In today’s hyper-digital world, companies are shifting to e-sourcing with e sourcing tools designed for digital transformation in tactical and strategic sourcing. E sourcing software provides efficiency and other benefits, including better vendor selection, collaboration, and visibility into this element of e-procurement and business spending.
What is e Sourcing?
E-sourcing is the use of specialized and automated electronic, web-based software tools to digitally accomplish a company’s strategic sourcing objectives. Electronic sourcing activities include determining and communicating purchase requirements, bidding, negotiating, vendor selection, and contract management for procurement activities.
Sourcing is a subset of procurement process activities relating to vendor selection, whereas procurement consists of the entire purchase requisition-to-order process and post-purchase vendor evaluation by the Procurement department in cooperation with other stakeholders. E-sourcing uses eSourcing software tools to perform workflow tasks and collaborate with the internal team and potential suppliers.
How does e Sourcing work?
e Sourcing works by using digital documents distributed online and comparing vendor capabilities, business risks, and electronic bids to create and electronically award contracts through e Sourcing software.
The 5 e-sourcing workflow stages are:
- Request for information
- Tender invitation
- Evaluate tender
- eAuction bidding
- Award contract
The request for information (RFI) is used by a business procuring goods or services to gather non-pricing information from potential vendors. In procurement, a tender is an invitation for potential vendors to participate in the sourcing process and compete for a contract award for a project or large purchase solicitation. Some smaller purchases only have purchase orders, which turn into contracts after being accepted by both parties.
Benefits of electronic sourcing
The benefits of electronic sourcing (e sourcing) are:
- Increased efficiency and effectiveness from built-in best practices, streamlined workflows, and paperless automation
- Better e-document distribution and collection, communication, collaboration, status notifications, and visibility in a unified online system with a vendor portal
- Cost reductions and better performance likelihood from reaching more eligible vendor candidates and comparing e-bids or quotes and vendor risk profiles
- Complete and unbiased vendor scoring, vendor risk management, and evaluation process
- Digital contracts and electronic PO data are available in a centralized document repository and can be attached to transactions
- Global supplier management
- Spend management control and analysis
- Ensuring that global vendors comply with regulations
Electronic sourcing and procurement systems provide accurate and efficient AI data entry where possible and standardized templates for customization. They enable your company to keep track of vendors and ensure best practices in global supplier management.
Note that although eSourcing systems may only focus on the sourcing workflow in procurement, many eSourcing tools cover other procurement process aspects, including post-purchase vendor evaluation. A post-purchase vendor evaluation system can continuously monitor vendor performance and notify suppliers of required improvements or pending contract terminations. It will also notify the company of these proposed actions and the need to begin e-sourcing an alternate vendor.
eSourcing tools often include an online vendor portal for centralized sourcing and contract documents, supplier communication, status notifications, and collaboration between the company and its current or future new vendors. Many eSourcing solutions use AI algorithms for sourcing and assessing regulatory compliance by vendors.
E-sourcing tools fall within the category of source-to-pay (S2P) software, but outside procure-to-pay (P2P) systems that start after the sourcing process is completed.
Types of e Sourcing tools included in online sourcing software for procurement are:
- Direct sourcing vs. indirect sourcing
- Contract generation and signing tools
The broad category of eRFX refers to electronic questionnaires with product or service specifications requesting information, capabilities, and pricing from competing vendors. eRFX are requests prepared by companies in the procurement sourcing process to be completed and submitted by competing vendors.
The eRFX purpose is to gather information, quotes, or proposals from prospective vendor candidates. RF stands for request for. The X is substituted with the beginning letter of the type of request to title a customized but standardized form for a contract award requiring potential vendors’ responses.
- RFI is a Request for Information
- RFQ is a Request for Quote
- RFP is a Request for Proposal
eSourcing software tools include templates for the procurement department to digitally prepare customized RFIs, RFQs, and RFPs, the ability to distribute these eRFX forms, and the capability for vendors to submit their completed RFIs, RFQs, and RFPs through the system, enabling visibility for all stakeholders. Some eSourcing tools include automated vendor scoring and evaluation. See Nanonet’s blog article for the differences in RFQ vs. RFP.
Some companies use their eSourcing solution to invite potential suppliers that passed the initial qualifications screening to bid for the contract award for which a vendor is being selected.
Competitive bidding can be used to find the low-cost bidder, but most informed procurement departments will also consider quality, financial strength, delivery performance, and sometimes sustainability goals in choosing a supplier.
Direct sourcing vs. indirect sourcing
Direct sourcing vs. indirect sourcing is the difference between selecting vendors and buying items for use in production for the eventual sale of goods to customers (direct sourcing) vs. selecting suppliers for other goods and services purchased for general use in the business (indirect sourcing).
eSourcing tools are used for both direct sourcing and indirect sourcing.
Direct sourcing is for the purchase of raw material inventory parts and manufacturing supplies. Direct sourcing includes issuing contracts and blanket purchase orders with multiple delivery dates that count towards receiving volume discounts.
Direct sourcing items have a bigger payoff in procurement. Excellent pricing, volume discounts, and prompt payment discounts can create much higher gross margins on sales from lower cost of goods sold and better bottom-line profitability. With eSourcing tools that improve the sourcing process and implement your company’s procurement strategy, your company will also achieve desirable cost savings, requiring lower cash outflows and financing needs.
Indirect sourcing may include tail spend/maverick spend items that are low in cost and bought in low volumes. The eSourcing software may include online software systems with hundreds of pre-approved vendors and controlled employee limits. Maverick spend items like office supplies often don’t require POs because you can’t justify the cost/benefit of preparing a purchase requisition and purchase order through the procurement department. However, companies can create e-contracts in advance with their preferred vendors through the system.
Contract generation and signing tools
E-sourcing tools can be used to review and generate signed contracts between a business and its vendors. These tools may either be built into the system or integrated as third-party software. The e-contract is digitally stored and accessed by stakeholders.
For transformational e-Sourcing, your business needs the eSourcing solution that best fits its sourcing requirements and budget. The optimal e Sourcing software will help your team select high-quality, competitive vendors and build supplier relationships through better collaboration and communication.
After your business has sourced its procurement, consider using Nanonets Purchase Order OCR API for accurate AI and ML-driven PO data extraction and AP automation, providing a seamless procure-to-pay cycle.