Dave McCormick, CEO, Freemarkets.com: Evangelising e-sourcing

One of the promises of the internet, and the reason why it became the biggest phenomenon of the Nineties, was the promise it held of ushering in the virtual corporation, which would exist only on the information superhighway, buy its raw materials from invisible suppliers spread throughout the world, turn them into products in 'wired' factories, and sell them to customers anywhere in the world. All this was to happen seamlessly, fast, and at fantastically low cost.

The digital dream may not have panned out quite that way, but there's no denying that a large part of it still holds true and that more and more companies are waking up to that reality. Take e-sourcing, for example. Even four years ago, it was just a glimmer in the eye of the purchase manager. Today, e-sourcing isn't just a reality, but an increasing number of companies-goaded sometimes by their CEOs-is learning to exploit its potential. Or at least that's what an exclusive poll by BT-Freemarkets.com of 30 CEOs and 35 Chief Procurement Officers (CPOs) from across sectors, reveals.

The Challenges

Nearly two-third of the participants polled have already tried out e-sourcing in some form or the other. Lower costs emerges as the biggest driver of e-sourcing, with more than three-fourths of the companies inducting between one and five new suppliers in the last one year to meet their key raw material and component needs. And more than three-fourths of the companies are now exploring the possibility of introducing new suppliers at least once or twice a year. Says Dave McCormick, CEO, Freemarkets.com: ''Most companies are getting squeezed due to financial and competitive pressures and the business imperative is to drastically lower cost to improve profits, and e-sourcing is at the centre piece of any global supply management strategy." Agrees Sunil Kant Munjal, MD & CEO, Hero Corporate Services: ''Companies are certainly becoming more open, especially now that they get to hear of success stories and significant savings.''

The only constraint seems to be on the supply side. There are several issues relating to quality, consistency, dependability, and pricing. Supplier relations continues to be the biggest challenge for e-sourcing companies, followed by the intricacies of global sourcing. Companies also often grapple with the problems of how to get around existing long-term relationships with suppliers while availing the benefits of more competitive suppliers. In fact, more than half of the CEOs said that they had been dealing with some suppliers for over 10 years. Says Ravi Kant, Executive Director (Commercial), Tata Engineering: "E-sourcing impacts not just procurement and brings down costs, but also forces transparency and requites relationships. It becomes a way of life where every constituent of the organisation adopts a disciplined and transparent process of buying."

Accepting Global Sourcing

The most common cost-reduction exercise is still limited to some hard-nosed bargaining with existing suppliers. In fact, it's here that the senior management jointly with the purchase/material departments, who in more than 80 per cent cases are responsible for supplier relationships, need to be more proactive and innovative. Sometimes it just may be a question of thinking out of the box and finding innovative ideas. Says O.P. Lohia, MD, Indo Rama Synthetics, which adopted e-sourcing a year-and-a-half ago: "Initially we felt that the existing systems could not be bettered. But now, we find it more efficient, transparent, and definitely much more competitive with a wider choice of suppliers."

Global sourcing is an even bigger challenge. Not only is the supplier untested, but culture and language are also very different. But once again, the issue of quality seems paramount, with 55 per cent of the polled CEOs feeling that consistent quality is hard to come by. Also, companies only see limited savings of 5-10 per cent in global sourcing. Explains Lohia of Indo Rama: "At the moment, tariffs and duties are far too high. Only when the highest duty comes down from 30 per cent to 10 per cent, will it really take off." Given a choice, most buyers would like to source from China, followed by South East Asia.

However, the ones that remain unconvinced about global sourcing are not likely to change their mind in the near future. A good 57 per cent of the companies that had no global sourcing initiatives did not plan to launch any in the next two years. What might help things along is if suppliers were made to realise how beneficial e-sourcing could be for them. Munjal advocates more aggressive selling of the concept to vendors.

But quality raises its head once again, with 72 per cent of the CEOs feeling that a lack of quality suppliers was the biggest hurdle in growing the vendor universe. Otherwise, CEOs all seem convinced of the financial savings e-sourcing can bring in. The other concern most CEOs have is in implementing the steps needed to realise the savings potential. A fifth, however, feel that 70-90 per cent of the steps can be implemented.

The survey also reveals what the purchase managers have long known and endured. Few CEOs spend any time on purchase issues. In fact, in the BT-Freemarkets.com sample, a bare 12 per cent of the CEOs spend more than 20 per cent of their time strategising procurement. Here's one investment that will go a long way in lowering costs.