Daily Archives: May 16, 2012

From Strategic Spend to Strategic Value-Add, Part I

Today’s guest post is from Ayush Sharma, a Strategic Sourcing Consultant with Trade Extensions in the Americas. His particular speciality is the application of optimization to Retail Sourcing, Dedicated Transportation, 3PL Logistics Sourcing, and Direct and Indirect Materials Sourcing. Ayush has a Masters degree in Supply Chain Management from the University of Texas at Dallas, certifications in Lean Six Sigma and Supply Chain Management, and has served as a Technical Director for a local branch of the Institute for Supply Management (ISM).

Supply and Demand Chain integration has been viewed as key to an efficient, profitable and fluid business. This is especially true today with several organizations looking for deeper synergies between their supply and demand planning processes as they look to drive costs out of the value chain. But soon enough, all the “costs” will be cut and companies will be looking to increase the efficiency and long-term profitability of their supply chain. ‘Long-Term Profitability’ is an interesting term given the context.

In today’s volatile business environment it’s even more imperative to insure your supply chain is primed to mitigate risk and deliver real-dollar savings year after year. If the last two years have taught us something, it’s the extent to which regional disturbances can affect supply chains worldwide. The high-level solution is to integrate supply and demand planning processes with each other. But even more important is that they be integrated with the strategic business plan. Specifically, on the supply-side, Strategic Sourcing is an important cog in the supply chain wheel simply because of the level of spend at most large organizations and the pressure to drive ‘savings’ year after year.

While trying to add value to the Strategic Sourcing process, combinatorial bidding as a methodology has seen some success in recent years. In the Sourcing space, the term ‘Combinatorial Auctions’ is widely used to denote a process that allows you to elegantly capture suppliers’ pricing in an auction-type event while taking into account several considerations like bundled pricing and supplier capacities. However, one must also realize that combinatorial bidding (in non-auction RFx type events) has been used with tremendous success by several companies spanning a wide variety of industries. The effects of combinatorial bidding are great because of the nature of the process — suppliers place bids based on what they think their competitive advantage might be and buyers can efficiently take these into account while consistently honouring their own business requirements.

Pair this with optimization and you can drive even more value (not just “savings”) out of the process. Optimization allows buyers to run several what-if scenarios in minutes and generate reports that show exactly how the overall spend distribution changes as newer business requirements are taken into account. The reason this is important is because a low-cost solution, even with combinatorial bidding, is never really tailored for any business. Given the wide-ranging scope of business requirements, optimization allows you to make an informed decision as it can quickly give you the information you need to identify the best ‘Overall Value’ rather than just the lowest cost — not to mention being better prepared for supplier negotiations.

The truth is that even today, with a variety of tools available to support these processes, too many businesses fail to see hard-dollar results. The reasons for this obviously depend on the specific nature of projects conducted and are generally complex and varied. But a common theme that ties them together is the thought that a few sourcing events with the methodology above would help realize immediate savings. This might be true in some cases, but even then, the savings realized are probably low-hanging fruit that should’ve been captured through either traditional spend analysis, cost modelling, or an appropriately designed auction. Furthermore, especially in cases where suppliers’ costs have been ‘driven down’, these ‘savings’ can quickly fade away as suppliers try to recover business in creative ways once the contract has been signed. This aspect should be given special consideration because of the macro- and micro-economic factors that come into play.

In order to drive down costs and at the same time maintain long-term viability, the sourcing process must be tightly integrated with the strategic plan. Further, bidding and optimization tools must be part of the sourcing process as these tools allow for increased collaboration with suppliers while maintaining control over the sourcing process. In Part II, we will discuss the requirements for a strong and measurable sourcing process.

Thanks, Ayush!