Viewpoint

ViewpointHigh performance through sourcingLeveraging a supply management platformfor low-cost country sourcing

Supply Chain Management

By Julien Pleska, Accenture, and John Webster, Emptoris

Although sourcing from low-cost economies is an establishedfact, how best to fully leverage the opportunities it offersremains obscure. The use of a supply management platform canbring compelling value to a purchasing organization by helpingit overcome some of the added complexity that is inherent inthe definition and execution of a low-cost country sourcinginitiative. By improving coordination among different buyersand suppliers, industrializing the sourcing process, and acting asa central knowledge base to store and share all supply-relateddata, supply management platforms add a dimension of stabilityand certainty to low-cost country sourcing that is often lacking.

2

In one sense this is not surprising.Successful sourcing from low-costeconomies involves addressing anumber of distinct challenges—andnot just one at a time, but together. In unfamiliar markets, companies must identify suitable vendors and beassured not only of vendors' potentialreliability of supply and the quality ofthe products that they provide, butalso of the rigor and capability of theirinternal processes.

Worse, the decisions companies mustmake are rarely clear-cut. Improvedquality may go hand-in-hand withbetter reliability of supply, or it maynot—a tradeoff may be involved. Andwhile increasing the pool of potentialvendors may uncover intriguing newalternatives to consider, it also equallyincreases the complexity of thecomparisons and "what if" analysesentailed in the decision process.

While challenging, the problem is notinsurmountable. Category by category,and product by product, managementscan and do rise to the challenge:Decisions are made and contractsissued. But was it the best decision? Is the solution truly optimal? Thelarger the category and the greater thevariability in the supplier base, the moredifficult it is to know with certaintythat the best possible deal has beenmade. Making a deal that's consideredacceptable is straightforward. Makinga deal worthy of a high-performancebusiness is an altogether morecomplex challenge.

Yet it does not have to be. The use of supply management platforms isbecoming commonplace acrossbusinesses. This trend is not startlinggiven that such platforms play afundamental part in enablingbusinesses to dramatically improve

Sourcing from low-cost economies is anestablished fact. However, how best to fullyleverage the opportunities it offers remainsobscure: While many companies have shownthat they can successfully source from low-cost economies on a category-by-categorybasis, far fewer have institutionalized theiroverseas sourcing to the point where itbecomes routine and "business as usual."

the effectiveness of their procurementfunctions and, ultimately, achievehigher levels of performance throughsupply chain mastery. While sharplyreducing the cost of acquisition for a wide range of goods and services,supply management platformssimultaneously free up managementtime for more strategic activities.

When it comes to sourcing from low-cost economies, however, theseplatforms are not being utilized totheir best advantage. The resultingirony is that even as companiesstruggle to engage with low-costcountry suppliers, the tools that theyneed are already in place. It is thecorporate equivalent of buying astate-of-the-art hi-fi system—and thenonly using it to listen to the radio.

Supply Chain Management Viewpoint

3

High performance through sourcing


4

Under the hood: How a supply managementplatform worksLet's first review what a supplymanagement platform actually does.In essence, its purpose is simple:manage the front-end source-to-contract process to help enterprisesachieve better compliance andperformance across their supply base.

Typically, enterprises begin the processwith spend analysis, determining whatthey buy and whom they buy it from.This analysis helps them understandand prioritize potential savingsopportunities. With the size of theprize understood, they then develop asourcing strategy that will bring theseopportunities to fruition and ventureinto the marketplace to identifypotential suppliers. From there, aprocess of supplier qualification andnegotiation takes place, leading todecisions around which spend isawarded to which supplier. Ideally, theawarding process takes into accountnot only reducing the landed cost, butalso the total cost of ownership—balancing cost, performance and risk.

Once suppliers are selected andbusiness is awarded, the enterpriseestablishes contracts and deploysprocesses to ensure operational andregulatory compliance. Spend,contracts and procurement controlsare continually monitored across theselected supply base to drive down riskand identify additional opportunitiesfor greater savings and efficiencygoing forward.

Going global: How a supply managementplatform helpsA robust supply management platformcan bring a number of benefits to apurchasing organization in pursuit oflow-cost country sourcing. First, it can

help to structure the sourcing processaround well-defined projects andtemplates where roles, responsibilities,tasks and deadlines are all clearlyoutlined and structured.

