e-Sourcing is the use of internet technology used by purchasing professionals to find suppliers and negotiate prices or reduce cost for a wide range of goods and services. A variety of online negotiation tools are used including RFI (Request for Information, RFQ (Request For Quotation), RFP (Request for Proposal) and electronic auctions.

It is important to understand when and how each should be used to achieve the best results. Incorrect use can bring about unsatisfactory experiences and can lead to bad press for e-Sourcing.

This article focuses on the criteria which should be applied to determine the most appropriate e-sourcing tool to use.

Strategic importance of the category

An auction is generally recommended for those products with a high value and a minimum or small risk. High spend, low complexity is the ideal scenario for this type of price negotiation. The level of spend which will attract suppliers will differ from category to category but as a rough benchmark we generally look at spend over 150,000. In nearly all other cases, requests for quotations (RFQ), requests for proposals (RFP) manual negotiations will be much more appropriate.

Is the specification clearly defined?

Clear and unambiguous requirements must be specified so that suppliers are competing on a like for like basis and not working to different assumptions. A clear set of requirements (commercial, technical, logistical etc) will allow suppliers to work out the cost of servicing the account prior to the auction. If requirements cannot be clearly specified then the RFP is likely to be more appropriate.

Are the market conditions favourable?

An auction requires competition in the marketplace. The more potential suppliers there are available, the more likely a good auction result will be achieved. Also consider the marketplace dynamics are there new entrants eager to win market share? How profitable is this sector to suppliers? Depending on the category these conditions may change quite frequently so holding the auction at the right time is crucial. If the category does not pass this test, other sourcing strategies will be more appropriate and will probably involve the need to work closely with suppliers to secure supply and will focus less on price but on total cost.

Cost/risk of changing supplier low?

A category may not be suitable for auction if the time taken to change supplier, the risks associated with change or the cost of changeover is high. Switching costs should be clearly understood in relation to the length and value of the contract.

It is possible to auction certain complex categories but this is generally done after a thorough tender / requirements definition process has been undertaken. This ensures that both parties understand the cost and implications of doing business. Good e-sourcing platforms will cover both the tender and auction aspects and allow suppliers who have passed the non-price evaluation be rolled over into the final auction.

In summary, e-sourcing can bring considerable benefits to optimising purchasing costs. Certain categories will work well by simply running an auction, other categories will require a more detailed tender process and others will rely on more traditional purchasing techniques. By considering the criteria above, buyers should be able to make an informed decision.