What is e Sourcing?
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A part cannot exist without the whole. Continuity cannot be seamless without all parts working together. While many use e sourcing and e procurement interchangeably, they are different, and each half makes up the whole in supply chain management. This article is an in-depth guide to e-sourcing, its various tools, software & procedures.
Table of Contents
- What is e sourcing
- Benefits of e sourcing
- E sourcing vs e procurement
- E Sourcing Procedure
What is e sourcing
Before defining e sourcing, let’s understand what sourcing is. When a company decides to spend money for procuring goods/services, it is called sourcing. Sourcing involves conducting a careful analysis of the company’s needs, history of the supplier/market, negotiating with suppliers and drawing up contracts. When sourcing is done electronically or via online software, it is referred to as e-sourcing. A company will electronically process proposals, quotes and bids (through eAuctions) from different suppliers and compare the results before deciding on what to buy, from whom and the price it will be bought at. Esourcing allows companies to easily vet different suppliers that offer competitive prices and products of great quality, from all corners of the world.
Benefits of e sourcing
- Cost Saving – With access to a wider pool of suppliers, negotiating and bidding is more competitive, which results in efficient price discovery for the company.
- Transparent Supplier-Client Relations – With the use of online portals and software, information about the goods, delivery time, price, status, etc., is available and transparent to all parties involved.
- Improved Compliance – Information/documents regarding procured goods are all stored in one place, thus making audits easier. Also, a transparent system makes compliance with regulatory procedures easier, with information regarding how a supplier was chosen and why.
- Improves efficiency and time saving – With the aid of software tools, esourcing reduces the time spent on tendering processes by reducing the time spent in awarding a contract to a supplier.
E sourcing vs e procurement
Sourcing does not get as much attention as procurement, even though procurement only happens after sourcing is completed. Sourcing is a vital step to the procurement to pay process, as it is at the sourcing stage that costs to the company are minimized. E-sourcing refers to the process of evaluating suppliers, electronically, using tools/procedures such as: Request for Information (RFI), Request for Quotation (RFQ) and Request for Proposal (RFP).
Procurement begins when sourcing is completed, since the next step is to order and purchase the needed goods/service from the suppliers that were awarded the contract. E procurement is when payment is managed and processed electronically using software and online payments systems.
The e sourcing process
E-Sourcing is a vital component of the eProcurement process. Potential suppliers are vetted through pre-purchase questionnaires (PPQ) and tender invitations are sent. Once the required information is received from each potential supplier, it is carefully analyzed and bidding commences in eAuctions with the shortlisted suppliers. At this stage, esourcing software becomes invaluable as it aids in facilitating communication between the supplier and buyer, especially for online negotiations, online auctions and reverse auctions. Post bidding, the buyer evaluates the results,chooses the best supplier that meets their requirements and awards the supplier a contract.
E Sourcing Tools
The foundation of esourcing is built upon the Request for x (RFX). The “x” in RFX is the request for something, which consists of the following three:
Request for Information (RFI) – When a buyer decides to purchase goods or services, the RFI tool is the best for finding suppliers, evaluating them and determining who best suits the requirements. PPQs (pre-purchase questionnaires) are often used at this stage. An RFI is more about appraising the supplier’s capability and less about product/service costs.
Request for Proposal (RFP) – Upon completion of the RFI, the buyer will request proposals from the shortlisted suppliers. The buyer will describe the product/service they require and ask each supplier for a detailed report on how they propose to meet the needs of the company. The buyer can ask for an RFP for either goods or services. RFP is a useful tool for determining what you need exactly and how the supplier can match your need.
Request for Quotation (RFQ) – The final step in e-sourcing is the “request for quotation”, where the buyer negotiates the terms of the contract, such as price, quantity, discounts etc. RFQ is an efficient tool to ensure the buyer gets the required goods/services at the best possible price.
Software for e sourcing and e procurement
As mentioned earlier, esourcing is sourcing done electronically through the use of software. The use of software saves buyers time and money. Some of the best software tools available for e-sourcing are:
Zycus can help buyers reduce costs by 15-45%. Its custom-built RFX templates save time for buyers, by speeding up the process of creating and sending RFXs to suppliers. Zycus also helps buyers plan for the future with what-if scenarios. This is important for supplier analysis as it is not based on opinions, which can be biased. Other features of Zycus are:
- Contract management
- Supplier management
- Invoice management
- Spend analysis
Many sourcing processes can be automated with Jaggaers sophisticated RFx tool. Suppliers can fill out PPQs on the portal, which are automatically analyzed and ranked by the software.
