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Sourcing OptimisationThe next level inDigital ProcurementA Deloitte ‘Point of View’August 2020

Sourcing Optimisation The next level in digital procurement01

Sourcing Optimisation The next level in digital procurementThe next level in digitalprocurementMany procurement leaders havequestioned what procurement could looklike in an automated, digital future. Inoperational procurement we can alreadysee the initial effects and benefits. Butfew organisations have established anintegrated and strategic approach toleverage value from their procurementfunction and their supply base.After about two decades of development,the perception and delivery ofprocurement is still more tactical thanstrategic. Many procurement organisationscould not enhance their procurementfunction beyond a process-driven strategicsourcing capability and in-depth insightsand knowledge about categories remainedmostly a business domain.Sourcing Optimisation will enhance thedelicate relationship between businessand strategic sourcing functions and as aconsequence will become a key element inthe digital procurement journey.Marcus KutznerPartnerSourcing & Procurement LeadSwitzerlandMarc RajalDirectorSourcing & ProcurementCapability Leadmkutzner@deloitte.ch 41 58 279 9056marajal@deloitte.ch 41 58 279 7631Our point of view outlines key elementsand opportunities unlocked by thisimportant new technology, demonstratesapplicable use cases from across ourclients in the category deep dives,highlights pitfalls that need to be avoidedand explains how Sourcing Optimisationcan be a stepping stone for procurementto become more strategic.02

Sourcing Optimization The next level in digital procurementReaching the next level indigital procurementThe increased speed of digital disruptionand change already seen in procurementtoday will further intensify and forcecompanies to act more swiftly in thefuture. A high pressure on resourcesand increasing complexity in productsand processes will put further stress onorganisations.Technology can mitigate some of thesedevelopments by providing advancedanalytical capabilities and automatedsourcing processes. These componentsenable sourcing managers to make moreinformed decisions in real time andachieve improved financial outcomes.Overcoming the resistance to applyingnew technologies and to change generallyin many organisations will be a majorchallenge for procurement organisations oftoday and tomorrow.Organisations that fail to identifysuitable technologies or to manage theorganisational enablement will not prevailin the procurement world of tomorrow.While some organisations have startedtheir digital procurement journey, mostdon’t use the available resources to their fullpotential yet. eSourcing and auctions arestill not commonplace in most companies.All the while new cloud-based sourcing toolsare entering the market that drive addedvalue through advanced mathematicalmodelling and scenario building. Thesetools are the first step towards automatedsourcing and are commonly described as‘advanced Sourcing Optimisation’ tools.opportunities in complex direct and indirectspend categories especially.Through elevating the ways of working,tool-based sourcing enables organisationsto increase their efficiency and unlocknew ways of delivering savings. It allowsthem to conduct more sourcing events andto apply complex negotiation strategies,like game-theoretical negotiation design, aspart of large-scale sourcing programmes,resulting in more spend covered andhigher savings. Ultimately, SourcingOptimisation can help to increase thereturn on your procurement investment.They offer features that are primarilyrelevant to complex sourcing events withlarge numbers of line items, input factorsand/or suppliers. These traits can be foundin almost all commodities, but offer newEvolution of Digital SourcingTraditionalProcurement capabilitiesEmergingProcurement capabilitiesEarly adoptors / uyingManualeRFXOffline / E-MailMonitored Sourcing03Level 5Level 4Level 3Level 2Level 1Level 0PartialAutomationHigh AutomationOptimisationPrescriptiveSourcing botsSelf-learningautonomous botsAuctionsTool-based Sourcing Optimisationcombines eSourcing & auction benefitswith advanced mathematical modelingUnmonitored Sourcing

Sourcing Optimisation The next level in digital procurementDefinition:‘Advanced Sourcing Optimisation’ describes the calculation of optimal award allocations using scenario-based mathematicalmodelling under consideration of holistic award criteria and internal/external allocation constraints. Infinite combinationsof input factors (suppliers, restrictions, risk & performance scores, etc.) can be processed and incorporated in customisedaward scenarios to unlock substantial savings potentials. Sourcing Optimisation reflects changing constraints andproposal updates in real time, which enables instant event analysis and improved decision-making.From toExcel-based event analysisIntelligent data mining and analysisManual & error-prone processesAutomated processes with accurate dataDifficult to reflect changing contentLive updates of pricing sheets and proposalsBinary decision pathsIntelligent scenario modelingSequential decision-makingData-driven decision-makingSourcing Optimisation tools change the way sourcingmanagers work by automating non-value addedtasks and elevating their analytical capabilities.04

Sourcing Optimisation The next level in digital procurement“When it comes to analysingproposals, Excel sheets are notthe optimal solution, but theyare all I have today. Each changein scope and each new tenderround mean starting over.”Global Sourcing Manager, FMCG05

