Daily Archives: July 28, 2011

What to Look for in a Strategic Sourcing Decision Optimization Solution

Once it is understood that Strategic Sourcing Decision Optimization is the application of rigorous analytical techniques to a well-defined sourcing scenario to arrive at the absolute best decision out of a multitude of possible alternatives in a rigorous, repeatable, and provable fashion, one can define some core capabilities of a strategic sourcing decision optimization platform. Then, when one is looking for a sourcing platform that includes decision optimization, one can determine whether or not the platform includes true strategic sourcing decision optimization foundations.

The following are core capabilities that should be present in any platform that claims to be based on strategic sourcing decision optimization:

  • Solid Mathematical Foundations
    LP, MILP, QP, and Convex optimization are good foundations. Random sampling, Monte Carlo simulation, and evolutionary / genetic programming are, on their own, not sufficient.
  • True Cost Modelling
    The models must be accurate and complete. Not “close” approximations.
  • Sophisticated Constraint Analysis
    At a minimum, capacity, allocation, (risk) mitigation, and qualitative constraints must be supported.
  • What If? Capability
    The “holy grail”, the tool must be able to generate, analyze, and compare multiple “what if?” scenarios in order to truly be useful to the organization.

In addition, the following capabilities are nice to have:

  • Constraint Impact Analysis
    Why is this solution “optimal”? Which constraints are driving the allocation?
  • Network Modelling
    for the analysis of demand across multiple categories and network (re)design
  • Automatic Scenario Generation
    that automatically creates “what if?” variants of a given scenario to jump-start analysis

For more information, see our recent article on What to Look For in a Strategic Sourcing Decision Optimization Solution over on the new Next Level Supply site. This article, that summarizes and updates some of SI’s best writings on Decision Optimization, including the Next Level Purchasing Optimization Interview and the e-Sourcing WikiPaper, is a good refresher for those of you looking to (re) acquire a sourcing platform based on strategic sourcing decision optimization.

What Competing Agendas?

The following was recently spoken at a leading sourcing conference:

The dynamics and sometimes competing agendas between finance and procurement are widely known.

Huh? What competing agendas? I am on planet Earth, right?

But more seriously, the fact that this myth is continually perpetuated is a serious problem. The reality is that, in a properly run organization, Finance and Procurement have the same fundamental agenda: Reduce Cost. Increase Efficiency. Drive Innovation. The only difference is that, for the most part, Finance is internally focussed while, for the most part, Supply Management is externally focussed. Just like the real goal of corporate finance is to insure that the company has more than enough money to achieve its goals and generate a return for the shareholders, the real goal of Procurement is to insure that the company has more than enough money to obtain the goods and services it needs and generate value for the customers, which, in turn, generates value for the shareholders.

The ultimate goal of any organization is to derive value for the stakeholders — employees, customers, and shareholders alike. Value is more than profit, it’s also sustainability and brand image. For example, if all a company does is produce cheap products that wear out quickly, either it’s going to go broke in warranty costs, or, if the product is not under warranty, it’s going to have a lot of upset customers who are not going to buy again, putting the long term financial viability of the company on the line.

As a result, Finance is about more than cutting costs and hitting budgets, it’s about analyzing the value of an internal spend and determining if the value is there to help meet the company’s goals. If hiring the best people increases that option, then Finance should determine that a higher payroll is the right decision and cost should be cut from somewhere else or, if there are no less critical areas, debt should be secured to obtain additional value, and profit, down the road.

Similarly, Procurement is about more than cutting costs to hit a savings target. It’s about finding the optimal balance of cost and value-add to maximize the overall return to the company. If buying from a supplier that costs 10% more will have a huge impact in brand perception, because either the component manufacturer is well respected and using their name will increase consumer interest or because the defect rate is significantly lower, then the slightly higher cost supplier is chosen. But if it’s a simple office supplies spend, then cost is cut to the low end of market pricing.

And both organizations are trying to find the right balance between cost cutting and value generation to meet the company’s goals and increase shareholder return. Just because Procurement is always spending while Finance is always trying to cut spend doesn’t mean that the departments are in opposition. Finance knows better than any other department that companies have to spend money to make money, it just wants to insure that the money is being spent wisely. And a good Procurement organization has better spending as its ultimate goal. There is no competing agenda between the Finance and Procurement Group, and any organization that thinks there is has a serious problem as they are not aligned, and alignment is become a key to success in today’s economy now that the Old Normal has returned.