Second, during the actual sourcingphase, the platform can ensure thatall steps are clearly documented andrecorded, which helps make the processrepeatable and can lead to shortersourcing cycle times. Finally, once thebusiness has been awarded, the platformenables an enterprise to monitorcompliance with negotiated contractsby measuring supplier performance overthe life cycle of the relationship. Withdivergent geographies, time zones,languages and cultures, the role playedby a supply management platform isinvaluable.

Yet some of these advantages becomeeven more critical in the context oflow-cost country sourcing. In particular,the platform actively helps businesseswith three of the thorniest problemsincurred when venturing into low-costcountry sourcing: finding suitablevendors, evaluating multiple offers andhandling the challenges involved inday-to-day management—again withinan environment of widely divergentgeographies, time zones, languagesand cultures. Let's look at each ofthese in more detail.

Identifying suitable vendorsWhile the use of intermediaries suchas local agents or the establishment of international procurement offices is far from unknown, the vast majorityof companies buying from low-costcountries choose to purchase directlyfrom the supplier. By automaticallykeeping track of all the suppliers thatever responded to a request forinformation, a supply managementplatform facilitates the supplierdiscovery process by creating a centraldatabase of suppliers—both qualifiedand yet-to-be qualified—that can be

A robust supplymanagement platformcan bring a number of benefits to apurchasing organizationin pursuit of low-costcountry sourcing.


5

tapped into on an ongoing basis asthe organization's supply needs changeand evolve.

A supply management platform is alsouseful during the supplier qualificationand audit phase, where satisfactoryassurances of quality and supplyreliability must be obtained.Establishing standard electronicquestionnaires and evaluation formsthat can be shared and completedcollaboratively with suppliers, cross-functional assessment teams or third-party accreditation services enablesenterprises to quickly and cost-effectively gather feedback, irrespectiveof where the reporting party is located.Again, the result is to help build adatabase of approved suppliers thatcan be quickly and economicallyleveraged at any time in the future.

Evaluating offersEven within a purely domestic context,disentangling the complexities ofcorrectly evaluating multi-item offersfrom multiple potential vendors canprove a challenge. This is particularlytrue when suppliers make so-called"expressive" or "combinatorial" bidsand detail alternative pricing theycould offer if, for example, quantity,specification or delivery requirementswere varied or if bundles of itemscould be bid for as a single lot. Whendozens of vendors offer competingbundles of items at varying prices andprice breakpoints, picking out preciselythe best combinations of offeringsthat yield the lowest total landed costbecomes a complex business.

Although an enterprise can certainlymake a reasonable evaluation despitethese complexities, it is equally likelythat any human judgment will fallshort of being truly optimized. It isprecisely this optimization that a spendmanagement platform can undertake,collecting competing optimizationscenarios through auctions or requests

for quotations (RFQs), and thenanalyzing the implied costs and trade-offs contained in multiline item bidsfrom hundreds of vendors in a matterof minutes.

In addition to analyzing expressivesupplier pricing schedules such asbundled pricing, unit volume discountsand business volume discounts, theevaluation can include itemsubstitutions and component lottingstrategies, as well as variations in itemspecifications—such as color, qualityand tolerance—while simultaneouslyfactoring in supplier capabilities andconstraints like capacity limitations,financing terms and historical supplierperformance metrics.

Better still, supply managementplatforms provide an excellent vehiclefor evaluating the additional cost driversassociated with sourcing from low-cost economies, such as transportation,tariffs, longer lead times and additionalinventory holding—all of which canlead to a more complex total landedcost model.

In short, by enabling the buying teamto conduct scenario-based "what if"sensitivity analyses to quantify theimpact of various purchasingalternatives and trade-offs associatedwith the complexities of sourcing from low-cost economies, companiescan be assured that their sourcingdecisions are not just broadly correctbut truly optimal.

Day-to-day managementIf evaluating multiple offerings iscomplex, so too is the challenge ofmanaging the coordination andcommunication that must occur amongparticipants in the process. To furthercomplicate matters, participants inlow-cost country sourcing are not onlylikely to be geographically dispersed,but also characterized by very differentbackgrounds, languages and cultures.

A supply management platform canhelp ease day-to-day managementissues by coordinating the end-to-endsourcing process; facilitating theeffective sharing of informationbetween buyers and suppliers; andproviding a centralized, globallyaccessible, single source of the truthfor all activities contained within thesourcing and evaluation process.

One way the supply managementplatform can help, for example, is atthe very beginning of the process byclearly identifying the required tasks,responsibilities and deadlines, andmaking these visible to every participantin the process—both outside andinside the organization. This includesnot just those departments that areinside the firewall, such as engineering,quality, production and logistics, but also suppliers, internationalprocurement offices and third-partyaccreditation services.

