eSourcing: the driver of supply chain transformation

eSourcing: the driver of supply chain transformation

April 12, 2022

Roman Davydov

Ecommerce Technology Observer

As sourcing and procurement have grown more global and interconnected, the process of expanding a business geographically has significantly simplified. Now companies can easily find new suppliers and access raw materials or products from regions that were previously unavailable.

However, trade globalization comes at a price. While selecting, managing, and vetting suppliers has never been an easy task, global businesses have to face additional challenges and risks related to geopolitics, cybercrime, nation-wide health emergencies, and climate change. At the same time, supplier relationships as well as supply chains in general, are becoming more complex and difficult to manage, especially when it comes to industries like IT or automotive.

The example of a modern supply chain

This whole situation is further complicated by the fact that today, despite the growing adoption of AI in transportation to streamline logistics, the cost of mistakes and disruptions in the supply chain is higher than ever. According to Statista, in 2021 global supply chain disruptions cost organizations around the world an average of $184 million.

Finding solutions to all these issues is a lengthy process. But we can already observe how companies are making first steps towards the transformation and optimization of supply chain management, and the widespread adoption of such an innovative concept as eSourcing or electronic sourcing is one of the most obvious improvements.

In this article, we'll take a closer look at the concept of eSourcing and explain how its implementation can help you sign more profitable contracts and build stronger supplier relationships. We will also give some advice on where to start with the electronic sourcing process and whether you should implement a ready-made eSourcing software or resort to eCommerce development services for a custom solution.

What is eSourcing

Simply put, eSourcing is the process of collecting proposals from various suppliers via a unified online portal. As with the traditional sourcing process, the goal of eSourcing is to gather and compare information from multiple vendors and then select the most relevant offers. The main difference between the traditional approaches and the new one lies in the choice of tools that are used by sourcing professionals in their strategic and day-to-day activities.

Generally, eSourcing includes such steps as defining criteria for supplier selection, creating tenders, sending invitations, running electronic auctions,  evaluating supplier responses, and finally, signing the contracts. Now let's take a closer look at how eSourcing works in practice.

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How eSourcing works

These are the stages of the typical eSourcing process:

eSourcing process
  1. First, potential suppliers are surveyed via pre-purchase questionnaires (PPQ). By creating and analyzing these detailed documents, the buyer can identify the most relevant and valuable suppliers from a business perspective.
  2. Once suppliers have completed the PPQ and if they have been approved to proceed to the next stage of the sourcing process, an eSourcing solution sends them invitations to tender (ITT). This document covers the buyer’s requirements regarding the required goods or services. ITT may also require suppliers to clarify some additional information for the buyer, such as their logistics procedures or corporate policies.
  3. Next, the buyer sends suppliers a request for quotation (RFQ) – a form in which a supplier submits their prices for its goods or services. Since the price often becomes the determining factor for the choice of a particular supplier, this step may be considered as one of the most important regarding the whole sourcing process.
  4. Having received the necessary information from each potential supplier, the buyer then initiates a trading session that runs in the format of an electronic auction (eAuction). During this session , suppliers compete with each other and place bets on the right to win the contract.
  5. At the end of the auction, the buyer evaluates its results, selects the most suitable supplier, and then signs a contract. Depending on the business context and the type of an eSourcing solution, this stage can also be automated using an electronic portal that automatically sends out contracts to those suppliers who won the bid.

It is important to note that the steps mentioned above may vary, as they mostly depend on processes, practices, and policies established in your organization. For example, you can send PQQ, ITT, and RFQ earlier or later than stated in our example, or even use additional document types such as request for information (RFI) or request for proposal (RFP).

The key benefits of eSourcing

Now let's discuss the advantages of moving from traditional sourcing to the eSourcing model:

  • Enhanced staff productivity

Sourcing is a rather complex and multi-step process (especially if we are talking about industries such as healthcare or tech), and a manual approach to this process is lengthy, costly, and risky. Unfortunately, many sourcing specialists are bound to spend countless hours on creating and sorting necessary documentation (such as RFQ), managing trading and negotiation processes, and analyzing and evaluating received proposals. Consequently, the lion's share of the sourcing departments’ work time is allocated to routine activities instead of invested in more important and strategic tasks.

In this regard, the automation capabilities provided by eSourcing can make a huge difference. For instance, using the electronic portal, teams can automatically create all the required documentation within a couple of clicks or automate selected assessment process steps via dashboards and built-in tools, thereby saving themselves hours of work time. What's more, since all sourcing-related documents are stored in one place, teams can collaborate more easily and quickly, which also improves their productivity.

  • Advanced scalability

In a  modern fast-paced business environment, traditional sourcing methods may slow down a  company’s growth and development. As an enterprise becomes more global, teams have to perform more manual tasks related to the analysis, management, and coordination of the sourcing process. The volume of generated data increases too, which may create additional workload and bring chaos, compromising the quality of sourcing decisions.

Fortunately, eSourcing technology enables professionals to manage multiple projects at the same time, seamlessly increase their volume and complexity, and scale up sourcing activities if needed. Such capabilities prove extremely valuable today, when many enterprises are striving to expand and diversify their supplier bases.

