I couldn’t agree more with this recent headline from Supply Chain News that notes that Asset-Oriented Supply Chains Need Supply Chain Network Optimization More Than Ever because, like just about every other type of supply chains, they do. This is because, as IDC Manufacturing puts forward in a recent research report,
- profitability is closely linked to the cost, and efficient use, of raw materials which are steadily increasing in price while market pressure is driving sales prices down,
- high operating costs (partly due to the continual increase in the cost of energy and water) are making plant efficiency a key concern, and
- changing demand patterns are adding additional strain to the supply chain from regional shifts and gaps between production and actual demand.
A good supply chain network optimization tool will allow a company with rising costs and shrinking revenues to understand the costs and benefits of each supply chain network option open to them and answer the following questions:
- What is the optimal allocation of materials or customers to plants and/or distribution centers (DCs)?
- What is the best location for new plants and/or DCs to minimize freight, inventory holding, and/or rail fleet costs while maximizing customer service levels?
- How do we reallocate our capacity so we may close (temporarily or permanently) under-performing plants?
- What capacity should we build into our plants, production lines, or processes, down to the requirements of specific machines or tools?
- Based on our inventory levels and production capabilities, what is the optimal product mix, considering co- and byproducts?
- Based on seasonal demand or production limits, what should we pre-build in inventory?
- How do we optimize our production and distribution schedules for the desired levels of customer service and profitability?
- What is the profitability impact of crossing borders – from currency exchange rates, tariffs, or duties?
And in this economic climate, such a tool may well make the difference between riding out the economic downturn and becoming a victim of it.
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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 addresses the challenges associated with optimization from a user perspective, which, unfortunately, are numerous. The good news is that they are all easily overcome if you are aware of the issues and address them early on.
User challenges fall into three categories:
- Increased Knowledge Requirement
- some people will be afraid of the unknown
easily addressed with a little education
- others think optimization is a threat to their job
easily addressed by explaining optimization is not intelligent, users still need to formulate the models
- many do not understand the power associated with optimization
easily addressed by a well-defined pilot
- utilization can require a significant cultural change
easily addressed by helping an organization define a change management plan
- there is a learning curve
easily addressed through repeated use over time
- the proper constraints need to be utilized for maximum results
easily addressed with provider support
- Measurement of Results
- it can be difficult to tie cost/benefit to the tool
but a baseline scenario always provides a good measure
- market timing can affect the event
but what-if scenarios can illustrate how much more could be saved/lost with price changes
- good historical data may not be available
which means you form a baseline by comparing the unconstrained scenario to the cost of a human-generated solution
- overuse can lead to “analysis paralysis”
which means you define the relevant scenarios before you start using the tool, and stop when you have analyzed all of the relevant ones
- Software Provider Issues
- tools are still evolving
the provider needs to explain how current functionality will not be affected, only additional capabilities will be added
- it’s hard for a novice buyer to select the right solution(s)
a good provider could recommend that the buying organization engage an external, unbiased, expert for educational purposes before evaluating vendor solutions
- internationalization — are the right languages supported
this is tough since no tools allow users to add new languages, but there’s no reason a buying organization could not work with a solution provider to create a new translation if it was needed
- installed vs. on-demand; supplier-driven vs. buyer driven
this requires a good understanding of your needs
- some providers recommend minimum event sizes
well, this is their problem … if they don’t want your business, what can you do?
- the provider might not understand the buyer’s business
the provider simply has to spend some time getting to know the customer
Other points to note are the following statements which are somewhat misleading:
- the first time you save a lot of money, then returns diminish
while it is true that the first application on a category will see more substantial returns than subsequent applications, creativity can be used to repeatedly find savings that you might not expect through product substitutions, supplier-defined bundles, and alternative delivery requirements
- demand collaboration, sales forecasts, and performance management … may be perceived as conflicting with optimization
while some providers who have these solutions and do not have optimization may position these as “alternatives”, they are not the same thing and they do not conflict with optimization — in fact, they enhance optimization because better forecasts and improved performance give you more reliable data which gives you more reliable models which give you better results
Finally, the chapter summarizes some of the suppliers’ perception of adoption barriers which are worth noting.
- organizational issues
- leadership conviction is required for a sale
- a long term focus is required
- it’s a hard sell to any organization not already using other e-sourcing tools
- organizations using other e-tools, including auctions, advanced forecasting, and performance management often see optimization as unnecessary
- too many organizations are content with costs that are “good enough”
- others “fear the unknown”
- optimization is not a well understood term in sourcing
- there is the fear that optimization can eliminate jobs
- implementation issues
- significant resources are often spent on supporting today’s customers, leaving few resources for developing better solutions
- users rarely have clean data
- the buyers are not always sophisticated enough to properly structure the problem
In other words, your success is in your hands — you have to see the value, acquire a solution, and get trained if you really want to see optimal results.
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