The 6 Days of X-asperation: Day 4 – Questions to ask your Decision Optimization Vendor

Just like we did in the X-emplification series, we’re going to continue with Decision Optimization as we tackle the generic questions that you should be asking every vendor, and the types of answers you should be expecting.

1. What do I have to do to get a good handle on how to make effective use of this technology, and for an organization of my size, how long is it going to take?

The first thing you have to do is get a good understanding of what strategic sourcing decision optimization is, what it can do for you, and, most importantly, what data you’re going to need. I strongly suggest you read the wiki-paper authored by yours truly if you haven’t already. The wiki-paper will tell you:

  • The requirements of a true decision optimization system
    which will insure you don’t get taken in by a cheap imitation decision support system
  • The basic capabilities a decision optimization system should have to be truly useful for strategic sourcing decision optimization
    which will insure that the decision optimization system you select is most appropriate for the problems your team faces as sourcing professionals
  • The basic requirements for success when using a decision optimization system
    which include good forecasts, appropriate cost breakdowns, and knowledge of the required, vs. desired, business rules
  • Ten strategies for success
    which will help you get the most out of every strategic sourcing decision optimization project

Then you need to figure out what your potential return is from strategic sourcing decision optimization. Although every project will benefit, the reality is that decision optimization is still relatively expensive technology to buy and the amount of work involved in these projects can be considerably more than an auction. This sometimes requires the time of senior professionals, which can add up. If you’re a small or mid-size company whose largest sourcing project is 10M — and you only expect to save 3%, primarily on reduced freight and inventory by way of better allocations, because it’s a buyers market and auctions work very well — then, considering that the cost of buying, maintaining, and using a good solution starts in the mid six-figures a year, it’s probably not for you. However, if you’re a global 3000 company with a dozen or more sourcing projects in the 50M to 500M+ range, and a possibility of savings of 5% to 15% per project, and your total potential savings is in the 50M to 150M range in the first two to three years, then you should identify the right optimization system for you and start using it as soon as possible.

Once you’ve decided optimization is a useful technology, and one you should be using, you need to review the categories that you will be sourcing in the next 12 months, and then rank them by dollar amount and complexity. The projects that appear in the top half of both lists will be good candidates for strategic sourcing decision optimization. (Note that if your annual spend is in excess of 1B, the doctor can tell you right now that properly applied decision optimization technology will generate ROI for you.)

Armed with the potential projects, you need to devise appropriate cost breakdowns for each of the goods and services under consideration, identify other relevant non-cost and qualitative factors, and prepare the appropriate surveys and RFPs/RFQs so that you can get projects underway relatively quickly. Optimization only achieves significant returns if done right – and this requires that you get accurate bids and cost breakdowns where the cost of the good or service is separated from the freight cost, and any relevant costs such as duties, differential costs of waste and returns, and discounts are taken into account. The extra preparation is definitely worth it when you consider that studies done by Aberdeen in 2005 and 2007 (as referenced in the wiki-paper) found that organizations that employ advanced sourcing methods based on decision optimization save an organization, on average, 12% above and beyond what can be saved in an e-Auction or basic sourcing project.

The amount of time it takes really depends upon the skill-level of the people you have. They have to wrap their minds around decision optimization for strategic sourcing, understand what it really is, how they best use it, and how they have to approach decision optimization sourcing projects and data collection to get the most bang for their buck. If they are junior buyers in skill-level, it could easily take them a few months to truly grasp the basic concept, and chances are they will never be able to take full advantage of the tool until you upgrade their sourcing skill level (through an appropriate certification program such as the CPSM or SPSM, for example). If they are senior buyers in skill-level, they should be able to grasp the basics and re-design the RFXs for the first project within a couple of weeks.

2a. How much functionality is my organization realistically going to be using in 12 months?

Your senior buyers should be using all of the functionality in the strategic sourcing decision optimization tool within 6 – 12 months. The situation now isn’t as it was when these tools were first hitting the market place 7 years ago (at which time the UI alone was so complicated you needed a graduate degree just to understand it). A good tool has a clear UI and good data import capability that allows you to specify the categories and items under consideration, the suppliers who can supply those items, the locations where you need those items (which may be done by way of groupings), and the cost breakdowns (at least by adjusted unit cost and freight cost). The tool should be able to import data from an appropriately formatted excel worksheet, or from an e-RFX or e-Auction module if it is integrated into a sourcing suite. Furthermore, modern software allows each type of constraint that can be defined to be clearly delineated, and step-by-step wizards exist to help you define the constraint appropriately.

Your intermediate buyers should be able to master the basic constraints in this time-frame, and be well on their way to improving their sourcing decisions and relative skill levels.

