A Case For eSourcing: The Strategic Side Of Procurement
eSourcing initiatives have been shown to reduce sourcing cycle times by more than 25 percent, cut time-to-market cycles 10 percent to 15 percent, provide access to better, quality inputs, and create an overall supplier base that is more responsive to innovation and changing economic conditions.
Consider a hypothetical company with $3 billion in revenue, materials and sourcing costs that equal 50 percent of its revenue, and Earnings Before Interest and Taxes (EBIT) of $400 million. With all other factors held constant, if eSourcing can reduce the company's materials and sourcing costs by 5 percent (a conservative estimate), then that can translate into a $50 million increase in earnings. Making a further assumption of a 20:1 price-to-earnings (P/E) ratio, savings associated with eSourcing can increase shareholder value by $1 billion.
Procurement comprises all activities associated with a company's acquisition of materials and services. Sourcing is a subset of procurement — its strategic context. Because it sets the stage for managing most companies' single largest cost component (acquiring direct and indirect materials and services), sourcing warrants senior executive leadership. Successful sourcing approaches are linked to key business goals and are defined by key business relationships. And they are measured by the bottom-line benefits they bring to an organization. Sourcing's mission is to maximize the value of suppliers and minimize the total cost of ownership (TCO) of materials and services.
Sourcing involves the development of a company-wide, strategic approach to:
- Obtaining needed materials and services.
- Identifying and evaluating potential suppliers to meet those needs.
- Negotiating and implementing contracts with selected suppliers.
- Monitoring and improving ongoing supplier relationships
The balance of this paper:
- Positions sourcing within context of overall procurement process;
- Discusses the eSourcing opportunity (potential benefits –and- contribution to procurement process best practices); and
- Provides a snapshot of eSourcing vendors.
Dr. Jeffrey Brooks is a research fellow at the Accenture Institute for Strategic Change, where he focuses on the impact of information technology on business processes. He publishes frequently on virtual networks, supply chain management and group dynamics. Jeff can be reached at jeffrey.d.brooks@accenture.com.
Donavon Favre is a partner in the Accenture Supply Chain Management service line who co-leads the company's global Procurement practice. He specializes in strategic sourcing, eProcurement, eSourcing and supply chain strategy, and works across a range of industries, including energy, natural resources, consumer goods and high tech. Donavon is a member of the Council of Logistics Management and the Institute of Supply Management. He can be reached at donavon.j.favre@accenture.com.