In this third edition of Gunpowder, we borrow an article
an e-sourcing applications vendor, and take a look at 5 tactics to
developing a stronger value proposition for suppliers to participate
in the strategic sourcing process. Next, just when you thought it
was safe to get back in the water, guest editor Kumkum
Dalal wades through the next type
of outsourcing (this wave might surprise some of you). Finally,
our editor-in-residence Lisa Reisman interviews Tony
Poshek, an industrial products online auction expert. Tony provides
some been-there seen-that bidding strategies for suppliers who are
asked to participate in on-line auctions.
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Getting Suppliers Onboard
With the Strategic Sourcing Process
Since the advent of strategic sourcing and reverse
auctions, traditional buyer / supplier interactions and relationships
have changed—in some cases for the better. But in many cases,
it has been for the worse. This, however, does not have to be the
The sourcing process, if structured correctly and
if it includes non-price considerations, can bring great short and
long term results to buyers. For buyers that have never competitively
“sourced” a part, commodity or component, there is an
especially large first time benefit. We would argue, however, that
benefits have started to wane for some buyers in specific industry
segments due to their approach to the sourcing process. Many buyers
use the sourcing process with the sole aim of beating down the incumbent’s
price (with no real intent to ever switch suppliers or to identify
higher quality suppliers with better lead times, fill rates etc).
This often creates a hostile negotiation environment, upsetting
the incumbent and creating suspicion among the other invited suppliers.
Despite the shadier side of the sourcing process,
there are real benefits to suppliers—participating in the
strategic sourcing process is an easy way for suppliers to avoid
SG&A expense and have an opportunity to win new business. This
is especially true for suppliers who are invited to participate
in an auction for a company that is new to the sourcing process.
Even incumbent suppliers can benefit as well by winning a larger
share of their client’s business when the buyer consolidates
their total purchasing volume, increasing the size of the contract
up for bid.
Getting all of your suppliers onboard with the process
is not as easy as it sounds. In fact, it has become significantly
more difficult in the past few years to convince suppliers in specific
categories to participate (this is due in part to the reputation
of some of the larger strategic sourcing service providers and technology
vendors, who have operated by shaking up the supply bases in specific
categories like metal stampings by looking at cost as the primary
We won’t pass judgment on these tactics—many
of these firms were arguably more ethical in their techniques than
many purchasing departments, because of their marketplace rules
and code of conduct—but they turned off many good suppliers
to the reverse auction process, many of whom will refuse to participate
in competitive sourcing events today (at least initially, before
To help bring suppliers onboard with the strategic
sourcing process, the five-step approach outlined below can help.
It’s not a panacea to winning over all your ideal participants,
but it’s a good place to start.
First, it’s essential to make sure that the
RFQ you structure is compete, well-written and contains critical
information outside of just part or service specifications to allow
suppliers to get a better sense of the buyer’s philosophy
and outlook on supplier management. This might include:
- A good overview of the company and its supplier
- A statement that describes the company’s
philosophy on the strategic sourcing process and perhaps most
important, a reiteration of the factors that the buyer considers
to be important when making award decisions (particular emphasis
should be made that lowest bidder does not necessarily win the
bid and anybody that submits bids below “cost” will
not be considered for future business with the buyer)
- A discussion on when, how, and why the buyer uses
reverse auctions and other negotiation strategies (this helps
explain whether the company takes a partnering view toward their
suppliers or a transactional “beat them with a hammer”
It’s also critical to provide some history
behind the part or service as well as an explanation of why it is
now up for bid. In the case of direct materials or industrial MRO,
it is also important to include good, clear drawings (especially
in the case of build to print parts)—with no markings or identifiers
of incumbent suppliers. For build to print parts it is critical
to include specific descriptions of tooling requirements, including
age, drawings, condition, etc. By providing insight into these areas,
it will help suppliers develop a total cost understanding of working
with the buyer over the course of the contract. In addition, the
more comprehensive the initial RFQ, the more likely it is for suppliers
to want to participate and respond. Smaller suppliers with limited
staff are hesitant to devote resources to bid development when the
information appears sloppy, incomplete or even inaccurate.
Second, it’s important to provide context to
the supplier to win their participation and enthusiasm. The buyer
must provide an explanation—either within a printed document,
over the phone, or in person—of what it will take to move
the part / product to a new supplier. For example, what is the buyer
hoping to achieve? Is it a certain percentage savings? Is it improved
quality and lower defect rates? Is it better fill-rates and on-time
delivery? Be as specific—and honest—as you can.
Third, focus on non-price factors as well as price
factors. Structure the RFQ and the sourcing event to include other
critical data besides unit cost. This might include quality information,
such as internal and customer PPM (parts per million) data, sigma
levels, on-time delivery, or fill rates which are either examined
separately or weighted into the overall price (or lowest bid). In
the case of highly complex events with thousands of line items or
lanes (e.g. transportation), it might make more sense to use a non-traditional
negotiation format such as optimization which enables suppliers
to bundle bids and factors rather than relying on a fixed process.