The enhanced sharing of informationsuch as specifications and technicaldrawings is another useful advantage,providing timely and up-to-date dataat every stage in the process—again,both internally and externally, andfrom the initial design phase rightthrough to the contract award phase.

Finally, supply management platformscan also help measure the progress ofsourcing projects by offering a varietyof tools and monitoring techniques,from management dashboards toexception-based alerts. Such benefitsare even more relevant to companiesthat decide to establish dedicatedoverseas sourcing organizations, suchas an international purchasing office,where the establishment of a well-understood process and clearly defined roles and responsibilities areespecially critical.

Case studies

Food products companySo how does a supply managementplatform work in practice? Take theexample of a major US food productscompany, which for many yearssourced strawberries from Californianand Chilean producers and brokers.Although the company was aware ofChinese growers that were developingboth new product varieties andshipping techniques, it also recognizedthat traditional approaches tosourcing presented numerous barriersthat prevented it from exploiting theopportunity. The resource requirementinvolved in engaging with new

suppliers to the point of meaningfulnegotiations was seen as too time-consuming—a prospect exacerbated by language barriers.

The Emptoris supply managementplatform, equipped with a broad rangeof languages including Mandarin, wasable to help the company overcomethese obstacles. Better still, as onlinenegotiations were already about totake place with its existing supplierbase for a one-year contract intendedto source more than 5 million poundsof four different types of strawberries,the platform enabled the company toinvite five prospective suppliers fromChina into the process.

Participating first in an initial RFQprior to the final competitive reverseauction event, the purchasingorganization determined that sourcingstrawberries from China presented a24 percent savings opportunity. In acompetitive market experiencingongoing margin pressure, that wassimply too big an opportunity to miss.Yet without a supply managementplatform to take advantage of theopportunity, those savings would havebeen left on the table.

Consumer durables companyAnother example involves one of theworld's largest consumer durablescompanies, which leveraged theEmptoris supply management platformto source 352 rubber items amountingto $32 million in spend. Running twosourcing events in parallel—one withits regular domestic suppliers, and asecond with 14 new prospectivesuppliers from India and China—theorganization managed the processcentrally, while also making use ofcompany personnel on the ground inIndia and China to facilitate activitiessuch as qualification.

In the bidding process, nine diverseattributes were collated and processedthrough a total cost formula for eachitem for which a bid was solicited.These attributes included price-basedfactors such as the raw material price

per unit, the percentage of scrap, thelabor cost, overhead cost and packagingcost per part, as well as other factorslike manufacturing tonnage, toolingcosts and shipping lead time. Supplierswere also allowed to offer expressivecombinatorial bids, such as bundlingitems together and offering volume-based discount schedules.

The supply management platform was then used to model a number of "what if" scenarios, which enabledthe company to determine theconsequences of different sourcingstrategies. Throughout the analysis,two practical considerations were keptat the forefront. First, the companywanted to avoid bringing on too manynew suppliers at once, recognizingthat ramp-up costs were inevitableand needed to be minimized. Second,in order to mitigate the risk of change,conditions were created to continue to

use certain incumbent suppliers whilesimultaneously constraining the totalnumber of suppliers among whom thecontract would be split.

The analysis proved invaluable. For thefirst time, the business could preciselyestablish the costs associated withvarious sourcing strategies—forexample, it was possible to determinethat splitting the contract among justthe five overall lowest-cost supplierswould cost 6 percent more thancontracting with the 25 suppliers whooffered the best price on a product-by-product basis. In all, some 27 differentstrategies were evaluated, involvingvarying the maximum number ofsuppliers, the percentage of businessremaining with incumbent suppliers,and the inclusion of supplier bundlesand volume-based discounts.


6

7

process in a clear manner, therebybetter managing the interactionbetween supplier and buyer. Usingsuch tools, both parties have time toprocess information—which may be in a foreign language—and are notcaught up in the pressures of a liveperson-to-person negotiation, eitherface-to-face or by telephone.

In summary, we believe that the useof a supply management platform canbring compelling value to a purchasingorganization by helping it overcomesome of the added complexity that isinherent in the definition and executionof a low-cost country sourcinginitiative. By improving coordinationamong different buyers and suppliers,industrializing the sourcing process,and acting as a central knowledge baseto store and share all supply-relateddata, supply management platforms adda dimension of stability and certainty tolow-cost country sourcing that is oftenlacking. It is critical to select a leadingsolution like Emptoris that presentsthe required functionality to tacklethe challenges of low-cost countrysourcing and the potential increase inrisks, including the provision ofsophisticated total cost of ownershipoptimization-based bid analysis.

