Optimization Based e-Sourcing

Sourcing or procurement is the process by which a company obtains goods and services for its manufacturing and operations. The materials procured could range from raw materials, components, and sub-assemblies, to office supplies and furniture. The services procured can be as vital as design and R&D to daily operations like IT and logistics. e-Sourcing or eprocurement refers to online procurement of the above direct and indirect inputs by an industrial buyer. The other predominantly used terms for this process are procurement auctions, reverse auctions, and e-auctions. We use the above terms in this chapter with the following definition of Minahan (2001): the process of utilising Web-based technologies to support the identification, evaluation, negotiation, and configuration of optimal groupings of trading partners into a supply chain network, which can then respond to changing market demands with greater efficiency. e-Sourcing of production and non-production goods and services has been in practice since early 1990s, especially among the Fortune 2000 companies. It was widely accepted then that web based sourcing can provide following advantages (Minahan 2001): Identify and negotiate with a broad range of qualified suppliers; Reduce process costs for sourcing engagements; Shorten sourcing cycles by 25% to 30%; Reduce time-to-market cycles by 10% to 15%; Negotiate an average of 5% to 20% unit price reductions; Extend strategic sourcing to a wider range of products and services; and Enhance collaboration and knowledge sharing. The market analysts’ predictions about the worth of online business transactions were in trillions of USD by 2003/4. However, the e-bust that happened in 2000, followed by the market studies of the real world implementations showed that these figures are indeed exaggerated and overstated, if not false (Emiliani & Stec, 2004; 2005). Irrespective of the figures projected and achieved, the use of e-sourcing is growing with steady incremental gains rather than abrupt exponential profits. Ariba1, a leading provider of online spend management solutions, has enabled sourcing of USD 250 Billion worth of goods and services till date, using its Ariba Sourcing Solution. The total annual savings generated is over USD 15 Billion (Ariba, 2007).