For decades, technological innovations have resulted in numerous benefits for business. More often than not, the scope of these benefits has been incremental. But, occasionally, technology opens a new window of possibilities that is so compelling it forces a major paradigm shift in how companies do business with one another. This is exactly what is happening with direct materials procurement right now, and optimization technology is the driving force for e-sourcing cost savings and better decision making.

First, it may help to explain e-sourcing. Strategic sourcing is the process that enables company procurement managers to select the most-effective suppliers to use for indirect and direct materials procurement while optimally allocating business among the supply base. The decision is not always based on best price but also involves delivery time, quality, deadlines, volume discounts, quota restraints, location and other factors. e-Sourcing is the automation of that complex process using sourcing and collaboration software rather than the traditional means of phone, fax, e-mail and letter.

Direct materials procurement managers are faced with daily purchasing dilemmas, but one of the overriding issues plaguing them is how to obtain the materials they need to deliver to their customers while keeping costs at a minimum. Aberdeen Group, a Boston-based industry analyst organization, estimates that most companies spend 55 cents in purchased products for every dollar they earn in revenue. This most likely can be attributed to a process of relying on faxes, phone calls and regular mail to negotiate with suppliers, backed by a matrix of spreadsheets to analyze which supplier best fits your requirements. The process of strategically evaluating sourcing options inevitably takes as long as three to four months, which quickly translates into a significant negative impact on the bottom line.

With the dawn of the Internet age, technology vendors saw an opportunity to solve this problem by bringing the negotiation process online. Public exchanges that presented companies to literally hundreds of suppliers in an easy-to-use forum seemed full of promise. However, as these exchanges began to go broke, the operators were left scratching their heads.

But the purchasing managers knew exactly why the exchanges hadn't gotten off the ground. The majority of the public exchange applications were only able to base the decision of whether to award a contract on price. And price is rarely the only factor that needs to be considered. As a result, many supply chain and purchasing managers continued to rely on paper-based negotiating processes because they could take into consideration not only price but factors such as quality, delivery, brand, volume discounts, specifications and previous relationships with suppliers. These are critical considerations that a public exchange just couldn't handle at the time.