# Problem Solving Series II: Formulate the Problem

This is the second post in a series of posts designed to introduce you to problem solving strategies that you can use to attack your sourcing and supply chain problems. Last Sunday we discussed eleven strategies you could use to help you understand the problem. Today we are going to discuss a generic methodology for attacking problem formulation.

The easiest way to formulate a problem is to simplify the task. There are three basic strategies you can use to accomplish this.

( 1 ) Simplify the Problem

If the problem is too challenging, simplify the problem. In spend reduction, don’t look at the category but look at each commodity. Don’t look at the commodity as a whole, but as a collection of cost components. Look for the key elements, visualize them, and redefine the problem as a simpler problem on those key elements.

( 2 ) Solve One Part at a Time

If you need to rationalize your supply base, instead of trying to rationalize your supply chain as a whole, just focus on rationalizing it for a key category. Then repeat the process. Instead of trying to define the optimum transportation route from Mumbai, India to Atlanta, Georgia, redefine the problem as trying to find the optimal land and sea route and the optimal air route, and take the best option. Then, instead of trying to find the optimal land and sea route, find the best routes from Mumbai to the nearest ports, the available sea routes from those ports, and the land routes from the available receiving ports to Atlanta. The best route will then be a combination of one route in each set. If one option in each set is clearly the best, and they match up, you have your route. If not, simply load this small amount of data into a network optimizer and you will quickly have your answer.

( 3 ) Redefine the Problem

Instead of trying to determine the minimum number of suppliers you can use to supply a given product to your different receiving centers with seven days notice, just focus on finding a fixed size sub set of suppliers from your current supply base that cover most of the receiving points. Chances are you can eyeball this. Then, for each receiving center not covered, choose the supplier that covers the most remaining receiving points. Continue until all your receiving centers are covered. If your starting set was good and most of your suppliers can cover a significant number of your receiving points, this technique could quickly replace dozens or hundreds of suppliers with a handful. You’ve accomplished significant consolidation with very little effort. If you still have too many suppliers, work with the best remaining suppliers to cover more centers more flexibly. Instead of trying to optimize a network with potentially hundreds or thousands of nodes, you are optimizing core supplier capabilities, which is not only an innovative solution, but a better solution in the long run.

Next Sunday we will discuss some strategies to aid with the third step of the Operations Research Modeling Process: Model Construction.

# Innovation Week I Review

This week we discussed five sources of sourcing innovation:

• Going Green, which can help you reduce costs, increase market share, help the environment, and keep the tree-huggers happy – all at once!,
• Build-to-Order, which allows you to increase customization, avoid single-sourcing scenarios, and operate using demand-driven best practices,
• Purchase-Order Free Supply Chains which allows you to decrease processing time and divert resources to more strategic activities, reduce inventory, and avoid stock outs,
• Procurement Lead Time Optimization to take your Total Value Management sourcing activities to the next level, and
• Outsourced Innovation that can help you jumpstart your innovation endeavors, manage the process, and even solve challenges that stump your best people.

As time goes on, we will discuss many more. (And fortunately for me, there are many more … otherwise “Sourcing Innovation” would be a very short lived blog!) David and I are planning multiple three-part series on Purchasing Innovation on e- Sourcing Forum as part of the summer series, so be sure to keep a watchful eye on ESF this summer. I’d also like to point out this week’s article on SupplyManagement.com noting that the message of this year’s CIPS Premier conference was “Innovate or fail“. It quotes Ian Pearson, a futurologist at BT, who indicated in his keynote that “The five-year plan is dead. You need agility because your business will not be the same in five years’ time. If you stay doing what you’re doing for five minutes you go out of business, so you have to adapt and innovate continuously.”

Like my colleagues, I love good stories of innovation from the trenches. If you have an innovation story you’d like to share, feel free to post a comment at any time, or, better yet, e-mail me (thedoctorsourcinginnovationcom). Good stories get front and center posts!

Tomorrow we will continue our Problem Solving Series and next week we will discuss some innovative best practices to jump-start your sourcing organization.

