Monthly Archives: June 2010

Optimization: The Only Solution to Complex Spend Management

Today’s guest post is from Paul Martyn, Vice President of Marketing of Bravo Solution.

Paul can be reached at p <dot> martyn <at> bravosolution.com or 312 279 6793.

Most organizations have a diverse spend portfolio that includes many simple, several moderately simple, and a few complex spends.

To address each spend appropriately, we need to understand the dynamics that make each event complex. For starters, let’s look to another ‘multi-faceted’ puzzle; the Rubik’s Cube.

Invented in 1974 by Ernö Rubik, Rubik’s Cube has puzzled generations around the world with its utter devilishness. The multi-faceted nature of the Rubik’s Cube makes for a good analogy to spend management and sourcing.

Read the very interesting Wikipedia article linked above and you’ll find out that a 3×3 Rubik’s Cube has over 43 quintillion starting positions. But, if you know the right combinatorial magic, ANY cube can be solved in 29 or fewer moves. Like spend management, the Rubik’s cube has an extraordinary number of possible starting positions but a logical process (algorithm) can elegantly solve the problem with minimal effort.

Complex Spend Management is another multi-faceted puzzle with even more complexity and ‘faces’ (internal and external to the buying organization) than Rubik’s famous cube. There are many factors which influence decision-making and, like a Rubik’s Cube, each factor of Complex Spend Management is related to the other factors. For example, let’s look at the supplier ‘facing’ decision factors inherent in sourcing decisions; price, incumbency, risk and timing:

If incumbency, supplier risk factors and timing are not important, the spend management puzzle is relatively straightforward to solve. We could use a reverse auction or simple RFI/RFP template and get the cheapest possible price, all other things being equal, pretty easily. This is akin to solving one face of a Rubik’s cube, something most of us have the skills to do.

But, if we are to focus on the multi-faceted nature of our negotiations and explore new, and potentially more efficient, ways of dealing with suppliers while balancing the satisfaction of our internal stakeholders (in operations, finance, marketing, etc) we must recognize how our efforts to solve one ‘face’ or dimension of the puzzle impact the other faces and work to find a solution that satisfies each dimension. We’ve all observed that the price visibility we see in a reverse auction inspires pricing creativity by suppliers. In the same way, if we can offer more visibility into other, non-price stakeholder requirements, we will stimulate suppliers to respond creatively in those areas as well.

Successful sourcing managers find creative ways to drive financial results for their company. Effectively reducing costs means challenging internal stakeholders’ assumptions, preferences, and processes with scenario analysis that quantifies trade-off costs. Buyers need to expand simple price analysis to quantify the total costs (of ownership) absorbed by the operational stakeholders. Complex Spend Management requires that buyers include the inventory and logistics impact in their financial analysis. Buyers are often challenged to explore a wider variety of options to redesign their supply plan while evaluating strategic considerations like ‘make versus buy’.

To address this explosion of complexity, many buying organizations have developed and maintain ‘big ass spreadsheets’ (BASS). BASS were often designed for a single project and then reused on subsequent complex spend events. This approach does not take into account the dynamic nature of Complex Spend Management. The BASS approach is akin to knowing the moves to solve one specific starting position of a Rubik’s cube and applying it to other starting positions – it simply does not solve the ‘new’ puzzle. In short, buyers need a more dynamic and flexible solution.

Fortunately, today’s optimization algorithms provide buyers with a technology that identifies the optimal sourcing solution for each combination of supplier pricing, buyer preferences, business rules and risk factors. This allows buyers to define a problem (starting position) and work with the suppliers in a collaborative manner to propose solutions. The buyers then use optimization to determine which combination of supplier proposals is best.

In essence, optimization technology provides the buyer with the ability to increase collaboration with suppliers and solve any starting position of a Rubik’s Cube by simply pressing the “Solve Now” button.

Thanks, Paul!

