UPS White Paper Analysis

Add comment March 12th, 2006 David Bush - Iasta

In keeping with our “it never hurts to re-state the obvious” theme, we would like to point out a recent white paper “Strategic Sourcing: Building a foundation for success - understanding the difference between sourcing and its impact” by UPS Supply Chain Solutions from January of this year.

In it, UPS Supply Chain Solutions defines Strategic Sourcing as “the process of evaluating, selecting, and aligning with suppliers or consortiums of suppliers to achieve operational improvements in support of an organization’s strategic objectives.”

This is an important and insightful definition. Strategic sourcing is more then just cutting costs - it is the implementation of a sourcing strategy that complements an organization’s overall business strategy. It takes into account the organization’s overall strategic objectives (such as profitability, brand image, and product offerings), targeted operational improvements (such as quality, cost control, service levels, cycle times, logistics, and asset utilization), growth objectives (local, national, or international), and desired supplier relationships.

This also says that the bottom line is impacted by more then just reductions in price per unit costs, associated logistics costs, and associated utilization costs. The selection of suppliers that improve the brand image, that can assist with future growth objectives, or that will work with you to improve their processes and decrease their costs over time also provide an, often measurable, impact to the bottom line as well. And, as the UPS White Paper points out, “it is typical for businesses to spend more than 60 percent of revenue purchasing goods and services and it is estimated that approximately 70 percent of all potential savings from purchasing can only be achieved through the Strategic Sourcing process”.

The white paper also points out that strategic sourcing must address a set of critical success factors, which include information availability, organizational commitment, supply market understanding, total cost evaluation, supplier approach modification, organizational role changes, and continuous improvement. Each of these factors must be understood and evolve as time goes on.

Although the UPS Supply Chain Solutions white paper stops short of specifying what technologies could, or should, be used to support a strategic function, we can fill in the gaps since we know what the tools need to accomplish. Based on the definition provided for strategic sourcing and the critical success factors that can be addressed by technology, we know that any strategic sourcing platform should include at least e-RFx, e-Auction, and e-decision optimization technologies.

Before we can source, we have to know what we need and what our suppliers are capable of providing - we have to satisfy the “information availability” and “supply market understanding” critical success factors. Therefore, we need e-RFx to help us collect as much information as possible in a centralized, normalized, standardized fashion.

Before we can analyze a potential sourcing plan, we need to have all of the information regarding the base costs, as we need to do a “total cost evaluation”, and know the delivery times we can get for each supplier, as well as their capacities. Therefore, we need e-Auctions.

Finally, we can not make a final decision until we do our “total cost evaluation” and analyze all the hard costs from the e-Auctions against the soft-benefits of selecting suppliers that align with our sourcing strategy and provide quantifiable benefits now and in the future. This is where a flexible e-decision optimization tool that can not only evaluate the lowest total cost of acquisition but the overall lowest total cost of ownership with respect to supply strategy constraints and numerically valued soft benefits comes into play. (And this is why Iasta is continually working on improving its e-RFx, e-Auction, and e-decision optimization products and why it’s competitors should be working on continually improving their respective offerings as well.)

In other words, regardless of your vertical, e-RFx, e-Auctions, and e-decision optimization just make sense and it still never hurts to restate the obvious now and then.

Entry Filed under: Functionality, General, Supply Management Best Practices, Technology