The Role of Optimization in Strategic Sourcing – The Benefits of Optimization

This series discusses the recent report from CAPS Research on the role of optimization in strategic sourcing. The primary goal is to highlight, clarify, and, in some cases, correct parts of the report that are important, confusing, or incorrect to insure that you have the best introduction to strategic sourcing decision optimization that one can have.

The second chapter did a great job of highlighting the many benefits of optimization from a productivity, cost/price, and decision visibility perspective. In brief, they are:


  • Faster Sourcing Cycles
    No more fiddling with error-prone spreadsheets. (Remember that 90% of spreadsheets contain errors!)
  • More Thorough Analysis
    A broader, deeper analysis that looks at more alternatives.
  • Higher Quality
    Data integrity is much higher.
  • Better Planning
    Better up-front planning is done before the event.


  • Significant Savings
    Especially on the first event in a category.
  • Cost/Value Trade-offs
    You can analyze whether the additional cost associated with a service is worth it.
  • New Savings Opportunity
    The expressiveness allows suppliers to get creative and find ways of providing you their lowest total cost.
  • True Market Baselines
    An unconstrained scenario will give you the absolute lowest cost.

Decision Visibility

  • Centralized Knowledge-Base
    Your sourcing team can learn from each other and management gets better visibility into cost trade-offs.
  • Cost Premiums
    You can run historical events through the model and determine the cost premiums paid for preferred awards.
  • Cost Drivers
    You can analyze multiple events and zero in on cost drivers such as particular locations or raw commodity categories.
  • Competitive Feedback
    You can let your suppliers know where they are, and aren’t competitive, and why they won or lost a bid.

It also did a good job pointing out that good strategic sourcing decision optimization models also allow qualitative criteria to be analyzed. For example, you can exclude all suppliers with a service level of less than 95% or a product quality less than 8 (on a scale of 1 to 10). The ability to consider non-price decision criteria, used creatively, allows you to model and calculate a wide range of cost vs. value trade-offs and make better overall sourcing decisions. A great example of the power is the user who ran two scenarios where one scenario forced all rubber-based parts against a baseline that allowed the user to gain insight into how the cost of rubber was impacting her costs.

Next Part III: Preparing for Optimization

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