As organizations and their leaders prepare for the next normal, CPOs at industrial companies around the world face a strategic imperative to cut costs. However, challenges including fragmentation, reduced transparency, and limited cross-functional collaboration reduce savings potential—particularly for high-volume, low-complexity parts. The continuation of travel restrictions related to the COVID-19 pandemic are further limiting the ability of procurement departments to optimize spend.
Furthermore, constraints such as stringent qualification requirements, combined with limited structuring and codification of current approaches, mean companies often rely on traditional single-source suppliers close to their production facilities. In addition, a long tail of simple, commoditized, and highly diverse spend categories (such as fasteners, small machined parts, and electronic components) are often overlooked as a source of efficiency initiatives, despite offering significant savings potential. This is due to factors including a profusion of parts numbers, strict technical requirements, and consolidated supply bases often comprising only a few qualified players.
Digital supplier days (DSDs) can address many of these challenges, compressing weeks—or even months—of research and negotiations into a single, multiday event (exhibit). Accelerated, analytics-based, and negotiated remotely, DSDs are designed to tackle fragmented categories and long-tail spend. By creating a strong sense of healthy competition among suppliers, with real-time visibility of negotiation outcomes, DSDs can help industrial players build stronger, more flexible supply chains, reducing costs by more than 20 percent and lead times by 15 percent—all with a fast negotiation process and almost zero logistics required for assembling suppliers.
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DSDs leverage a tailor-made analytics tool, supporting real-time negotiations through dynamic target price setting, request for quotation (RFQ) assessment across multiple dimensions (including cost, lead time and quality), and scenario optimization. Building on the recent proliferation and broader acceptance of remote-collaboration platforms, this tool allows for multivariable scenario optimization in a flexible, user-friendly way. This enables users to extract more value from bids, factoring in not only the assessment of best price, but also quality and lead-time effects.
In addition, the tool helps companies identify the best procurement strategy for each commodity through market-share allocation simulations that control for total cost of ownership and supply-chain risk, avoiding single-source suppliers in key commodities. Finally, a network of experts in procurement and negotiation facilitates the tool’s deployment and can support the refinement of negotiation tactics.
Companies across industries have applied the DSD methodology to bring more efficiency to their procurement activities, achieving shorter lead times and lower costs. Moreover, DSDs have helped companies cut buyers’ workloads, optimize supply bases, improve resilience, and develop stronger supplier relationships.
For example, one aerospace and defense player that negotiated 1,400 SKUs at a DSD achieved an aggregate cost savings of 20 percent, while also consolidating spend with a select group of more reliable suppliers and virtually eliminating single-source risk. Similarly, an oil-and-gas machinery company that negotiated 3,100 SKUs over a four-week period cut costs and lead times by 15 percent. Several other companies in advanced industries have used DSDs to redesign their cost structures and optimize their supplier bases, leading to more transparent relationships and more secure supplier networks.
The DSD process: How it works
DSDs bring together large numbers of suppliers in one digital venue. The events are centered around multiple rounds of parallel negotiation, with real-time price-target setting and contract-scenario optimization, leading to winning offers being selected. They are supported by video conferencing and digital negotiation tools, which provide participants with transparency and real-time insights, fostering competition. And because great execution is usually predicated on great preparation, five additional steps, typically conducted over about seven weeks, have proven to be especially important to these events’ success.
Define your baseline
A precondition of effective live negotiation is a clearly defined baseline, defined over the first one or two weeks. The baseline informs a range of procurement variables including item prioritization, price (and gap to should-cost), category strategy, and repeatability rates. The latter can be analyzed against complexity and impact, and adjusted for criticality and commonality. For commodities that currently are purchased according to suppliers’ specifications, a specification-standardization effort can be launched, thereby extending the addressable baseline.
Scout suppliers
One of the main advantages of a DSD is to provide opportunities to negotiate with as many prescreened suppliers as possible. Accordingly, by the end of week three, a thorough scanning of suppliers from different geographies and industries is needed to help identify potential new partners. Ahead of the event, supplier assessments are based on factors including product capabilities, quality assurance, certifications, financial health, and reliability—ensuring that suppliers will be able to deliver as agreed. In case of medium-complexity commodities, upfront technical alignment could be needed to ensure new suppliers provide pertinent quotations. This phase can also benefit from a technical-alignment acceleration event, or “technical marathon,” aimed at ensuring simultaneous technical alignment of old and new suppliers and increasing the sense of competition.
Screen RFQs
RFQ screening can be organized in two stages from the beginning of week three to the end of week six. The first stage is to issue RFQs on high-priority items to confirm supplier capability and competitiveness, and should be followed by a second wave of RFQs on the full set of items. They should be sent to both existing and new suppliers, with successful bidders invited to take part in the DSD event.
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Prepare DSD
Negotiation planning and logistics and IT setup can commence between weeks three and four, and continue up to the beginning of the event. This period can also be used to introduce the various digital tools to event participants and to agree on the event’s agenda.
Hold the DSD event
The DSD itself is conducted as a multiday event encompassing several rounds of multiple parallel negotiations, in private digital rooms. A digital platform allows for involvement of a large number of suppliers (both current and new) to participate remotely. Video conferencing enables one-to-one negotiation meetings as necessary. Despite physical remoteness, the live negotiation format and real-time supplier rankings create a positive, competitive atmosphere, and encourages suppliers to meet target prices.
The process typically allows for buyers and category managers to hold negotiations with suppliers over three to four days. As buyers work through the negotiation process, they can reference supplier quotations on a dedicated cloud platform, and use a negotiation tool to assess bids against target prices and other bidders’ offers. The tool can provide dynamic target setting and real-time contract scenarios (including optimization of share allocation). Supplier quotes can be ranked and assigned preliminary volumes, which are then confirmed by sourcing teams.
Negotiations are carried out with the support of a dedicated member of the engineering and quality teams, ensuring a cross-functional approach in tackling fact-based negotiations and fully addressing supplier concerns.
In the final negotiation round, teams can leverage bespoke, digital scenario planning based on buyers’ preset parameters—for example, in respect to lead times or prices. Once terms are agreed, participants monitor contract variables, including projected geographical splits and savings after negotiations. A visualization dashboard provides a bird’s-eye view of contracts, spend by commodity, bid, allocation, and SKU.
Once the auctions are completed, the format offers an opportunity for analysis and review, followed by the signing of framework agreements.
The experiences of large industrial companies has shown that digitally-enabled live negotiation formats can deliver significant cost and lead-time savings for the purchase of high-volume, low complexity parts, as well as help cement supplier relationships and boost supply chain resilience. Via specialized digital tools, companies are able to reduce risk in the process and optimize engagements based on real-time analytics. The result? Companies going from good to great, with a step-change in procurement negotiations, increased transparency, and value creation that goes straight to the bottom line.