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Plain English Contracts Can Be Reasonable

Last year, Dick Locke, who has an entire state on his side, wrote a great post on the importance of plain English in contracts. Then, last month, with the help of The Temp Life (Season 2, Episode 7), I made it very clear what might happen if you don’t follow his advice.

But one aspect of contracts we haven’t tackled yet is that of “reasonableness”. As highlighted in this recent article over on SupplyManagement.com which asks you to now be reasonable, these clauses can end up causing more disputes than they ultimately resolve. While they are included in the hopes of raising contentious issues during critical phases of contract negotiations, they simply delay the inevitable because, given enough time, a supply disruption will happen and finger pointing will begin.

The key to preventing disputes is to define precisely what conditions define a breach and what steps each party will take to try and remedy it, in plain English, so there are no disagreements down the line. While it’s true that a contract cannot predict, or define a remedy for, every type of disruption that could happen, it can predict, and define actions for, the most likely disruptions. The use of plain English to define reasonable remedies for these disruptions will prevent problems down the line. This will minimize the chance that the “catch-all” reasonableness clause will need to be invoked, but even if the “catch-all” clause does need to be invoked, if the reconciliation process is defined in plain English (notify, meet, accept, correct, etc.), things will still go smoother than if plain English is not used.

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Greener Shipping Can Save Green

… but green goes beyond just packaging and carrier efficiency. In other words, while a recent article in the Environmental Leader on how greener shipping can make you more green had some great advice that should be a starting point in your shipping considerations, I think it missed a few key points. Furthermore, it advocated carbon offsets over greener technology, which is not the answer. You need to solve the sustainability problem, not just shift the burden to someone else who may or may not solve the problem with your cash.

To understand what green shipping truly requires, we need to start with a review of some of the key points made by the author:

Pick Packaging With Care

This goes without saying. As the author notes, the packaging must be unbleached, minimal, and should use recycled materials that meet the relevant environment standards. But before you address packaging, you need to address the product. Is it small and dense, or large and vacuous? If the latter, can it be shipped unassembled or partially assembled to save space, and thus, packaging? In other words, good packaging is more than just material selection, it’s maximizing how much you can get in a shipment (without a significant risk of damage).

Choose Efficient Shipping

This also goes without saying, but this is more than just choosing a carrier who has well planned routes, avoids wasted trips, and doesn’t send three trucks a day when one will do. It’s making sure that you’ve optimized your daily/weekly/monthly shipping schedules to maximize truckload volume, use the most carbon-efficient mode of transport possible (be it rail, ocean, truck, or air), and set up the right processes and systems to make sure their are no hold-ups or waits on your end during shipping or receiving.

Mitigate Shipping Related Emissions

This is a must, but carbon credits aren’t the answer. The answer is lower emission (bio) fuel, more efficient (hybrid) engines, and conversion to green power in your facilities (wind, solar, hydro, etc.) where the batteries for the hybrid/electric vehicles are recharged.

Read the Report

You should definitely do your homework, but don’t stop with the company’s official sustainability report which has been routed through their PR — search the traditional (online newspapers, magazines, etc.) and new media (blogs, forums, etc.) to see if there is any coverage or discussion around their sustainability and corporate responsibility and what the market has to say.

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None of Us …

… is as dumb as all of us!

While generally regarded as true, there has, unfortunately, been a lack of evidence to support the belief … until now! As per this recent article on the Knowledge @ Wharton site on how group dynamics may be killing innovation, a recent study by Christian Terwiesch and Karl Ulrich demonstrated that the average quality of the ideas generated by the hybrid process [where participants were given time to brainstorm on their own] were better than those that came from the team process by roughly 30 percentage points. While this may not be the gap the researchers were hoping for, it shows that even in a simple study where there is nothing to lose by trying to get the best idea pushed through, it won’t happen if everyone is asked to innovate as a team. I can only imagine how much innovation is being lost when there are real stakes in the real world! Innovation requires creativity and vision … more specifically, creativity of the individual and the vision of the group to realize it.