Sourcing Optimization The next level in digital procurementTechnology as an enabler foroptimised decision-makingDeloitte recognises three key elements that are responsible for driving benefits and success using Sourcing Optimisation tools. Theapproach to sourcing has to shift towards more upfront planning and anticipation of relevant information for the decision process orpotential content changes in order to create sourcing events that take full advantage of data analytics and modelling capabilities.Event design:Fully customisable events can be set upwith an infinite number of input fields. Thisenables buyers to account for a Total Costof Ownership (TCO) perspective, which canbe modelled in sophisticated cost formulas.All information relating to the event, fromRFI to supplier quality scores, discounts,bundles, alternative offers and handicaps,can be incorporated in the event andinform the decision-making process.Event analysis:AI-powered, instant data analysis and reporting allows for easycomparisons between offers across suppliers, scenarios and eventstages. As project scopes fluctuate and multiple tender rounds requireadaptations, advanced sourcing tools increase the speed to market,since updates can be published, collected and analysed in real time.This responsiveness represents a competitive advantage due to thereduced time to market.Additionally, incorporating holistic award criteria or constraints and thetransparent modelling of allocation splits across scenarios enables aninformed decision-making process.RFIinformationEvent management:As optimisation tools are highlysophisticated, users require sometraining and experience to unlock theirfull potential. Category-specific eventtemplates and externally managed servicescan drive adoption and create immediatevalue while organisations enable theirsourcing teams. The use especially ofvarious static and live feedback optionssupports advanced negotiation strategiesand tactics (e.g. parallel or onlinenegotiations) that result in improvedresults.HandicapsPriceAlternative offers(on specifications)Supplierquality scoresDiscountsand bundles06

Sourcing Optimization The next level in digital procurementApplying Sourcing OptimisationIndirect spend categories usually require high volumes of labour and/or large numbers of different components, whereas direct spendcategories often require detailed cost breakdowns or TCO analysis. In either case, intricate structures and matrices quickly make tenderscomplex and hard to manage, and Excel-based analysis cumbersome and error-prone.Besides the ability to structure and analyse information in a more usable format, advanced sourcing tools can support the creationof holistic databases that capture cross-country and cross-event information and enable advanced analytics, without the risk ofcompromised data files or insufficient access rights.We believe that Sourcing Optimisation can be applied and will deliver these benefits independent of commodities. The following deepdives will provide an overview of potential use cases to start the conversation.Overview of potential categories relevant for Sourcing t forResaleFacilitiesMgmt.UtilitiesSourcing/Category ManagerConstructionMarketingRawMaterialThe items highlighted in blue will be explored in the following deep dives07ITServices

Sourcing Optimization The next level in digital procurementRaw Materials & CAPEXDeep DiveRaw Materials and associated categories are usually driven by a high level of granularity and hence large numbers of input requirements.At the same time, many markets are open and competitive, which results in healthy competition through multiple suppliers. Thecombination of granular pricing requests and large numbers of suppliers makes Direct Materials a perfect area for Sourcing Optimisation.Raw materialsSourcing critical components of an endproduct requires thorough analysis of thefinal impact. Manual assessments are oftentime-consuming and inaccurate. SourcingOptimisation can provide real-timeanalysis across the full breakdown of inputmaterials, driving efficiency and impactthrough detailed feedback.MROMRO is usually defined by large numbers ofrequired products. Sourcing Optimisationcan drive speed and impact by comparingendless lists of spares, providing detailedfeedback on a line by line basis.Bill of MaterialComplex Bills of Material (BOM) can bereplicated in a single event as differentcomponents can be assigned to individualsupplier groups through visibilityrestrictions. This enables a true TCOanalysis and award optimisation.CAPEXCAPEX projects usually require complex bidsheets for multiple technologies or buildingcomponents. Granular information onassumptions and required input materialsmake them hard to analyse and compareholistically. Advanced analytics andscenario modelling can drive speed andfinancial benefits in this category.08

Sourcing Optimization The next level in digital procurementDeep DiveServicesIndirect portfolios need to address a wide variety of different services with their respective complexities. The cost breakdowns tend tohave combinations of labour cost and materials and can amass large numbers of line items, depending on the local or global nature ofthe commodity or the number of countries/sites covered in a tender. Excel-based analysis is cumbersome and error-prone, especially ifmultiple tender rounds need to be administered. Potential use cases in this context include:09Professional Services Rate CardsHourly rate cards across levels/titles andgeographic location are commonly neededfor management and IT consulting or legalservices.Outsourcing servicesComplex outsourcing tenders with a largenumber of variables, dependencies andoptions benefit from modelling capabilitiesand real-time updates to changingrequirements.FleetComplex fleet tenders within or acrossmarkets with large numbers of models,OEMs and/or service requirements canbenefit from scenario modelling anddifferent feedback options.Facility ManagementFM tenders need to cover a wide array ofdifferent services that combine labourintensive services with the complexity ofsite specific requirements in potentiallycross-site or cross-market tenders.Advanced analytics, feedback options andscenario modelling are highly relevant foroptimising tender results.