Is E-Sourcing For You?

Many of today's grocery retailers have gone beyond national brand equivalent in certain food and beverage categories as a way to set themselves apart from competitors. But with limited sources of supply in many categories, how do you ensure you're getting the best value for your organization and, in turn, your customers?

Today, many organizations are embracing e-sourcing, or reverse auctions, as a way to generate consistent results in cost reductions and efficiencies. As effective as e-sourcing can be, however, it's simply not the right approach for every buy.

Sourcing considerations

As with the procurement of any item or service, store brand category managers have choices when it comes time to bargain. Whether the choice is traditional means of negotiation, a standalone e-sourcing tool or a full-service e-sourcing provider, each avenue comes with its own unique benefits and challenges.

When it comes to store brands, e-sourcing, which automates sourcing through an online process, can be much more than just a means of securing better pricing. E-sourcing also allows buyers to quickly gain visibility into the market to ensure they are getting the best overall value based on price, performance history, quality and any other additional elements that support the buying decision. Not only that, but through e-sourcing they can do this while maintaining — and even improving — quality standards.

When does it make sense to e-source a store brand product or product line? Opportunities exist in a number of areas, including tuna, pineapple, mandarins, green olives, frozen fruit, bags, wraps and trash bags, to name a few. Grocery retailers that use the e-sourcing process for private label items recognize two major benefits: 1) They secure the best price by putting as much transparency into the process as possible; and 2) They gain access to the most cutting-edge products.

E-sourcing a store brand product differs from a more standard e-sourcing process in that vendors spend a lot of time talking about new capabilities and what differentiates them from their competitors instead of just taking about price. We see the results of this reality in positives such as improved product quality with new recipes or premium ingredients or innovative new packaging.

Despite all the benefits of e-sourcing, the process simply won't work with some items. Frozen vegetables, sugar, commodity rice and tomato products, for example, are not good candidates, thanks to the lack of a vendor base. Certain other products might present issues related to market requirements, including items with a very narrow or proprietary specification. Traditional means of negotiating would be favored in both of these instances.

Take a closer look at your options

Although not every e-sourcing event results in savings, buyers typically can expect to save anywhere from 10 percent to 20 percent, and sometimes more. Private label items typically do not have the "big wins" seen in some other categories, but the savings are there nonetheless — sometimes seen in the form of cost avoidance, where the price would have been much higher without the use of the reverse auction.

Retailers also have several options when it comes to e-sourcing providers. And if you have the resources, a standalone e-sourcing tool can be a great way to source standard items with easily defined specifications and an established supplier base.

The potential downfall of such an e-sourcing tool, however, can be underutilization due to the amount of time required to properly run an online sourcing event.

Training and support also have proved to be issues with a standalone tool. Setting up an e-sourcing event, creating the proper strategy and making sure the supplier participants are properly prepared all take time and e-sourcing expertise, which are not core competencies for most buying organizations. But the majority of e-sourcing companies do offer add-on services that can be purchased as needed to offer assistance where necessary.

A full-service e-sourcing solution, meanwhile, allows buyers to enjoy the benefits of a reverse auction while actually giving them time back to focus on more strategic initiatives. Full-service solutions become familiar with your organization's unique processes, goals and challenges and can take on any or all aspects of your e-sourcing event while still allowing the buyer to remain in control of all sourcing decisions.

Full-service e-sourcing providers also can assist with processes such as performing category reviews, locating qualified suppliers, determining the appropriate strategy for each category, creating or optimizing specifications, training supplier participants, monitoring the live event and dealing with any potential issues that arise — in real-time.

If you do utilize an e-sourcing partner, however, make sure it doesn't have existing supplier relationships, paybacks, volume incentives or preferred status that could undermine the integrity of the process.

Price, too, likely will play a role in determining whether a standalone tool or a full-service e-sourcing approach is right for your organization. As you would expect, the upfront cost of a tool will be less than that of a full-service solution. The decision process should include an evaluation of add-on costs that might become necessary to reap the full benefits of the tool.

The bottom line

Providing great value and fair prices to customers is a top priority for every grocer — regardless of whether or not it uses e-sourcing. The most mature sourcing teams understand that it's about more than the tools. The highest-performing grocers have the right blend of technology, processes and staff — along with the experience to understand when and why to apply the various means of negotiating to compete and profit in today's volatile economy.

Len Kaplan is vice president of sales for Intesource Inc., headquartered in Phoenix. He may be reached at 800-475-2149 or [email protected].

If you do utilize an e-sourcing partner, make sure it doesn't have existing supplier relationships, paybacks, volume incentives or preferred status that could undermine the integrity of the process.

Although not every e-sourcing event results in savings, buyers typically can expect to save anywhere from 10 percent to 20 percent, and sometimes more.