As per our last post we recently discussed the criticality of optimization in
It’s Not Optimization, It’s Strategic Sourcing, explained that Even “Simple” Categories Hide Extreme Complexity, and pointed out Why Your First Generation Platform is Not Ready for Modern Sourcing in the hopes that you would understand that you need to be ready for Complex Sourcing.
But Strategic Sourcing Decision Optimization (SSDO) is only one area where optimization can be applied to add organizational value. There are at least half a dozen other areas where optimization can be successfully applied in a progressive organization that is a leader in its industry. As noted in our last post where we briefly discussed inventory optimization, production optimization, and demand optimization — three areas that can hide considerable cost savings when properly analyzed — there are a number of areas in an organization where optimization can identify considerable value. Today we will discuss three more areas.
Service (Level) Optimization
The goal of service level optimization is to find the right balance between customer satisfaction and service cost to maximize profitability while minimizing customer dissatisfaction. While everyone would like a robust high-quality product that lasts until they are done with it, that’s not always feasible. The very nature of many product lines — electronics, automotive, plastic-based CPG is that the products will break down with regular use and/or regular exposure to the elements. Better materials, better manufacturing, and better care will lengthen lifespans, but computing equipment, cars, and plastic boxes don’t last forever. And if the intended lifespan is 3 years, it’s not cost effective to build a product expected to last 13 years. However, the nature of things is that if you build a product expected to last 3 years, some units will breakdown and need to be replaced before the 3 year mark is up (and some will last longer). So what level of warranty do you need to offer, what level of service (in terms of repair / replacement window), how much will it cost, and how much will the market bear. Finding the right base / extended offerings and price points is key to maximizing both consumer demand and customer satisfaction.
Big organizations have a lot of assets, often assets they often don’t know that they have. For example, unused compute power in the data centre, unused production time at the factory, and unused equipment in the yard. This last category can be a huge burden to an organization that is paying a lease or amortized monthly payment on a 10-year plan for equipment that is only being used part of the time. (That’s why renting by the job or renting out might be a better solution.) And if an organization is continually renting the same equipment for multiple projects, it might make sense to buy and share the equipment between projects, even if it has to be transported between locations. Asset optimization can save an organization a lot of money and can often, when done properly, considerably increase working capital. This brings us to:
Working Capital Optimization
Optimizing the balance between assets and liabilities, working capital ensures that a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses without creating a crushing debt load or jeopardizing long term profitability. Working capital optimization is tricky as it involves balancing with DPO (days payable outstanding) with DSO (days sales outstanding), early payment discounts (on the inbound and outbound supply chain), supply chain and invoice financing, short and long term investment opportunities, and short-term gains vs. long term cost reductions. It’s not easy, and, like all of the other examples of optimization covered in this brief two-part series, often requires sophisticated optimization.
These are just a few of the examples where optimization can yield significant benefits beyond sourcing and where Sourcing can bring additional savings and value to the enterprise since it will be able to collect a lot of the data and intelligence that is required to build, and solve, the sophisticated models required.
In future posts we will discuss these types of optimization in depth as well as the new breed of providers tackling these types of supply chain optimization. Stay tuned.