To fully leverage the opportunitiespresented by the use of a supplymanagement platform, it is equallyimportant to select a service partnerwith experience both in the deploymentof supply management platformtechnology, as well as in the marketsand industries from which the materialsand services in question will bepurchased. Well-qualified on bothcounts, Accenture is committed tocollaborating with clients to helpthem adapt innovatively to changingconditions, seize opportunities such asthose associated with low-cost countrysourcing and achieve high performancethrough supply chain mastery.

Leveraging supplymanagement platforms toachieve high performanceAs impressive as the outcomes in theadjacent case studies are, any businessseeking to emulate them must becognizant of a number of priorpractical considerations. For example,a supply management solution is aneven more powerful proposition whenit is allied with the provision of third-party services that can empower thepurchasing organization to seizeopportunities presented by low-costcountry sourcing. Typically, for example,a business may want to consider third-party help in such areas as supplierdatabases, local supply marketknowledge and on-site support in locallanguages for sourcing events takingplace in economies like India and China.

Historically, technology—while enablingsupply management platforms—haspresented challenges in certain regionsthat have been slower to adopt suchinnovative solutions. From a technologystandpoint, for example, not allsuppliers in emerging markets haveproven ready to participate in onlineevents. These challenges can beovercome through approaches such as surrogate bidding processes (wherethe buyer or third-party service providerplaces bids on behalf of the supplier),as well spreadsheet-based, easy-to-usebidding interfaces.

More subtle barriers to adoption alsoexist. Language support, for example,is critical to ensure the success of suchan initiative, hence the added value of a solution that offers a multilingualuser-interface. Local cultures, too, areoften assumed to represent an obstacleto the use of technology-supportedprocesses—although our view is thatthis presumption is generally mistaken.Our experience shows that technologycan actually help reduce language andcultural challenges by codifying the


About the authorsJulien Pleska is a manager in theAccenture Supply Chain Managementservice line. He teams with clientsacross industries to improve theperformance of their procurementoperations through processimprovement, organization developmentand system implementation initiatives.Based in Brussels, he can be reachedat [email protected].

John Webster is a Product MarketingManager within Emptoris' Europeanpractice. With a strong background in business process consulting, heworks closely with Emptoris customers,partners and prospects across allindustries to define innovative strategiesfor supply management technologiesand services across an extensive rangeof solutions including spend analysis,sourcing, contract management,supplier performance and compliance.Based in the UK, he can be reached at [email protected] or [email protected].

Copyright © 2007 AccentureAll rights reserved.

Accenture, its logo, and High Performance Deliveredare trademarks of Accenture.

The Accenture Supply ChainManagement service line works withclients across a broad range ofindustries to develop and executeoperational strategies that enableprofitable growth in new and existingmarkets. Committed to helping clientsachieve high performance throughsupply chain mastery, we combineglobal industry expertise and skills insupply chain strategy, sourcing andprocurement, supply chain planning,manufacturing and design, fulfillment,and service management to helporganizations transform their supplychain capabilities.

This document is not intended toprovide advice specific to yourorganization. If you require furtherdetails on any matters discussed inthis point of view, please contact your Accenture representative or oneof the document’s authors.

We collaborate with clients toimplement innovative consulting andoutsourcing solutions that alignoperating models to support businessstrategies, optimize global operations,enable profitable product launches,and enhance the skills and capabilitiesof the supply chain workforce. Formore information, visitwww.accenture.com/supplychain.

About EmptorisEmptoris is the world leader ininnovative supply and contractmanagement software solutions thatempower enterprises to realize bestvalue and accelerate profitablegrowth. Emptoris solutions are usedby successful Global 2000 companiesin every industry. Customers includeAmerican Express, Boeing, DowCorning, GlaxoSmithKline, Motorola,Owens Corning, Samsung America,Toro and Vodafone.

About AccentureAccenture is a global managementconsulting, technology services andoutsourcing company. Committed todelivering innovation, Accenturecollaborates with its clients to helpthem become high-performancebusinesses and governments. Withdeep industry and business processexpertise, broad global resources and a proven track record, Accenture canmobilize the right people, skills, andtechnologies to help clients improvetheir performance. With approximately146,000 people in 49 countries, thecompany generated net revenues ofUS$16.65 billion for the fiscal yearended Aug. 31, 2006. Its home page is www.accenture.com.

About Accenture Supply Chain Management

Documents

Viewpoint