the doctor Goes Mental On Optimization Myths

In my last post, I went mental on three of the most dangerous myths out there with respect to e-Auctions. In this post, I’ll attack some of the more brain-dead myths that are out there with respect to optimization. For more great information on decision optimization, I recommend checking out the e-Sourcing Wiki paper (Strategic Sourcing Decision Optimization: The Inefficiency Eliminator) that was originally authored by the doctor, the doctor‘s joint podcast with Next Level Purchasing (Part I and Part II and Free Transcript with Editorial Notes brought to you by Sourcing Innovation and NLP), and the posts in the Decision Optimization category here on this blog.

Myth 1: I need a PhD to use optimization!
It used to be the case that you needed an advanced degree to use the overly complicated command-line tools that represented the first generation of commercially available optimization products, but that hasn’t been true for quite some time. Today, companies like Emptoris and Iasta offer very simple wizard-driven user-interfaces that can be driven by any business analyst or sourcing professional which are often easier to use then your ERP or BI tools!

It’s literally as simple as selecting the relevant auction or RFx data, defining your demands for each item at each distribution center, identifying invalid freight lanes, specifying supplier capacity restrictions, identifying any business rules (such as dual-supply, 70-30 split) and defining any discounts or “preferred award” valuations (if I buy from Quality Delivered, the joint marketing campaign will be worth $10K). Then you click “optimize” and the optimal award for your scenario is spit out. If you don’t like it, you can copy the scenario, add or remove some constraints, and see what your idea of an optimal award is costing you and make the smart decision.

Myth 2: I can’t afford optimization! It’s too expensive!
Having been involved in this industry for a while, I know that early solutions were very expensive – usually starting in the seven figure range for an average company. But that’s true for every new generation of technology, software or hardware, it’s costly at first, as companies need to recoup their massive R&D investments, but gets cheaper over time. Today, a mid-size company can get a true enterprise quality strategic sourcing decision optimization solution for its sourcing department starting in the quarter-million to half-million six-figure range – and this will include a (shared) C-Plex license and (shared) dedicated hardware resources if they use an on-demand model such as that offered by Iasta.

Myth 3: My problem’s too large / complex for optimization.
Again, the technology has come a long way in the last decade. Not only can massive problems (which couldn’t have been solved in months a decade ago) now be solved in a matter of hours, but the types and quantity of constraints available have greatly increased. If your model is truly humongous, just remember that both CombineNet and Algorhythm regularly solve problems that take millions of variables and hundreds of thousands of equations to specify. As for complexity, even the solution by the relative newcomer, Iasta (which has adopted a best-to-market strategy) supports the four basic categories of constraints required for true decision optimization (capacity, allocation, risk mitigation, and qualitative), flexible discounts that will allow you to implement just about any cost structure you can devise, and freight costs for a true total landed cost model (as you can also define adjustments to capture utilization costs).

Myth 4: We’re very sophisticated when it comes to e-Auctions. We’re not going to save enough money with optimization to make it worthwhile.
Wayne Campbell said it best when he said and perhaps monkeys will fly out of my butt!“. Although it’s theoretically possible that you could be making the perfect buy – every time – without any decision optimization, in reality, the chance that this is true is about as close to 0 as you can get. I’ve NEVER encountered a situation where optimization didn’t provide a company with a cost savings opportunity in any moderately complex bid (and, these days, what bid is not moderately complex?). Furthermore, Aberdeen has found, both in their 2005 study AND their 2007 study, that advanced sourcing and negotiation methods, which includes decision optimization, saves a company an average of 12% beyond what they would save just using e-Auctions. That’s a lot of cash you’re leaving on the table.

There are more myths, but this is a good start – and hopefully enough to convince you to check these solutions out. Decision optimization for strategic sourcing is worth the investment.