Fourth, constantly communicate with the supply base.
Over communicate if you need to. Develop strong working relationships
with suppliers and identify and address their concerns. A poor –
or non – response from a supplier could mean that the supplier
is gun-shy or has had a negative experience with reverse auctions—not
that they’re not qualified to bid. Take the time to find out
and see if you can overcome their concerns. Have they had any negative
experiences in the past? Demonstrate empathy and understanding.
Are there specific steps your team can take to make the supplier
feel more comfortable with the bidding process? Provide rapid response
(e.g. 24 hour response) to any and all supplier concerns. A phone
call not returned from a potential, is indeed a response. Pull out
all of the stops to understand why they might be hesitant to participate.
Fifth and last, if you’re working with a technology
vendor or services provider who is managing the bidding process
for you, ensure that they’re up front with the supply base
about how they are getting paid. There are often misconceptions
about the buyer / partner relationship. Many suppliers believe that
the buyer will “mark-up” a fee on top of their bid.
It’s important to be frank and clear about the economic interests
over everyone involved in the process.
These are just a handful of tips for bringing suppliers
on board. It would be possible to devote a whole book to the subject,
exploring topics such as techniques for working with new suppliers
versus incumbents, local suppliers versus overseas suppliers, etc.
But if you start with a good foundation that focuses on full information
disclosure—including the context of the bid package—you’ll
pave the way for maximizing supplier participation in your events.
This article was generously provided by Iasta.
The Next Wave of Outsourcing:
In the domestic press these days (and even in Europe as well) it’s
hard to escape stories about outsourcing. It seems everyday there’s
a story about the movement of IT and Help Desk support, payroll
processing, call centers, HR and financial processing offshore.
In addition, many industries have also outsourced a wide range of
direct materials or the parts and components used in the manufacturing
process such as bearings, metal parts, ceramics etc. But most recently,
the product innovation function—engineering and design have
started to move offshore. In fact, the outsourcing of Computer Aided
Design/Drafting (CAD) services is a huge area for cost reduction
for small and mid-sized manufacturers.
Why are US design firms and
manufacturers outsourcing CAD work?
The primary reason for outsourcing is financial. Overseas outsourcing
provides advantages to large and small firms alike. Firms can now
reduce the high labor costs associated with people who do CAD work.
In addition, small firms are now able to take on the larger projects
(in a cost effective way) that only a larger firm could take on
just a few years ago. In some industries, production time is a major
issue. For example, in the construction industry, as design and
construction schedules become compressed due to client demand, preparation
of design documents must speed up in order to deliver projects on
time and within budget. Having access to reliable low cost helping
hands give small and large firms an added competitive advantage.
Moreover, collaborative technology makes it easy for the US operation
to coordinate activities with its overseas partners. The US or European
operation can focus on core strengths such as product ideation (the
first phase in the product development process) which requires tighter
coordination with the marketing and sales functions and/or manufacturing
and distribution capabilities.
Who is benefiting from this
Any firm currently using an in-house CAD system can benefit. This
would include manufacturing firms in highly commoditized industries,
architecture firms doing costly drafting work, civil engineering
firms doing mass grading as part of land development projects and
even mechanical engineering firms doing machine design.
Where are the service providers
located and what do they do?
Some service providers are located in the US, but an increasing
number are in overseas locations such as Eastern Europe, China and
India. Indian firms are aggressively pursuing this market sector.
These firms provide a range of tasks including:
- Digitization of legacy graphics through raster
to vector conversion of existing images and drawings
- Production of detailed working drawings from the
designer’s schematics and design development drawings
- 3D visualization: modelling /rendering of civil/architectural
- Customization of in-house architectural and engineering
design detail libraries for use in preparation of working drawings
How does a US firm with in-house
CAD operations explore outsourcing CAD work?
We suggest the following low risk path:
- Conduct a vendor identification search either
on your own or through a third party provider. A search of this
sort should begin with contacting your state or local international
trade office and the international business committee at your
local Chamber of Commerce. In addition, companies exploring the
strengths of some of these firms should ask about the firm’s
- Start with a sample of work already done just
to assess the service provider’s competence and strengths.
- If you are satisfied with the results of the sample
project, continue with a small project to further assess quality,
on-time delivery and competence.
- Continue with larger projects.
To get the maximum benefit with minimum risk, outsource
work that is standardized and repetitive. Also, choose work that
is low profile but has high production cost such as drafting and
CAD tasks are well suited to the model of outsourcing
standardized and repetitive activities associated with high headcount
costs and low intellectual property concerns. Manufacturing, engineering
and architectural design firms are benefiting from outsourcing of
CAD, 2D, 3D and CAE work. As CAD tools are generic, engineering
firms and CAD managers will have to answer the question, “How
do I improve my design efficiency and differentiate the services
I provide to my clients?” As cost containment becomes an increasing
concern for maintaining the competitive edge, outsourcing becomes
a vital business strategy.
