A Global 50 company recently invited me to speak to their top suppliers about the value of e-sourcing. At first, I felt a bit like Colonel Custer being sent off to resolve the pesky “native problem” at Little Bighorn. (And we all know how well that turned out for Custer.) However, as I investigated the issue, I uncovered much evidence on how e-sourcing is actually helping suppliers and the entire supply chain by making negotiations more fair, more efficient, and more effective at determining best-value relationships, enabling suppliers to differentiate on their total solution attributes — not just price.

Knowing that my audience would be predisposed to act hostile, I avoided emphasizing the basic fact that e-sourcing is strategic sourcing. (Although, Gartner Group research sums it up best: “e-Sourcing has developed from a crazy e-business idea to become a standard tool in the process portfolio of all large enterprises…Leading edge adopters now use e-sourcing for practically 100% of their procurement requirements across direct and indirect goods.” And, if that wasn’t enough, CAPS drives the point home reporting that “all of the evidence suggests that electronic reverse auctions are here to stay…”)

Instead, I set out to dispel “The 7 Myths of e-Sourcing.” Here are some of the highlights of my case:

Myth #1: e-Sourcing is all about lowering prices. False. Thanks to tightening supply markets and maturing sourcing methods (and e-sourcing functionality), price-only negotiations have gone the way of Member’s Only jackets. Advanced auctioning capabilities enable buyers to evaluate suppliers on a myriad of price and non-price factors, such as lead-time, delivery, quality, and payment terms. Nearly all e-sourcing users engage in multi-threaded negotiations (e.g., e-RFI-to-e-RFP-to-auction), enabling qualification and evaluation on all attributes of a supplier’s capabilities and costs. And many optimization-based sourcing tools allow suppliers to offer alternative bundles or bids that boost their profit margins and further differentiate their offerings.

Myth #2: e-Sourcing is unfair to suppliers. Untrue. In most cases e-sourcing introduces greater integrity into the sourcing process than existed in the offline mode. e-Sourcing mandates that buyers clearly articulate their selection criteria and award decision framework to all participating suppliers. Suppliers go into a negotiation full knowing how they will be judged and how the award decision will be made. Any clarifying questions asked by suppliers and corresponding answers from the buyer are available for all suppliers to see, further leveling the playing field. This was best summarized by a VP of Sourcing at Cadbury Schweppes “We emphasize fairness and open disclosure on both sides of the sourcing process. We have shut down ‘backdoors’ for internal stakeholders and suppliers.”

Myth #3: e-Sourcing is unfair to incumbents. Nope. Competitive incumbents are in a better position to be exposed to more business volume and new business opportunities, particularly considering that any strategic sourcing initiative goes hand in hand with a supply base rationalization effort. Better e-Sourcing tools also enable the ability for users to incorporate “transformational” elements that give “credits” (in the form of switching costs or innovation credits) to good performing incuments. As a result, incumbents don’t need to be the lowest price bidder in order to win the business. Consider the approach taken by Eastman Kodak: “We sat down with incumbents to explain why we were [using e-auctions] and prepare them with the right strategy and techniques to competitively participate in the event.”

Myth #4: e-Sourcing makes it difficult to win new business. On the contrary, e-sourcing dramatically shrinks sourcing cycles. These efficiencies alone enable buyers to negotiate more spend volumes, across more spend categories, with more suppliers. As noted in the previous example, qualified incumbents in good performance are in a position to expand existing business and be exposed to new business opportunities. One large industrial manufacturing used its e-sourcing strategy to cut the number of MRO suppliers from nearly 2,000 to just 20. Incumbents retaining the business are doing 4X to 10X the volumes than in the past, and they’ve added new, more profitable revenue streams, such as integrated supply relationships.

Myth #5: e-Sourcing lengthens the sales cycle. There is ample evidence that e-sourcing shortens sourcing and, hence, sales cycles. And as an old boss of mine would say, “In a sales cycle, getting to no fast, can be as valuable as getting to yes.” His point was getting to “no” enables you to focus your salesforce on the opportunities they can win.

Myth #6: e-Sourcing burdens suppliers with new cost, technology, and resource requirements. Wrong again. There is compelling evidence that e-sourcing also reduces overall SG&A costs. A recent study from the University of North Texas found: “A supplier can reduce its cost of sales (salesperson commissions, advertising, etc.) using reverse auctions.”

Myth #7: e-Sourcing eliminates buyer-supplier relationships: I recently asked a supply management executive at a major life sciences company how he was able to drive such aggressive use of reverse auctions. His response, “I tell suppliers, ‘If you believe your customer relationship is all about negotiating, then you don’t have a relationship.’” This isn’t just rhetoric. Many companies have begun partnering with suppliers to remove cost from the entire supply chain. New multi-tier sourcing, co-sourcing, and buy-sell approaches are being embraced by a wide range of enterprises (particularly in the aerospace, automotive, and high-tech sectors) looking to gain better visibility into costs and risks inherent in the sub-tier supply and to aggregate spend volumes and remove costs from the total supply chain.

For more e-sourcing strategies and tips, visit www.supplyexcellence.com