Optimization Backed Sourcing Platform … Or Bust Part I

This is the first part of a five part series that revises and ties together key ideas outlined last year on Sourcing Innovation that were spread across multiple posts. Regular readers will be familiar with much of the content, but the integrated perspective should help to cement the ideas in regular readers and new readers alike.

This post is largely based on It’s Not a Suite, It’s Just Sourcing, Part I.

For a while now, Sourcing Innovation has been effectively saying that if you do not have an optimization-backed sourcing platform, you’re not ready for the modern era of complex sourcing. And SI means it. This isn’t to say that you can’t get value from a modern suite that covers the end-to-end sourcing lifecycle, or that you can’t get value from a first generation optimization platform, because you can — especially if you haven’t had these solutions before. However, every last-generation solution has a limit on the value it can deliver. Some of these limits are low, and some of these limits are quite high — so high, in fact, that it can take years, and sometimes a decade or more, for the average organization to hit the ceiling. But once that ceiling is hit, the organization has to know what comes next to continue extracting value from the supply chain. So this is a post about what comes next for the average organization and, most importantly, what comes now for the leaders who have already realized that their first generation optimization modules and / or first generation suites are failing to deliver the value they need today.

The reality is that, these days, Sourcing needs to be much more strategic and is thus not an activity that can be accomplished as a discrete set of loosely connected tasks where you can pick and choose what you need ahead of time. Strategic Sourcing is an activity that needs to both analyze the need and the market situation and respond to the stimuli the market is providing in a dynamic fashion.

This can not be done according to a pre-planned, limited set of tasks. To clarify, let’s take a hypothetical, but realistic situation. Let’s say that the company is a high-tech retailer selling custom assembled high-end development boxes to software development and engineering shops. This company will not be buying pre-configured Dell and HP machines, targeted to the consumer market, but custom configured boxes using high end motherboards, which may be manufactured by the same production houses that manufacture boards for companies like Dell and HP, high end Intel and AMD processors, ultra-fast high density DRAM, high-end solid state drives, mid-tower cases with extra fans, etc.

This might sound like a relatively easy sourcing event as there are a relatively small number of acceptable motherboard manufacturers, DRAM manufacturers, drive manufacturers, case manufacturers, and only two chip manufacturers, but even 5 * 5 * 5 *5 * 2 = 1350 and each manufacturer might have over a dozen acceptable options — and it’s hard to say up front how many of these combinations are not only viable, but acceptable (as even though it might be feasible to connect the components, there might be driver or other issues that affect compatibility or performance). In addition, new manufacturers arise once in a while and old manufacturers fail or sell out. Last year’s customer spend pattern is not the same as the spend pattern two years ago, and until year-over-year is analyzed for multiple years, you have no idea of the average deviation.

In other words:

  • you may or may not need a pre-event spend analysis to determine potential volume leverage points, the opportunities with supply base consolidation, and expected savings potential, all depending on when the last event was run, how much data you have, and current market data points
  • you may or may not need optimization; if you restrict the bid to pre-configured systems, because business is up 40% and you need a quick event to get through the rest of the year with plans to do a more detailed analysis in 6 months, you can probably get away with a weighted auction, but if bid options are open, you will probably need optimization to handle all the data
  • you may or may not need multiple RFX rounds, so you may or may not need a supplier portal to handle the communication necessary for a multi-round event

And this is all fairly obvious, so you are probably thinking

  • if I need the analysis, I invoke the spend analysis module, get my insights, and plan my strategy
  • then I invoke the RFX module to create the RFX
  • if I am doing multiple rounds — I have to configure the Supplier Portal instead of just sending out the Excel spreadsheets (which I would import on return otherwise)
  • when the data is retrieved, validated and cleaned up then I either
    • push it into the auction for a weighted auction or
    • push it into the optimization module for optimization-backed analysis
  • when I have my winners, I push the data into the contract management module for draft contract creation

… easy-peasy, right?


This is the real world, and it never works this way, as we will discuss in our next post.