In the beginning, there was the reverse auction. Industry visionaries applied reverse auctions to their sourcing events for commodity and competitive categories (in the mid nineties) and saved a small fortune (which sometimes exceeded 30%, 50%, and even 70% of previous category costs). They were heroes and the world was good.
Then, a couple of years later when they circled back to the first categories and held another auction, something unexpected (to them) happened. The total savings shrunk considerably. The average savings, expressed in terms of percentages, dropped from the mid double digits to the (low) single digits. The savings often equalled what they would have expected from a traditional RFX / negotiation process. But the market was a seller’s market and the total event time, and thus the total event cost, was low, so with the right spin, they still looked quite successful. The world was still good.
Another couple of years passed, and they circled back to the first categories again. But this time, the market was a buyer’s market again and savings were bound to equal those seen in the initial category reverse auctions, right? Wrong! Instead, something really surprising (to them) happened — instead of saving money, total costs increased — sometimes in the double digits! The world was a dark and scary place. What happened? Could it have been avoided?
In short, as I explained in A Brief History of Optimization (published in By the Buy, the TradeExtensions Newsletter), reverse auctions are not the panacea that many auction platform providers still make them out to be and the identification of real savings through auctions can often be elusive at best. A new technology is needed, and as I have been saying (well, shouting from the rooftops) for years, that technology is optimization.
But, even though the technology is now a mature technology (as strategic sourcing decision optimization turns 10 this year, which makes it middle-aged in Internet years and a senior citizen in dog years), only the true market leaders (which generally account for 10% of the total market) have even tried it, and, in my estimates, less than half of those have truly adopted it on an organization level, even though the analysts have consistently found that strategic sourcing decision optimization consistently saves an average of 12% above and beyond what you’ll get from the best reverse auction.
Simply put, optimization is instant ROI. Guaranteed. In the absolute worst case, your allocation is already perfect and you won’t save any money. But I’ve NEVER seen this happen in practice. Even the most dismal events generally return 3% to 5% savings. Even if we’re only talking a 50M category, that’s still about 2M in savings. And now that you can run an event for (considerably less than) 100K, that’s still at least a 20X ROI!
And it doesn’t take a PhD to use it anymore. Now that most of the platforms offering true strategic sourcing decision optimization have easy to use GUIs, wizard-based constraint definition, and scenario and costing templates built right in — with full Excel integration for data collection, modification, and reporting, optimization is as easy to use as an auction platform. (And in Trade Extensions‘ platform, it’s built into the auction.) And while it might still take a couple of days of training to master the advanced features, any of your senior analysts should have no problem picking it up quickly. And once they learn it, they can modify the templates for your organization and train your more junior staff, who will probably only need a couple of events to master most of what they’ll need to do on a daily basis for an average category.
And after reading this recent piece in Industry Week that says Transformation is Out; Optimization is In that pointed out that while organizations still want to ‘transform’ how they deliver back-office services, they typically want to move in pragmatic, incremental steps and focus on achieving best-in-class, standardized and optimized delivery models and said that while many organizations remain keen to avoid the costs of new capital and migrating to new suppliers, investment is being made in ensuring existing suppliers and internal processes are delivering optimum value, I’m starting to think that maybe optimization might finally begin to come of age. It appears that the term has finally entered the daily vocabulary of supply management professionals, who should now be more open to at least reviewing optimization solutions. And once they see the savings to be had, and the power that they can have at their fingertips, I can’t help but thinking that the followers are finally going to start to adopt this technology and become leaders in their own right. (The laggards will ignore it for years to come, but that’s okay. Most are still hunkered under their desk waiting for the recession to be over and will eventually go out of business anyway, so let’s not worry about them.)