BPM InLead: Enabling Business Value Realization

I was very pleased with the 30% savings I made by ordering my Subway lunch on a lazy Sunday afternoon from www.foodpanda.in, instead of driving to the nearest subway outlet in my locality. Especially because it came with an added bonus of free delivery (no fuel cost), hassle free ordering and saved me the effort of standing in a queue (which by all standards is on top of my NVA - non value added activity list).

Having spent the previous week discussing savings achieved for one of our newest engagements, I started wondering (rather wishing), if it would ever be equally easy to achieve savings in Indirect categories that we manage for most of our customers. One thought led to another and I started doing some research on existing e-marketplaces in different industry sectors and if they could really be used as an effective sourcing strategy.

I spent a lot of time going through websites like www.alibaba.com, www.indiamart.com, www.bizeurope.com, www.amazon.com etc., in search of my Food-panda-like experience. Here are my observations:

• B2C e-marketplaces are more evolved and offer better user experience, but B2B marketplaces are catching up fast. There is no reason we buyers/Sourcing managers should not explore using these e-marketplaces for assistance with our day-to-day buying.
• I was surprised to find that e-marketplaces like Alibaba and Indiamart even have their free mobile apps, plush with features including, category-wise segregation of goods, country-wise segregation of suppliers, options to obtain quotations from multiple suppliers within seconds, supplier qualification/verification tools, instant chat with a supplier representative, secure payment options, online bar code scanner, etc.,. There are also options to attach specifications in the form of pictures or other files to obtain customized quotations, survey the supplier facility and get quality checks done.
• B2B e-marketplaces are designed more to support start-ups and SME type business set-ups and may not be ready to cater to complex requirements of large businesses yet. However, even large businesses can benefit from e-market places for their tail-spend requirements for categories ranging from personal protective equipment, electrical consumables, hardware and tools, packaging, advertising, office supplies, pumps, chemicals, rubber and plastics, minerals and metallurgy, pumps, LMV parts, tires, etc.
• In-spite of all the modern features, B2B marketplaces are still a chaotic place and may overwhelm a new buyer. Expect to spend significant amount of time getting comfortable with navigating the tools before you can actually place an order or send an enquiry. 
• I could not locate my Food-panda or Amazon type discount coupons, so I guess negotiating is still upon the buyers, i.e., after you have zeroed in on the right supplier. I also found that terms and conditions of purchasing may be supplier centric, which most large organizations would not be comfortable with.
• While I found several B2B e-marketplaces for goods, I could find only a handful of e-marketplaces for professional services whose offerings were limited to some specialized services.

Have you used e-marketplaces as a sourcing strategy? Please leave a comment and share your experience.

Posted by Jyoti Upadhyay at 7:42 AM | Permalink | Comments (2)

Carrying forward the topic of savings from my previous blog, we will now discuss the second type of hard saving - saving achieved while purchasing a commodity which has no previous price reference. This situation can arise if the commodity being purchased is completely new, or if the specifications have changed so much that it cannot be compared to previous commodity even after applying adjustments, or if there is no data available to find previous reference. There are 4 popular methods of calculating savings in such situation:

1. Average of all initial quotes minus the final selected quote
2. Average of all initial quotes (excluding outliers) minus the final selected quote
3. Initial quote of the selected supplier minus the final quote of the selected supplier
4. Lowest of all initial quotes minus the final selected quote

Here the assumption is that all the quotes are from technically acceptable suppliers. There could be differences of course, in technical ratings, but they all qualify the minimum acceptance criteria. Procurement would like to table savings using the first method of averages, because that is what gives maximum savings. Some would use method 2, to eliminate outliers, which to me does not sound very logical; if a supplier is technically qualified, why should his price not be considered, even if it is too high or too low! Deciding how much of variance defines an outlier is another point of debate. Method 3 is regarded most acceptable when the technical acceptance of participating suppliers is not very clear. Finance tends to question method 1 and 2, since they do not get easily convinced on the 'average approach. 'You would not have bought this commodity 'on average' from all suppliers', they would question! So, method 3 appeals best to procurement buyers and they claim, 'user would have bought this from this supplier at initial quoted price had we not negotiated it to the final price', and so the difference is the saving. Fair enough. However, from a finance point of view, the company could have purchased the commodity from the lowest bidder had procurement not been involved and so saving should be calculated against that, thereby method 4.

Let me illustrate method 4 by an example. You want to buy a commodity for which supplier A quotes $100, B quotes $90 and C quotes $80. After negotiations, A is at $85, B is at $75 and C is at $70. User chooses to buy from B due to technical ranking. As per method 3, the saving will be $15 (90-75); as per method 4, it will be $5(80-75). Method 4 rationale is that you could have bought the commodity from C at $80, if you had not negotiated. Although one may argue that you could have still bought it from B at $90, since that is what you preferred; but the key here is your budget. You could buy the product at $80 since it fits in your budget, which you would have to manage with C initially; it's the negotiation that allowed you to buy it at $80 from your preferred supplier. So, method 4, though most conservative, is most convincing.

In some organisations, these savings are not regarded as hard saving, considering the notional aspect of it. This view is acceptable as well, as long as the hard savings targets are picked by procurement accordingly, taking into account the savings thus lost, due to previous price reference not available.

We will continue this topic in subsequent blogs. Meanwhile, I would be very keen to know your views and what methods you have seen in your organization.

Posted by Khalid Kureshi at 9:42 AM | Permalink | Comments (5)