by Andrew Durlak, Co-Founder & VP of Operations at Scout RFP
One of the best ways for your business to increase savings is to foster competition. If this doesn’t sound right, think again: When procurement is taking the lead, creating constructive competition within the vendor space is vital for businesses that want to increase savings and, in turn, positively increase their bottom line.
After years of quietly helping businesses increase their savings, procurement is now taking the spotlight as a strategic and crucial business operation. The growing importance of procurement is the topic of a recent research report from Harvard Business Review (HBR) in partnership with Scout RFP, which states that “sourcing and procurement leaders point out that any cost savings realized through sourcing improvement drop directly to bottom line, which in turn can have a substantial impact on profitability.” In order to take full advantage of sourcing possibilities, businesses must also develop more strategic and valuable vendor relationships.
This leads to the big question: How does a business create constructive competition within the vendor base in order to build up sourcing decision strategies? Begin with these two tried and true methods:
Method #1: Be the judge and stay objective during the selection process.
When fostering constructive competition that is beneficial to your company, neutrality is essential. It is common for a department or individual to develop stronger relationships with previously used vendors, therefore making it difficult to stay objective when in the process of choosing a supplier for the next project. Utilizing the support of a strategic sourcing platform is extremely helpful when deciding between renewing a contract or searching for a new vendor. It will assist you in viewing and comparing your vendor options in a neutral setting so you can select the right one for your company.
As Uber’s Head of Global Strategic Sourcing Neil Aronson noted in the HBR research paper, “Sourcing and procurement can offer a fresh and different perspective — asking hard questions and driving a competitive environment.” These hard questions can be challenging for stakeholders to ask, especially if they have an existing relationship with a vendor. Unsurprisingly, many stakeholders avoid asking them all together in an attempt to dodge uncomfortable situations.
Method #2: Ask vendors to vie for your business.
Reverse auctions are sourcing events that run for a fixed amount of time and give multiple vendors the opportunity to “outbid” each other by lowering their price point on a product or service you need. These auctions are a great way to develop constructive competition within the vendor space and can help businesses reduce purchasing costs, while still getting high quality materials or services — ensuring that all their needs are met.
According to Gartner senior procurement analyst Deborah Wilson, a business has the opportunity to save 10 to 20 percent when using reverse auctions as part of their sourcing strategy. These savings go straight to the bottom line, saving money for the business as a whole. Findings from a survey of 100 sourcing, procurement, and finance professionals throughout the world showed that nearly 70 percent of those professionals believe businesses benefit from reverse auctions, and more than 45 percent said that even the supplier benefits from auctions.
A little competition can be good — especially if it is beneficial to both your company and your suppliers. Using a strategic sourcing platform will provide your company with valuable insights that give you the ability to drive efficiencies and develop valid procurement processes. The platform can also make your job of choosing the best vendor easier by helping to create constructive competition between suppliers that are making a play for your business. It’s time to get serious, stay neutral, and make those suppliers vie for your business. By doing so, you will see many overarching benefits as you create an environment of constructive vendor competition — including successful sourcing, positive supplier relationships, and bottom-line savings.
Andrew Durlak is Co-Founder & VP of Operations at Scout RFP. Andrew has a rich background in the world of finance from his private equity and investment banking days. He previously worked at Prospect Partners doing due diligence and portfolio management. Prior to this, he executed M&A transactions at Harris Williams & Co.
