What e-Sourcing Is Not – A Necessary 7-11 Update!

Twenty years ago we wrote a post on e-Sourcing Resistance and what e-Sourcing is Not. In that post, we began by referencing “The 7 Myths of e-Sourcing” by the great Tim Minahan (before he went over to the dark side), where he tried to dispel the myths.

Since the original myths still persist today, we’ll start by reminding you of those — and then address the new myths that have arose / are arising so you don’t lose the path.

Tim’s Original 7. e-Sourcing is NOT about

  • lowering prices: it is about getting the best, fair, price you can get on a product, or service that meets your needs, but not about squeezing supplier margins so thin they go out of business
  • unfairness to suppliers: it’s not about forcing out or limiting to preselected suppliers, but creating an open, level, fair playing field
  • unfairness to incumbents: it’s not about forcing incumbents out, it’s just about ensuring they also play on a fair, level, playing field
  • keeping suppliers out: it’s not about making business more difficult to win, but easier to win
  • sales cycle lengthening: it’s about making sourcing processes right-lengthed
  • supplier burdening: it’s not about adding costs, technology, or resource requirements — but minimizing the burden on the supplier
  • eliminating relationships: it’s about finding the right supplier to build a relationship with

but with the rise of technology, and, AI, in particular, a new set of myths has arisen and needs to be dispelled ASAP. E-Sourcing is NOT an excuse to:

  • turn every Procurement event into a(n) (e-)Sourcing Event: just because you can, doesn’t mean you should … most procurements should be off existing contracts, most tail-spend should be spot-buys, and when the volume/cost is enough, simple RFQs; e-Sourcing is for goods and services that are strategic or custom, not tactical or commoditized
  • use AI to draft RFPs: with AI, you can draft RFPs, and incorporate as much as you want into those RFPs, and ask as many questions about as many things as you want — this might make your life easier, but it unfairly burdens suppliers when you ask for details you don’t need (at least until you are going to seriously consider them) — plus, AI will hallucinate, ask wrong questions (and then force a follow-up request later when it’s discovered) and waste time on both sides … RFPs need to be human drafted — they should be based on templates (and assembled using non-LLM AIs), and AI should be used to judge completeness, clarity, etc — and even recommend gaps to fill in (because, when well trained, 90% accuracy can be useful), but AI should never lead
  • use AI to conduct events agentically: AI should be used to automate the tactical, but humans need to be engaged at every decision point
  • use the same process for every event: some events should be simple one-shot mini-RFPs just to verify key product/service requirements; some events should be moderate two-stage RFI/RFPs to ensure the suppliers meet mandatory organizational requirements; others deep three-stage RFI/RFP/RFQ processes to first verify suppliers, than products and services, then BAFO pricing so complete information is known before a decision is made

e-Sourcing is about right-sized efficient execution of strategic sourcing events for both sides, nothing more, nothing less.

Supply Chain Security Is Becoming More Important By The Day: Part II

Yesterday we reminded you of the benefits of supply chain security, and then noted good supply chain security has gone from a nice to have to an absolute must have.

In fact, your entire supply chain now needs to be designed with security in mind as well as risk. It’s not just lowest cost and availability of supply any more. It doesn’t matter if the supplier is lowest cost, highest quality, able to produce more than you need in the best market conditions, and guaranteed component and material supply from local distributors and mines if you can’t get the products from their factory halfway around the world to your local warehouse.

In other words, you can’t choose a supplier:

  • in a sanctioned country
  • if the only shipping routes include war zones

… without a backup (for when something inevitably goes wrong):

  • where there are active trade wars between their country and your HQ or target country
  • where the majority of shipping lanes are currently high risk (of disaster, piracy, and/or theft)
  • where the government is pursuing an isolationist agenda that could significantly impact exports
  • where the available transportation companies don’t have good security measures

Then, once you select that supplier, you need to focus on ensuring you have end-to-end security. This involves ensuring that:

  • you use suppliers with good plant security
  • … who use carriers with good security
  • … and sub-tier suppliers with good plant/mine/farm security
  • you have (near) real time GPS (cell/satelite) tracking on every vehicle
  • you have RFID tracking on every pallet
  • you ship food and drink in tamper proof packaging
  • you ship electronics or dangerous products in tamper aware packaging
  • you have documented chain of custody for every pallet from supplier factory to your warehouse
  • you have physical security for valuable goods (and especially those that are hot targets, like truckloads of iPhones)
  • … this includes the use of ocean freight carriers, that spend a lot of time in international waters, that have their own private security force to deter piracy / terrorism

Otherwise, you’ll have an insecure supply chain and it’s just a matter of time before you get blocked, seized, pirated, terrorized, or sunk.

Supply Chain Security Is Becoming More Important By The Day: Part I

We’ve known for decades the benefits of good supply chain security. (We talked about many of them 20 years ago on this blog.)

