Daily Archives: October 28, 2015

It’s Not Optimization. It’s Strategic Sourcing.

Last week in my post on how The Trade Extensions Event Was Different. Their View is Different. It’s Time for Different I noted that the reason the event was different is because, unlike most purveyors of perplexing optimization software, they did not focus on their the capability, uniqueness, and savings potential of their optimization software, choosing to barely acknowledge the concept, and instead took the viewpoint that it’s not optimization, it’s just sourcing.

And as I indicated in that post, said in Monday’s Post on how It’s NOT a Suite, It’s JUST Sourcing Part II, SI has a very similar view. SI is now convinced that it’s not optimization, it’s strategic sourcing as SI believes it has become practically impossible to do true strategic sourcing without optimization.

Why? Because we have not only reached the point where it is impossible to define a sourcing event of any magnitude without hitting at least a few of the nine dimensions of complexity but we have also reached the point where the data collection, manipulation, and analysis requirements are so intensive that only a sourcing solution built on, and backed by, a true optimization engine is going to be able to handle the data, manipulation, and analysis required.

Now, we’re not saying that the right strategy for every event is optimization, but we are saying, as per SI’s already classic paper on Optimization, What Comes Next, that you cannot determine the right strategy without optimization to at least build and solve a baseline cost model given current market prices and expected bidder increases or decreases from the last event. For example, while a 3% savings potential might be enough for a (strategic) sourcing auction or optimization-based multi-round RFX, a 3% drop in expected product cost does not necessarily imply a 3% savings potential. If that drop is from remote suppliers that ship down lanes where costs have risen 10% and shipping is 30% of the overall total cost model, there is no savings potential. The right strategy is a renegotiation with the incumbent for a contract extension or a spot market buy. Similarly a 2% drop in price combined with a 5% drop in logistics costs could equate to a 3.5% savings potential under the right circumstances, which is substantial on a 50M+ category.

Plus, with bundled discounts, volume discounts from suppliers and carriers that take effect at different price points, different import and utilization costs for each supplier, and an ever increasing plethora of capacity constraints, mandatory award splits to minimize risk, secondary goals of minimal environmental impact, and so on, it’s often impossible to determine what the lowest cost solution is and, thus, if the cost increase associated with assigning a (greater percentage of the) award to a preferred supplier seen as being more valuable in the long term is actually worth it.

There’s just no way to do a strategic analysis and justify a strategic decision without a basic level of true mathematical optimization capability. Spreadsheets were breaking under the strain of basic sourcing requirements years ago. Now these sheets are just shards of glass — which will eventually cut you if repeatedly handled.

So if you want to source, use what you want. But if you want to strategically source, use an optimization-backed sourcing solution. You won’t need optimization for every event, but since you won’t know when you’ll need it until you have it, you still need it.