, including commodity management tools that help analyze and price raw material risk and variability. But sourcing optimization (also known as “advanced sourcing”) capabilities are just as important, enabling:

• A fluid RFI/RFP process
• More flexible data collection
• Supplier creativity/alternative specifications/alternative proposals
• The ability to fully explore — not just weight — all price and non-price factors in a tender
• Creation and application of constraints
• Ability to run scenarios based on constraints and present a menu of outcomes for stakeholders to consider

If we extend the implication of this approach for commodity markets, for example, optimization can allow us to explore different commodity scenarios (e.g., who buys, from whom, how much, when, from what geographies/plants, on what terms?) It can also enable us to discover unforeseen potential advantages/disadvantages of specific suppliers, understand the cost of trade-offs (e.g., split of business to reduce the chance of a supply disruption in specific geographies) and generally engage on a more collaborative basis of working with supply chain partners.