They included:

  • higher supply chain visibility
  • improved supply chain efficiency
  • better customer satisfaction
  • improved inventory management
  • reduced cycle and shipping time
  • improved product safety
  • improved inventory management
  • improved product handling
  • process time reduction
  • efficient clearance
  • better customer satisfaction
  • resilience

However, good supply chain security is now now just a nice to have, it’s an absolute must. Supply chains are as fragile as they have been in decades and, even worse, today’s prime targets for theft, sabotage, and terrorism. Including of the legal variety. Let’s discuss.

  • tariffs, trade wars, and trade barriers:
    in the midst of these spats, governments are looking for reasons to block or seize shipments — and a lack of security (where you can’t prove the goods weren’t swapped for counterfeit or sabotaged) can increase your chances that your goods will be turned away, stuck in customs indefinitely, seized, or even destroyed
  • pillaging pirates:
    the pirates are back on the Ivory Coast with a vengeance (they never really went away, but for a while they were less active as the generation of the 2000s retired)
  • military target proxies:
    we’ve already seen this in the Red Sea and the Strait of Hormuz in particular, the Strait’s open, then it’s not, and if you’re a ship registered, or going to, the US or Iran, you’re a target
  • terrorism targets:
    sales and purchases of large quantities of fertilizer and other chemicals and materials that can be used to make bombs are carefully tracked in most developed countries, and flags are (supposed to be) raised, so it’s pretty hard to do a domestic bombing and get away with it; on the other hand, most private food shipments are not well tracked, even by the shipping companies, so it’s a lot easier to break into a truck when the driver stops to eat or sleep (and keep him that way with the help of chloroform) and inject a few hundred almond cakes with cyanide; spray the lettuce with a concentrated salmonella mist; replace the shipment of grain alcohol with methanol; etc. twenty years ago warnings were everywhere about next generation terrorism (and we discussed some of them here) — now that terrorism is on the rise again, the methods, and mass impact, is going to be much worse
  • natural disasters:
    they’re not going away — with the weather getting more extreme, plan on more (flash) fires, floods, tornados, hurricanes, tsunamis, etc. especially in routes traditionally at higher risk

In other words, your supply chain is under constant (threat of) attack, which makes security paramount. So what do you do?

Part 2 tomorrow!

VENDOR ROIs ARE A LIE!

Recently asked and realized I haven’t addressed this in a while.

(Summarized) question from an experienced Director Level:
“I’ve never seen vendor ROIs materialize. Where’s the gap?”

First, the 30% to 40% gap has been known since the early 2000s when AMR (swallowed by Gartner) reported it.

Reasons:

1) Formulas assume best case scenario

2) Formulas assume all savings are captured … sourced must be purchase-ordered at the right volume from the contracted supplier using the right logistics at the right volume at the contracted price

3) Payables must check the invoice against the … PO (for price) logistics tables (for freight rates) against received (for quantity not shipped) …. and ensure that there is received inventory not paid for (as some suppliers will keep resubmitting the invoice until paid, leading to duplicates without PO numbers)

Also, most “suites” miss one or more of these capabilities and there goes 20%+ the day you buy it!

Then there is org maturity to ensure

* contracts get switched
* maverick spend is properly assessed
* “expedited” and “surcharges” are within range …

Spend analysis service providers love to dive into utility, contract services, and “tail spend” for a reason: they can find overpayments of 15% to 30% they can go after, and then keep 33% of what’s recovered (that you could do yourself with a cheap tool and a week of training). It takes a long time to ensure contracts get switched across a mid-size or larger organization!

Providers that like to get rich off of overpayments, once you implement proper m-way invoice matching, will switch to the new trick of “identical” SKU substitution. I.E “we don’t have the 8-packs/20-pack/10000 screw boxes in stock, but we have the same product in 4-packs, 10-packs, 5000 screw boxes — is that okay?” … you say yes, they ship, but the half size packs cost 75% of the normal size pack, so you end up paying 50% over contract rate!

Of course, there’s always exceptions for “expedited” or “surcharges” that will creep in on orders suddenly too small, too big, or shipped fast … if those aren’t indexed and checked, well, we all know the fraudulent 800,000 shipping charge for a hammer (and a small package of emergency parts) was true!

You’ll never see more than half of what they promise in an average organization as:

  • you won’t be able to source/procure more than a 1/3 of the spend through the system in a given year (if that!)
  • there will always be exceptions
  • there will always be missing features that suppliers can exploit to overcharge you, and by the time audits find them, most of that won’t be recoverable
  • they assume you, and your team, are all seasoned Procurement experts
  • they assume you have mastery over a tool they just installed with little to no training

In short: always discount the promised ROI by at least half if you want a reasonable estimate! Vendor ROIs are a lie!

Feel Free To Discuss!