Kumkum Dalal is President
and CEO of Global
Reach Consulting, an advisory firm specializing in sourcing
and doing business with India. Kumkum can be reached via email at:
Q&A with Tony
Poshek—Auction Strategies for Suppliers
Based in Chicago, Tony Poshek is a Strategic Sourcing
Manager for a major industrial products company. Prior to his current
position, Tony directed and led hundreds of online bidding events
worth over $1B with FreeMarkets. Tony has sourced a full range of
industrial products including: metal stampings, castings, plastic
injection molding, rubber components, PCBs, electrical components
and capital equipment on behalf of many Fortune 500 companies. We
caught up with Tony to get his perspective on the advantages for
suppliers to participating in online auctions and perhaps more important,
a few bidding tips. Tony can be reached directly at firstname.lastname@example.org
When a supplier says, “I
don’t like to participate in reverse auctions because we have
had a negative experience with them,” how would you encourage
them to participate?
For new (i.e., non-incumbent) suppliers, reverse auctions are a
great way to get your foot in the door. Suppliers have easy access
to new sales revenue that otherwise might not have been available
via other channels. I also believe that shorter sale cycle times,
reduced SG&A expense, and the opportunity to get in front of
a company that you might otherwise either not have known about or
couldn’t get a meeting with on your own are key benefits to
One benefit that never seems to be articulated is
that online auctions are one of the only ways in which a supplier
can see exactly where they stand in the market. These events allow
suppliers to benchmark their pricing against peers and obtain real
time market data. This is invaluable. Large companies spend tens
of thousands of dollars per year trying to obtain this type of intelligence.
As a supplier to a small and mid-sized firm, you will know, for
example, if you lose a bid by 30% your company probably has some
serious problems to address.
Another advantage of participating in online auctions
is that when they are run by a third party, they tend to follow
strict marketplace rules creating a competitive but fair playing
ground for all participants. Lowest bidder should always at least
get an introduction to the buyer. When responding to a buyer’s
offline RFQ, suppliers usually do not receive buyer feedback on
their quotations nor do they often know exactly where they stand
vis-à-vis their competition. Online bidding events go further
in creating a level playing field.
How should suppliers think about
their bid strategy prior to the event date?
My advice to all suppliers is to come prepared. By that, I mean
that every supplier needs to know their drop dead walk away price.
They may not submit it but they need to know it. But let me digress
for a moment. I’d like to discuss what I call “reverse
auction dynamics”. Whether a supplier decides to take a bid
strategy of ‘early and often’ or ‘drop- the-market”
with a few minutes to spare, there are certain dynamics that always
appear. Most markets tend to start out as a horizontal line from
left to right with a slight downward slope. Somewhere between half-way
and two thirds of the way through an event, the slope tends to become
steeper moving toward a vertical direction and in the last seconds,
begins to take on more of a horizontal appearance. What this tells
us is that there really is no wizardry involved with when, how often
or how much a supplier should bid during an event. All events sort
of look the same way.
Of course the fewer the number of suppliers, the
greater any one supplier’s chance of being the winning bidder.
If you are trying to get yourself noticed by the buyer because these
are the types of parts that fit your company’s core competencies
or your boss told you this is the type of work you ought to be doing
more of, you might want to consider bidding very aggressively. If
this is less strategic to you, you might only slightly decrease
your price. All suppliers would serve themselves well if they can
honestly look at themselves through the eyes of the customer. Has
the supplier done business before with this buyer? If not, how will
the supplier ‘get noticed’? Some suppliers who may have
some type of relationship with the buyer might know that the buyer
has some concerns about their quality, for example. Knowing this,
if a supplier wants this piece of business, the supplier should
try to differentiate on price. The exact opposite is also true.
If the supplier knows that the buyer has had quality concerns, the
supplier might not have to be as aggressive on price.
How do you coach suppliers to
participate in online auctions if they suspect that the buyer is
actually only trying to lower the price from the incumbent?
There is a cost both in time and dollars for a buyer to go through
an online process. Most small to mid-sized firms would likely not
undertake the effort if they were just hoping to achieve a few percentage
point savings. Switching costs do become a factor, however, and
have to be pre-determined. While obviously a reduction in cost from
the incumbent would be happily received by the buyer, the buyer
will likely not go through the entire process unless they were serious
about potentially switching suppliers.
When the buyer asks for a preliminary
bid, what type of pricing strategy should I use?
Preliminary bids are used to determine if the market conditions
are ‘good’ as defined by the customer. Moreover, they
are used to see if suppliers can get below a ceiling price and meet
the reserve price. The buyer knows that if none of the bidders are
able to meet the ceiling price, then market conditions will not
be favorable to running an online event. If one or a couple of bidders
can’t get below the ceiling price then those suppliers will
likely be asked not to participate. One strategy for a supplier
is to place a bid as close as possible to the reserve price because
it will increase the likelihood of being noticed by the buyer. The
buyer will be anxious to see which suppliers they should be paying
extra close attention to on bid day. Getting below the reserve price
becomes the critical challenge on event day. Some suppliers, however,
will prefer to save their best pricing for the bidding event.