Daily Archives: September 11, 2013

What Do Bid Optimization and Corporate Strategy Have in Common?

Last month, Pierre penned a very interesting piece over on Spend Matters when he asked What Do Bid Optimization and Corporate Strategy Have in Common and answered Everything. SI doesn’t entirely agree, but definitely agrees that bid optimization and corporate strategy have a significant amount in common.

Pierre is 100% correct when he says that people who say sourcing optimization is too complex and a nice area barely used and needed by most sourcing folks are dead wrong. As Pierre says, ignorant statements like this throw out the philosophy, methodology and techniques that are behind the tool. Optimization is more than a mathematical model embodied in a piece of software — it is an encompassing process designed to make sure you achieve the most value from your efforts. It starts during the problem definition phase where you define your objectives and then figure out the appropriate model, data elements, options, methodology and measurements of success — not after you’ve collected a bunch of semi-random data.

Furthermore the methodology employed is critical and relates to corporate strategy. Pierre says the overarching methodology is corporate strategy, but SI believes that the relationship is a little more subtle — corporate strategy limits the methodologies that can be used. The objective of corporate strategy, which is a fact-based process of developing strategic scenarios and then determining how to best allocate finite resources to support various business objectives and a balanced scorecard, is to define strategies that should be “optimal” in the sense that they minimize trade-offs and are doable by the various stakeholders. The chosen strategy limits the methodologies that can be employed because only so many methodologies will support the strategy, and only a subset of those will be capable of delivering an optimal result. For example, if the corporate strategy is to dominate a foreign market, then the methodology employed must support getting more knowledge and demand for the brand, getting the product on more shelves in the market, and making it affordable for the consumers in that market. The methodologies would have to support developing advertising congruent with the market, logistics efforts that work on the ground, and cost control to insure the product could be priced to maximize sales. If the corporate strategy is to reduce costs to improve the bottom line, the methodologies would have to support better sourcing, more efficient production/distribution, and better supplier relations. With respect to better sourcing, we’re limited to strategic efforts — tactical or catalog buys are out. And with respect to cost minimization, depending on the product being sourced, where it is being sourced from, and the market dynamics, this may dictate an open auction, a multi-round negotiation, or decision optimization based upon final best bids, logistics costs, incurred and usage costs, and/or other value drivers. Optimization doesn’t always mean the most complex model you can imagine, but it does mean insuring everything you do is optimal and that every sourcing event is driven off of a lowest-cost baseline, which is easily calculated by a decision optimization solution built on a proper model. (This is because you only spend more if you get value back — whether it is better quality, marketing power through the supplier’s brand, or joint development efforts — that is at least equal to what you spend.)

And when you apply the proper methodology and process to a category, as Pierre explains, it will improve how Procurement will tap supply market power to help the stakeholders meet their objectives. After all, resources are limited, stakeholder requirements are diverse, and trade-offs and constraints are plentiful — which is the precise problem strategic sourcing decision optimization was designed to solve. And when scenarios are developed with stakeholders during the planning processed and then used to improve the robustness of the category strategy, how can you not win?

In short, corporate strategy has a lot to do with bid optimization, as it drives the sourcing strategy and model objectives, and you really can’t succeed in one without the other. They have a lot in common. Not everything, as some aspects of strategy have nothing to do with bid optimization (such as advertising tactics employed or market positioning, although other types of modelling will be used to determine the expected effects of each potential strategy), and some aspects of optimization and based purely in math and logic (which not all strategies are).

And using the two hand-in-hand makes perfect sense. So, just like Pierre, I have to ask why is it when we take this approach to a specific market basket and sourcing project, it somehow becomes an obtuse technology thing rather than just doing good strategy work? It just doesn’t make sense. Without both, you are playing a game of win, lose, or draw with a greater chance of losing or drawing then winning.

Remember, the power of “collaborative sourcing” or “market informed sourcing” is not the tool, but rather the philosophy of cross-functional teams doing scenario planning, defining what they really want as an objective, reducing or eliminating unneeded constraints, and fully tapping supply market power. The optimization tool is just an enabler, albeit a critical one.

Go, Pierre, Go.