The Role of Optimization in Strategic Sourcing – Optimization Results, Spend Applicability and Business Cases

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.

This chapter overviewed some of the results obtained by numerous companies as a result of optimization and provided a number of cases studies, including a few that included non-cost elements. A few of the examples are worthy of note. They include:

  • the company who used optimization for cost avoidance in an inflationary market and achieved an ROI of 28%
  • the company that saved 120 Million on a 3 Billion spend, a savings of 4%
  • the company that saved 600 Million

The latter two cases are significant as they demonstrate that returns of up to 100 ROI (in extreme case) are possible since a number of providers now offer unlimited usage licenses for (well) under 1 Million a year. Now, professional services could run up the costs by a factor of 10, but it should still be clear that the ROI claims of 20X to 40X that some providers have stated they have achieved (on certain events for certain clients) are possible.

The cases that were described in detail are very illuminating and the following are worth noting:

  • A National Freight Sourcing Event
    A company decided to rebid 2,200 freight lanes, in an event which was opened up to 65 bidders. The company, which expected a 3% to 6% price increase if they stayed with incumbent suppliers, realized a 5% price decrease, a cost avoidance of 8% to 11%.
  • A Film Packaging Event
    The company required over 2,000 different film packaging items across 70 “families” in an event that was opened up to 45 suppliers. The company was able to involve more suppliers while breaking the price down into 25 cost coefficients per material family, demonstrating the power optimization can bring.
  • Product Containers
    Containers for product across 100 locations were needed. A savings of 8 Million was realized.
  • Ocean Freight
    The company utilized 600 ocean shipping lanes and 3 container sizes per lane. Before the event began, the suppliers projected 10% to 15% cost increases. In the end, price increases were only 1%, a 9% to 14% cost avoidance.

Next Part VII: Optimization and Reverse Auctions

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