# Outsourced Innovation

Back in 2001, pharmaceutical Eli-Lilly funded a new endeavor by the name of InnoCentive as a way to connect with brainpower outside the company – specifically, people who could develop drugs and speed them to market – and threw open the doors to other firms eager to access the network of ad-hoc experts. These companies post their most ornery (scientific) problems on InnoCentive’s Web site and anyone interested on the network can take a shot at cracking them, for a prize that ranges from \$10,000 to \$100,000 per solution. To date, more then 30% of the problems on the site have been cracked, which is 30% more problems than would have been solved using a traditional in-house approach (since these companies typically post the problems only after their internal R&D team has taken a shot and failed).

Furthermore, a study by Karim Lakhani, a lecturer in technology and innovation at MIT, and his coauthors that surveyed 166 problems on Innocentive, found that “the strength of a network like InnoCentive’s is exactly the diversity of intellectual background” and that “the odds of a solver’s success increased in fields in which they had no formal expertise”. Why? He believes it is due to a central tenet of network theory, “the strength of weak ties”. The most efficient networks are those that link to the broadest range of information, knowledge, and experience.

Outsourced Innovation works – companies like Colgate-Palmolive, Boeing, DuPont, and P&G are using it to reduce costs and propel innovation forward. For example, Colgate-Palmolive paid an InnoCentive member who found a solution to a fluoride powder injection problem a mere \$25,000, a fraction of what it could have cost Colgate-Palmolive to dedicate their R&D team to the problem until it was solved internally.

Furthermore, companies like Big Idea Group that bring together creative inventors with new ideas and innovation-driven companies looking to license new discoveries are also doing well. Big Idea Group has brought over 50 products to market.

Finally, some companies are bringing in systems built by third party experts to manage their innovation process and using these same companies to guide them. For example, companies such as Honeywell International, Reliant Energy, and Stryker use products and services from BrightIdea.com to jumpstart and manage their innovation processes. And it works. Honeywell reported a 300% return on investment within sixty days.

In other words, just don’t look inside your four walls for sources of innovation, look outside as well. You never know what you might find!

# Procurement Lead Time Optimization

As I pointed out in my companion post on e-Sourcing Forum today, Lead Time Optimization, or applied Total Value Management Decision Optimization, is another innovative capability that some leading sourcing organizations are latching on to.

When you translate Lead Time Optimization, which Zara has used to design a flexible supply chain that allows the company to take a garment from design through the manufacturing process to store shelves in 10 days, to Procurement you focus not on maximizing profit but on minimizing costs against possible demand fluctuations.

In this scenario, you do not optimize your awards on a forecasted demand value, but a forecasted demand range and the solution you select is not the lowest cost solution at any specific demand point but the solution which maintains a lower cost over a demand range. The solution you select will, on-average, be lower than other solutions and yield a solution that is expected to be near-optimal regardless of what happens.

This requires a tool that allows you to capture not only all of your business constraints and supply chain flexibility requirements, but the costs associated with new suppliers, supply base consolidation, and mixed transport options. This in turn requires the ability to define global costs, cost modifiers that specify transportation mixes, and what if scenarios to take different possibilities into account. Outside of SupplyChainge’s offerings, these tools are rare, but I know for a fact that Iasta is pursuing a solution that will incorporate many of these best practices. (See David’s original post on LTO.) I personally can not wait as there are too few players in the decision optimization market place and I personally think that many needs are currently going unmet because of it.

# Purchase-Order Free Supply Chains

No, I haven’t flipped my gourd (or at least I don’t think so, but they say you’ll never know when you finally do). Consider how much time it takes to create and process a purchase order and then multiply this by the number of purchase orders you process in a year. Chances are that if you are a mid-size enterprise or larger, this is a pretty big number, tying up the equivalent of multiple man years that could be better spent on more strategic, less tactical activities. And, as demonstrated in “The Supply Chain Innovator’s Technology Footprint: A Benchmark Report on What Companies Want in Their Next-Generation Supply Chain Solution” by Aberdeen, such a strategy can reduce buyer direct material inventory by 30% while cutting supplier component inventory by 25%.

This can be accomplished by close collaboration with strategic suppliers and contract manufacturers which includes forecast sharing and demand-supply synchronization. In these situations, suppliers manage replenishment according to minimum/maximum targets, as determined by forecasts, contracts, and service level agreements.

Although a significant amount of work may be required up front to identify, implement, and synch the systems and build the proper relationships, this will ultimately be a drop in a bucket compared to how much work you will have had to do if you continue to be driven by paper-based purchase orders in a wired economy.