Originally posted on on the e-Sourcing Forum [WayBackMachine] on Sunday, 27 August 2006

Friday we noted the effectiveness of decision optimization and how it can enable early adopters to identify average incremental savings of 12% above those that basic, price-focused auctions alone have generated, according to Aberdeen’s recent “Success Strategies in Advanced Sourcing and Negotiations: Optimizing Total Costs and Total Value for the Next Wave of e-Sourcing Savings” in June of 2005. Yesterday we discussed the factors that combined to downplay decision optimization’s importance to a successful e-Sourcing process. Today we will discuss how the market is changing and why decision optimization will soon take its rightful place at the heart of strategic sourcing initiatives.

Four major factors are currently combining to elevate the importance of decision optimization to strategic sourcing. Briefly they are:

• Extensive use of e-Auctions over the last 3-5 years by early adopters.
• Optimization Technology has evolved.
• Solution Providers are integrating optimization into their platforms.
• Solution Providers are recognizing that there needs to be a significant amount of sophistication under the hood.

(1) Extensive use of e-Auctions over the last 3-5 years by early adopters and market leaders have sucked all of the fat out of supplier margins, rationalized the supply base, and streamlined the process to the point where there is essentially no more money to be saved on auctions alone.

(2) Optimization technology, like all technologies undergoing an evolution, has become more accessible and easier to use. No longer does it take a heavily trained PhD to use today’s optimization products. A BSc with minimal training can be up and running with today’s tools in a few hours, and comfortable within a few days. (However, it still takes a PhD, or PhD team, to build the product, but that’s why market leaders are hiring very well educated and experienced teams.)

(3) Leading Solution Providers are recognizing that decision optimization needs to be an integrated part of an e-sourcing platform that supports the full range of e-sourcing activities and are incorporating these capabilities into their product suites.

(4) Leading Solution Providers are recognizing that a minimal amount of sophistication is required in the model and building this into their products. For example, whereas Iasta’s bid optimization 1.0 product contains the basic concept of Ship Tos by way of allocation groups, their forthcoming product, among other capabilities, will eventually support Ship Froms and discounts, which in turn support freight lanes and volume-based pricing.

I see a very bright future for decision optimization enabled e-sourcing platforms, both for solution providers and their clients who will now have the opportunity to maintain double digit savings in their sourcing events for years to come. But I’d like to know what you think. Who’s using it now, Who’s planning to use it, and Who’s not. And why?

For a more in-depth discussion of decision optimization, what it is, what it is not, how it enables decision support, the benefits it provides, and strategies for success, see the “Strategic Sourcing Decision Optimization: The Inefficiency Eliminator” wiki-paper over on the e-Sourcing Wiki [WayBackMachine].