A key feature of Jaggaer is its advanced spend analysis tool, which helps businesses to improve spending by using every opportunity to save money. For example, buyers can view how much they are spending by category, by supplier, total spending, invoices to suppliers etc. With this information spending patterns can re-evaluated to see where expenses can be increased, decreased or eliminated.
Another useful feature is Jaggaer’s contract lifecycle management, which allows users to easily access contracts from a centralized repository, making collaboration and compliance easier.
GEP Smart, which is cloud based, easily provides real time data on spending habits by analyzing all the available information. It also offers various RFx tools, with an interface that is simple to use while providing in-depth functionality.
With GEP all your sourcing processes can be completed in one place, many of which can be fully/partially automated. Moreover, similar to Jaggaer, GEP also comes with spend analysis software that you can use to track spending by region, supplier, spending trends etc.
Finally, GEP’s contract management functions get triggered automatically once the sourcing process is completed - saving time and improving efficiency.
The features of Ivalua’s project management software are known as one of the best in the industry. Multiple users can input their requirements during the initial phase of RFI, which ensures no details or requirements are forgotten. Ivalua can also be configured to support existing workflows.
A key feature of this software is its real time auction capabilities. You are not limited to one type of auction, and you can start auctions as quotations/bids come in. Ivalua also offers what-if simulations similar to Zycus.
Additionally, with Ivalua, the sourcing process and bill of materials can be managed from one place, which enables users to see supplier/product performance. This in turn can help buyers in reviewing/assessing supplier partnerships.
Coupa offers both esourcing and eprocurement tools to help you from your initial spend analysis to contract management. The spend analysis feature has built in report templates, but users can also create custom reports easily with its user-friendly interface.
The most useful aspect of Coupa is that it can be accessed through your mobile. This speeds up sourcing time as you can see supplier bids as they come in and respond. The app can also be used to gain insights into your expenses, invoices, purchase orders etc.
E Sourcing Procedure
- Request for Information or PPQ - As per the above diagram, the first stage in the esourcing process is the RFI. This can be done through the PPQs, which will evaluate the suppliers. Prior to the introduction of e-sourcing software, information was collected by hand and then recorded in MS Word/Excel. By using any of the above-mentioned software, companies can collect all the required information efficiently & in real time.
- Tender Invitation – To encourage competition and lock in the required goods/service at the best possible price, buyers will request tenders from chosen suppliers. The tender document from the buyer also known as Invitation to Tender (ITT) details not only the needs of the buyer but also requests the supplier to provide information about their policies and practices.
- Request for Quotation – This tool is mainly used to collect the varying pricing information offered by each supplier. RFQ can also be carried out before RFI, if the buyer wishes to understand the market price for the goods/services needed.
- Upon reviewing the submitted quotations, the buyer will shortlist the suppliers deemed viable, to move on to the next stage.
- e-Auction – This type of RFQ is a vital component in finalizing the supplier the buyer wishes to award the contract to. The deciding factor in choosing the supplier at this stage is the price. E-auctions are a great way to encourage competitive pricing amongst invited suppliers. The most common e-auction types are:
- Reverse Auction – here, bidders compete to offer the lowest, acceptable price against a pre-set starting price. The auction ends when only one bidder is left with the lowest offered price.
- Dutch Auction – The start of this auction has prices so low that it would not be acceptable to any bidders. At set intervals the price is increased marginally for bidders to accept. This cycle continues until there is only one bidder who has accepted the new price. At this point the auction is over for the other invited suppliers.
- Japanese Auction – This is a reverse of the Dutch auction, where the buyer’s starting price is so high that all participants accept it. A time frame is set for each bidder to accept the price and once this time has passed, a new price is set, which is usually lower. Again, the bidders are given time to accept the new price. The cycle repeats until there is only one bidder left who has accepted the new lower price at which point the auction is closed.
- Award Contract – Once the buyer has selected the supplier, the contract is awarded, which then starts the eprocurement process. The process of awarding the contract is sometimes automated.
E sourcing and e procurement are two halves that make up the whole. E procurement cannot exist without e sourcing. E sourcing is critical in ensuring the goods/services are bought at the best price and locked into a contract. E procurement ensures a seamless flow of goods and services based on the contract awarded to the supplier during the sourcing process. Both halves are equally important for efficiency, saving costs and supplier relationship management.