In our last post we addressed three common misconceptions about sourcing. In this post we expand upon those corrections we provided to give you six pillars of a properly designed optimization-based sourcing platform.
The three pillars of a properly designed optimization-based sourcing platform that we addressed in our last post were:
- Useable by everyone, including the most junior of buyers
- Affordable as any other sourcing platform
- Efficient, decreasing event set-up time by at least a factor of 2 to 3
In addition, an optimization-based sourcing platform is also:
Optimization is powerful. A modern optimization engine can solve sourcing problems to 99.9%+ optimality in a matter of minutes, even if they require tens of thousands of variables and hundreds of thousands of equations to describe. The platform is effectively evaluating hundreds of thousands, or millions, of different award splits in a matter of minutes.
Valuable, more so than any other sourcing platform
Simply put, optimization gets amazing results. Even if the category has been negotiated repeatedly over the last ten years, and it looks like the savings opportunities are razor thin, with the ability to analyze more suppliers, more bids, more transportation options, more value-add options, more constraints, and more supplier-specified opportunities, optimization can often identify an additional savings of 10% or more. In fact, the year-over-year average savings from optimization alone on the categories it has been applied to has been clocked at 12%, more than any other sourcing platform.
With optimization, you can create different scenarios, with different suppliers, constraints, and goals and see how the optimal awards differ as the problem definition changes. This inspires a sourcing analyst to look at the problem in different ways.
However, the first three statements in particular are only true if the platform used by default is an optimization-backed sourcing platform . Classically, optimization solutions have been implemented as stand-alone platforms. These were powerful, and when used by the right senior resources who set up the right sourcing events, these platforms generated amazing results, but they were very difficult and time-intensive to use compared to an e-RFX or e-Auction platform. The model had to be set up. RFX data had to be imported. The data had to be validated and cleaned. The model was then run, altered, and re-run until an acceptable baseline was found. Then multiple what-if scenarios were run until a final award scenario was identified. Then the award scenario had to be exported to the sourcing platform so the suppliers could be notified and the contract(s) drafted. All of this was very time consuming. As a result, the platform was not useable across the sourcing organization, was not very affordable as it had to be supplemented by other sourcing platforms, and this process was definitely not efficient.
For mass adoption of optimization, it needs to be supported by an RFX and/or an e-Auction platform for data collection, by analysis and reporting for result presentation and exploration, and needs to be integrated with contract management and the supplier portal for negotiations and communication. In other words, optimization is the engine that powers the modern sourcing platform, it is not a stand-alone solution.
That’s why a modern optimization-based Sourcing platform, and not a standalone optimization module, is the silver lining that Procurement has been waiting for. What does this platform look like? Stay tuned!