TECHNOLOGY

Problem

Existing eRFP systems are based on a simple item or catalog architectures. Simply put, an item is described and a price quote is requested. If there are more items, more rows are appended.

Such systems can be used in two ways: Item Bidding, where every single purchase is bid out as it happens or Catalog Bidding, where the top line items (80/20 rule) of a large catalog of potential future purchases are bid out.

There are many theoretical and practical problems with the pricing approach that this catalog architecture forces upon users. Bidding events that contain multiple items from an overlapping set of suppliers suffer from sub-optimality as combinatorial auctions beyond a few hundred items are numerically impossible.

Episodic bidding of purchases under-leverages the multi-period nature of the buyer-supplier relationship and comes with a high administrative effort that usually leads to low intensity efforts and unsophisticated analysis.

80/20 approaches where the top items are bid out and the tail is assumed to be "ok" are very common but even more problematic. The loss of potential savings from 80/20 sourcing is much bigger than people think. The top items have been sourced multiple times, while the tail is often totally unpriced and vendors take advantage of that. Future specifications change further erodes the savings in the top items, creating an even larger unpriced tail.

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Solutions

The Mitchell Madison Group has spent almost three decades solving these issues for clients by building custom pricing models for specific sourcing categories we encountered. We routinely achieved twice the savings of prior efforts because of the aforementioned dynamic and our solutions outlasted prior contracts because they had pricing flexibility and incentive alignment built-in.

Choosing the appropriate pricing methodology is the key to effective strategic sourcing, as the correct pricing approach maximizes competition, extracts microeconomic information and aligns incentives between suppliers and buyers to innovate. We believe that there are five common generic pricing approaches with two subcategories each that can handle any strategic sourcing categories effectively. This taxonomy is organized in order of disaggregation, i.e. from "Item" (cost for a single specified item) all the way down to "Cost Model" (the recipe for pricing an item).

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Tellingly, existing eRFP platforms are all architected at the top level (Item) so they cannot perform that math required for any of the pricing approaches below, i.e. the more disaggregated methods.

Instead, our MyRFP platform is architected from the lowest level up, i.e. the cost model components that when combined algorithmically compute the bid for a specific item. The MyRFP architecture can handle arbitrarily granular pricing elements and arbitrarily complex algorithms that link bids to practically unlimited baselines in item format to produce instant strategic sourcing decision support analysis.

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