Organizations investing in supplier and manufacturing base differentiation
  • Increased transparency

Among other things, eSourcing contributes to the transparency of relationships between buyers and suppliers, and as a result, enhances the visibility of the entire supply chain. Using the electronic portal, buyers can not only easily access any documents or data on supplier selection, but also generate reports (even in real-time) to facilitate in-depth analytics.

Most organizations lack visibility into their supplier networks

Suppliers in turn can also access any information they need, as an electronic portal would allow them to check the terms, statuses, and other key information related to a particular buyer. In the long term, this can help foster trust among all process participants, build stronger partnerships, and drive the growth of a successful international business.

  • Improved standardization

Without a single, centralized eSourcing solution, buyers and suppliers may find it difficult to keep their workflows in sync, which can lead to chaos and supply chain disruptions. In contrast, by adopting eSourcing, enterprises can set up standardized processes based on templates and electronic documentation (such as RFQ, RFP, RFI). This will allow an enterprise to not only streamline the sourcing process and reduce administrative costs but also help coordinate joint initiatives, which can be especially helpful when building global supply chains.

How to choose the right eSourcing software

As we have explained earlier, eSourcing is performed online via specialized web-based software. This, in turn, means that a buyer and their potential suppliers require a convenient collaboration tool or, to be more precise, an electronic portal. Therefore, you have two options – to use a ready-made eSourcing solution or to develop a custom electronic portal, tailored to the traditional seven-step sourcing process or the one established at your company.

The example of a seven-step sourcing process

To make an informed decision on your approach to eSourcing adoption, you first need to get acquainted with its essential capabilities. We advise you to purchase or build an eSourcing solution that is able to:

1) Prequalify and onboard suppliers

This feature will allow you to filter more relevant suppliers at the early stages of the sourcing process setting such parameters as supplier performance, quality standards, or delivery terms. Alternatively, you should be able to set up automatic filters that would sort out potential partners according to parameters like the provider's service or product category, operating region, and so on.

Ideally, the feature would also enable you to customize the vendor approval workflow. For instance, if some supplier meets your requirements, an electronic system may automatically compile and send out the necessary documents, saving your sourcing specialists from performing routine tasks.

2) Manage documents

Considering that all communication between a buyer and potential suppliers takes place online, an eSourcing system must be able to create, store, and send documents in different formats. Additionally, it should support the types of documents (such as RFQ, RFI, or RFP) that your sourcing department uses.

3) Store supplier data

Supplier data management plays an essential role in maintaining the supply chain’s stability and integrity. In this case, the main goal of your eSourcing solution would be storing all supplier data in one place together with the information related to suppliers’ pricing or their current activities. Additionally, your solution should have a search engine that would allow you to filter vendor-related data.

4) Manage electronic auctions

As you already know, eSourcing enables buyers to run trading sessions in an auction format, but since there are several types of auctions in use in procurement, you need to make sure your eSourcing solutions support the one that suits you the most. Here are some of your options:

  • Reverse auction
Reverse auction

The reverse auction begins with the announcement of the initial price, which should be approved by all the suppliers. Then they begin to reduce bids, thereby competing with each other. Finally, a supplier that offers the lowest price wins the contract.

  • Dutch auction
Dutch auction

The Dutch auction works differently: the initial price is so low that suppliers simply wouldn’t receive any benefit from providing their goods or services. With each new round of an auction, the price increases, and the first who accepts the new price wins.

  • Japanese auction

Unlike the Dutch auction, in the Japanese auction initial prices are so high that all potential suppliers have to accept them. With each round prices decline, and bidders should signal that they agree to continue; those who do not agree with new bids should exit the auction. The auction stops when only one participant remains, and this supplier is the one who wins the contract.

Japanese auction

5) Manage contracts

The sourcing process doesn’t end with signing the contract, so a robust eSourcing solution should provide features for comprehensive contract management. Depending on your needs, such software may allow you to review and edit existing contracts, set up automatic contract approval workflows, and notify sourcing specialists of the start or end of a contract.

6) Provide analytics and reporting

Effective sourcing should also be able to generate a deep and detailed analysis of the organization's data on all the aspects of your sourcing workflow. Ideally, your eSourcing solution should provide you with enough analytics capabilities to help you identify your most profitable contracts, understand whether you are hiring the right vendors or not, and measure the effectiveness of the RFI/RFQ and vendor qualification processes.

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Revamping the traditional sourcing model

Establishing a global supply chain is hard, since today international businesses have to handle the growing complexity of logistics processes, while facing new challenges and risks. At the same time, the cost of a mistake is too high, and an enterprise may spend hundreds of thousands of dollars to mitigate the consequences of a small supply chain disruption.

Fortunately, transformation and optimization of the key aspects of supply chain management can help businesses overcome these and other less serious logistics challenges. That is why the adoption of innovative concepts such as eSourcing becomes a natural step for any enterprise that aims to remain effective and competitive in the digitized business landscape.