Problem Solving Series I: Understand the Problem

Last Sunday we discussed the Operations Research Modeling Process because it described a basic problem solving process that you could apply to sourcing and supply chain problems.  Today we are going to start a series of posts that are going to discuss some problem solving strategies that will help you in the application of this process.  This series will run on Sundays for at least the next five weeks, so keep checking back for more tips, tricks, and insights that you can use.

The first step of the Operations Research Modeling Process is “Recognize the Problem”.  Today we are going to discuss eight problem solving strategies that you can use to aid in this process and clarify them with examples from the sourcing space.

( 1 ) Clarify the Problem

It is often easier to solve specific problems then vague generalizations.  If you need to reduce spend on a high-spend category, then determine precisely what commodities or materials make up that category and reformulate the problem as reducing spend on each of the commodities or materials individually.  If you need to help engineering identify the appropriate widget to source for a new prototype, determine what properties are required vs. what properties are desired.

( 2 ) Identify Key Elements

Some aspects of a problem are more relevant than others.  Take our spend reduction problem.  Reducing spend on a commodity can be re-stated as reducing spend on the individual spend components.  Identifying which components are the highest spend, especially with respect to a should-cost model or market index, will help you greatly.

( 3 ) Visualize the Relevant Process

Sometimes you know all the factors that contribute to a problem, and sometimes you do not.  Our spend problem is also relevant here.  Maybe global transportation costs from your suppliers in one of your low cost countries are higher then you think they should be.  However, just looking at costs per unit or quoted freight rates are not going to give you the whole picture.  However, if you visualize the process, which starts with a crate being packed and put on a palette, continues with the palette being loaded into a truck, transported to a warehouse, sitting there for three days, being loaded onto a boat, crossing the ocean, being unloaded to a warehouse where it sits for four days, being loaded onto another truck, and finally delivered to your factory, you will see that there are significant excess inventory costs on both sides of the ocean.  If you could synchronize shipments on both sides of the water, you could eliminate significant built in inventory holding costs even if the land and sea freight rates are not negotiable.

( 4 ) Draw a Diagram

Visualizing a problem can increase your understanding, but if the problem is complex, it might be a lot easier to draw a diagram to help you keep track of the different aspects of the problem you have visualized.

Lets say that you need to consolidate your supply base because you are using over a dozen suppliers with over three dozen collective shipping locations for a commodity and you have determined you should be able to mitigate single-supply risks with only three or four suppliers and you need to choose who those suppliers will be.  Lets also say that you want to retain a flexible demand-driven supply chain and make sure that every receiving location can be supplied by at least one supplier in seven days or less.  Finally, you need to reduce costs by at least 10%.  We now have a problem that is beyond simply considering Total Cost of Ownership (TCO), which is the current state of the art supported by most of the advanced decision optimization systems on the market today, and well into Total Value Management (TVM), which is, generally speaking, not (directly) supported when your problem includes more then one of the standard well-defined optimization problem space boundaries, and this one includes traditional sourcing (TCO/TVM-based determination), inventory and logistics, and network design.  In order to use even your state of the art TVM-based decision optimization system, you will first have to determine which groups of suppliers can satisfy your time-based shipment requirements as well as which business rules dictate which suppliers can and cannot be used in conjunction.  Drawing a diagram of all the potential shipping and receiving destinations will help you determine which supplier shipping centers can supply which of your receiving centers, and that information will be crucial to building a valid model.

( 5 ) Consider a Specific Example

Sometimes problems are just too abstract for us to solve easily.  For example, let’s say we want to consolidate our supply base but want to know the minimum number of suppliers it will take to meet our supply chain flexibility requirements.  If we have access to the right solvers, a solver can determine this for us given a mathematical model.  However, we need to be able to appropriately specify the model and we need a check for its validity.  A specific example will help us here.  Choose four suppliers and determine whether or not each receiving center can be supplied by those four suppliers.  If it can, we know that the optimal answer is at most four, so if the solver comes back with a higher number, we did not properly formulate the model, and probably need to clarify our understanding.  If it cannot, we know that those four suppliers cannot constitute a solution and any solution with four or less suppliers must include a different set of suppliers.  Furthermore, by working out all the relationships, we will have specified the majority of constraints for that problem instance and if we feed just that sub model to the optimizer, then we have a good check on the accuracy of that model.

( 6 ) Consider Extreme Cases

Although we again consider specific examples here, we are testing what happens at the boundaries of our problem space.  For example, let’s say we are trying to determine whether or not the fuel surcharges that were charged by our current carrier over the last year are reasonable and fair.  To do this, we would build a should cost model for each route based upon an the lowest fuel rate and the highest fuel rate for the year (the extreme cases).  If most of the average charges for each route fell into our should cost ranges, then the rates were probably fair.  If most fell outside of the range, the rates were probably not fair and we should either change carriers or build in maximum fuel surcharges based upon a standard market index.

( 7 ) Consider Levels

Sometimes solving a problem requires preventing the problem.  This requires determining what led to the problem and fixing that process.  For example, let’s assume a preferred supplier is adamant that rates cannot be reduced because the profit margin is too slim even though direct competitors are quoting 10% less.  If the direct competitors are located in the same geographic market, chances are that either the supplier’s overheads are too high, the amounts they are paying for the raw materials are too high, or their processes are inefficient.  If you examine each in turn, you might find an obvious weak point that you can help them fix and allow you to continue your relationship at a significantly lower cost.  For example, let’s say their material costs are too high.  If this is a product you buy from multiple suppliers to mitigate risk, then you could save each of your suppliers money, and lower your costs, by sourcing the raw materials for all of them at a higher volume and associated spend leverage.

( 8 ) Change Perspective

Let’s say you are in a tough negotiation that isn’t going way.  Consider the viewpoint of the other party.  Why won’t she go lower?  Why can’t she?  If it is because their production costs are simply to high to support lower rates, then maybe working with them to find ways to produce the product at a lower cost is the answer.

Now, I know all of these are obvious, but in the midst of a high-pressure dilemma, especially one that must be solved quickly, it is easy to forget a couple of these strategies, and you never know which approach is going to work in advance.  Reviewing them regularly and attempting to apply them whenever a problem comes up will not only keep them fresh in your mind, but increase your problem solving aptitude – and that’s what strategic sourcing is fundamentally about.  When we are identifying, attacking, and removing any unnecessary costs and inefficiencies in the supply chain, we are identifying, attacking, and solving problems.

Next week we will discuss some strategies to aid with the second step of the Operations Research Modeling Process: Problem Formulation.