Even though the tools have improved significantly, strategic sourcing decision optimization, by its very nature, requires a more advanced skill level than other tools in the e-Sourcing suite and your junior buyers may not be up to the challenge. You will need to provide them the training they need to upgrade their sourcing competence to an intermediate level before you can expect them to master the tool, even though your technologically savvy junior buyers will be able to get a reasonable grip on the basics of setting up a scenario and defining simple constraints in a rather short time frame. You have to remember that the use of strategic sourcing decision optimization is advanced sourcing, and this requires more than just a friendly tool – it requires buyer skill.

2b. How much functionality do I really need?

When it comes to model development and solver capability, as much as you can get. This is still a developing technology, and even though you can achieve considerable savings above and beyond an e-Auction just with what’s out there today, there’s still a long way to go.

When it comes to add-ons, it depends on what the company is offering you as an add-on. If it’s services, then, considering you should have guidance on your first few projects, you should strongly consider them if they’re reaonably priced. If it’s custom integration services to your RFX or e-Auction platform, then, assuming these are the right RFX and e-Auction platforms to be using, and the integration is priced competitively, then this is also worth considering. However, if the add-on an enhanced solver module, I’d ask why this isn’t part of the base offering (as it should be).

However, one thing that is important to note, if it’s not easy to load the data into the tool, it likely won’t be used at all. Thus, it’s important to make sure that not only is the import or ETL tool included as part of the basic functionality, but that the import functionality is also easy to use.

2c. And how does this functionality solve my #1 pain today, which is X?

If you’re looking at strategic sourcing decision optimization, chances are you are seeing diminishing savings from your sourcing projects and need a way to improve returns. What you’re looking for here is an answer not based on technical competence, but on sourcing experience. You want the vendor to tell you that their product has been applied successfully by companies in a number of verticals on a number of categories and that, based upon their experience in and around your industry, they expect that you will be able to save in the 5% to 15% range on a well-defined set of categories. You want to know that they have the experience to help you select the right categories to start with that will help you get some quick wins and support for the new technology.

3. How much training is my team going to require to effectively use the software? How long is it going to take them to absorb this training?

It should not take more than a week to get your intermediate and senior buyers up to speed on how to use the tool. However, the training is not really going to be absorbed at a deep level until your professionals apply the tool on a few projects, which should be done under the guidance of an experienced professional who can insure that your team is tackling the project in an optimal manner. Thus, it will probably take a few months, at the minimum, for your senior buyers to truly master the tool.

4. How much is this software REALLY going to cost me in the first year and each subsequent year?

Although real strategic sourcing decision optimization has been around for almost seven years, it only became usable in the last few, and due to its relatively low adoption rate to date, and continued development, it’s still a reasonably new offering. You should expect to be paying in the mid six figures per year, depending on the power of the solution and your hardware and solver license requirements. (Most platforms are built on top of industry leading solvers, such as Ilog’s CPlex, which can run 25K to 50K per license. Plus, you need high end servers if you want to build large models and have them solve relatively quickly. Thus, even an on-demand offering is going to be pricey if you want dedicated solvers and hardware, which you could need if you have large models or intend to use the platform significantly.)

Furthermore, since this technology is still emerging (like real spend analysis), updates should be regular and maintenance will be higher than for e-RFX and e-Auction, so you are probably looking at maintenance (for behind the firewall or ASP solutions) in the 20% range.

Installation should not be time consuming, and should not require more than a few days of consulting. (On-demand should be free if you’re using a basic service that uses shared optimization resources, but if you are asking for dedicated resources, you should expect to pay for some consulting time as a dedicated resource will need to deployed to get this done.)

5. You say you care about your customers and that you are going to provide great service. Prove it!

Ask for references. Talk to them. If the vendor has an upcoming user meeting or conference, ask to go to it. Ask for examples of results their customers have achieved on the platforms recently, and how they can help you achieve the same. But most importantly, ask them if they’ll help you with your initial pilot project at a reasonable consulting rate and see what kind of results they deliver – with their tool.

6. Can I take it for a test drive or a short term lease?

Considering that this software is usually either web-based or a fat client that runs on your desktop, there shouldn’t be any problem for your provider to set you up with a single instance, or copy, for you to use on a pilot project – which they should be comfortable with you undertaking at a low consulting rate – equal to the cost of the consultant that guides you through the pilot project.

7. Can I buy it or implement it in pieces?Just like you should ultimately buy the entire e-RFx or e-Auction tool functionality up-front, you should buy the entire functionality of the strategic sourcing decision optimization tool up-front as well, but I’d hold off on buying dedicated hardware and solver resources until you’re ramped up and ready to maximize usage of such resources, as a single dedicated high-end machine with a dedicated CPlex license will cost you (well) over 50K a year in additional cost. If you’re maxing out your solver, dedicated resources can be worth it when you consider the ROI that accompanies strategic sourcing decision optimization. But if the hardware is just sitting there, that money is better spent on consulting services to help you get up to speed on how to maximize use of the tool.