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E-Sourcing: Does It Destroy Value?

March 30, 2009

The debate over the impact of e-sourcing on buyer / supplier relationships rumbles on, with an article in Supply Excellence that claims e-sourcing and supplier relationships are ‘a match made in heaven’.

IACCM research is not alone in finding that most suppliers disagree with this assessment. As I observed in an article last year, which was specifically addressing reverse auctions: “Logically, the (buyer’s) terms and conditions associated with a reverse auction ought to be considerably less onerous. The customer should – in the interests of gaining the lowest price or cost of ownership – be prepared to take on higher levels of risk and responsibility for selection and use.

Yet as most suppliers know, the reverse is generally the case. Buyers want to have their cake and eat it. They demand not only conformance to specifications, but then also impose onerous terms on the supplier – indemnities, liabilities, often also areas like IP rights and liquidated damages.” Such attitudes do not create a framework for open, trusting relationships – which is why many people within customer organizations share the supplier’s hostility to e-sourcing.

Is The Problem The System Or The People?

The experience of most suppliers is that buyers hide behind the e-sourcing process and use it to impose ‘compliance’. The Supply Excellence blog claims that this ensures transparency and enables suppliers to better understand and address their weaknesses, including the ‘weakness’ of an uncompetitive price. They quote Oracle, saying “E-Sourcing has actually proven to help increase margins for some suppliers”, by forcing them to address inefficiencies.

I have no doubt that e-sourcing has delivered many benefits. But I am also certain that in many cases it continues to undermine economic value and relationships. The big question to be answered is whether those failings are intrinsic to the software products (and if so, what limitations should be placed on their use?), or due to the inadequacies of those using the software.

Questions To Be Answered

Specifically, many e-sourcing events stifle discussion. They seek to make the areas of comparison narrow and to discount things that the buyer has either decided have no value, or perhaps has failed to imagine. Second, they tend to eliminate judgment. Relationships have many nuances and while software can undoubtedly help in narrowing the field, it can also eliminate perfectly good matches because it has no sense for ‘chemistry’. Third, e-sourcing struggles to consider life-cycle performance. It tends to base decisions on today’s environment, eliminating history and ignoring future change.

But to be fair, these criticisms are often levelled at Procurement regardless of whether or not they are using e-sourcing applications. The evidence suggests that it is Procurement’s lack of accountability for longer-term relationship outcomes that undermines the selection process. This results in a ‘one size fits all’ approach to supplier selection, regardless of the strategic significnace of the acquisition. And this is why e-sourcing often gets maligned. It is a visible and outward manifestation of inappropriate or unskilled purchasing behavior.

So in my view, e-sourcing does indeed bring benefits in some situations. What I would really like to know is whether it can in fact bring benefit in all situations, regardless of complexity? And if so, how should its use vary to ensure it really is a tool that offers mutual buyer – supplier value through stronger and more collaborative relationships? 

I would love to hear from e-sourcing suppliers or consultants with definitive answers to these questions; or even better, from an organization that can point to ways it has implemented such tools, driven greater internal efficiency, AND built greater supplier loyalty.

9 Comments
  1. Tim,
    The answer to the question as you phrased it can only be no, eSourcing cannot bring benefit in all situations, but this is a factor not of the tool, but of human nature. eSourcing tools serve to amplify the strengths and weaknesses of the buyers who deploy them. However, those users of eSourcing, on both the buy and the sell side, who learn from and analyze their eSourcing experience and adapt their buying and bidding strategies can benefit from accelerated market feedback. I would also hypothesize that those buyers who develop a reputation for utilizing eSourcing tools in a manner that effectively incorporates qualitative differentiators, will over time attract a higher quality of bids on a more consistent basis.

  2. Call me old fashioned but I’m a relationship builder. I have always found that when you build a strategic or strong relationship with a supplier things like the BEST Quality….BEST Service Levels…and BEST Pricing go along with it. I was VP of Purchasing for Slim Fast Foods for many years and our suppliers considered themselves partners in our business. They knew that we had a loyalty to them and what we expected. Meeting competitive challenges was part of that.
    You can say that using E auctions is more effieient and gets you the best pricing but nobody is going to tell me that it build strong supplier partnerships.
    When Unilever purchased Slim Fast I stayed on for 5 years and Slim Fast was left quite independent. Right from the get go it was obvious that we had better prices, in some instances, shorter lead times, and strong relationships. If we needed to get a short lead time in a pinch….we got it. The people that came over to work at Slim Fast were presently suprised how quickly we could get thing executed with that kind of a supplier enviromment.

    That’s my two cents.

  3. I agree with Bill that e-sourcing can’t bring benefits in all situations, but it can certainly cater for 95% of situations. When you think what the alternative is; face-to-face meetings, e-mail, fax, and telephone trails, lots of paper work and so on, you can see that an online hosted communication tool has a lot of benefit.

    The idea that it breaks relationships may seem very plausible but research by independent and respected bodies, such as the Bristol Business School found that it simply is not the case. In fact, they found that it improved relationships. You can find the articles here, http://www.marketdojo.com/resource.

    Hope this helps,

    Nick
    Market Dojo

    • Nick, thanks for this input. I think -as with most technology – the benefits depend very much on the quality of the users. It seems entirely logical that relationships can be improved by the use of electronic tools, so long as they are used in an appropriate way and to supplement, rather than completely replace, other mechanisms.

Trackbacks & Pingbacks

  1. Supply Excellence — Above the Noise: The Truth About e-Sourcing
  2. E-Sourcing: Destroyer or Doyen of Value « Vendor Management
  3. E-Sourcing: Destroyer or Doyen of Value : Hudgeon!
  4. E-Auctions & Supplier Alienation « Commitment Matters
  5. Divided by Expenses» Blog Archive » E-Sourcing: Destroyer or Doyen of Value

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