Author Archives: thedoctor

Why You Need Mass Adoption Of An Optimization-Backed Sourcing Platform

Last week, in our post on why Higher Adoption is Where the True Value of Optimization Lies, we emphasized the importance on not just having optimization, but an optimization-backed sourcing platform that can be used by the most junior of buyers. We focussed on the efficiency, time savings, and value such a platform would bring, but didn’t give you any hard numbers. While the hard numbers will be hard to come by, SI expects that the savings that hit the bottom line from such a platform will increase by at least 150% over using stand-alone optimization, and more than likely will double what an organization would see if it just used a regular strategic sourcing platform without optimization. We know that 2.5X is not a very impressive number when vendors go around talking about 10X ROI, but the ROI that vendors promise is relative to the cost of the platform, not the ROI relative to the organization’s bottom line, and that’s what really counts.

The reality is that, at the end of the day, after COGS, depreciation, taxes, etc. are factored in, a good Procurement organization might only take 2% off of the bottom line. This doesn’t sound that impressive, unless the organization is a 10B organization where 2% is 200M, in which case it’s knock your socks off impressive. Now imagine if that same Procurement organization could increase the straight to the bottom line savings by 150% and show a bottom line savings of 5.2%. That’s another 320M in annual savings for a total savings of 520M! That’s buy everyone on the Sourcing team a custom made Jaguar savings because no other initiative is going to take that much off the bottom line.

But you don’t have to be a 10B organization to see the impact. Imagine you are a small mid-size organization with only 100M in annual spend. Instead of seeing an average year-over-year impact of 2M, you’d see 5.2M. If a fully burdened FTE is 200K and you had a small Procurement department of 5 people managing your spend, the department’s ROI would go from 2X to 5.2X in a single year, and that is quite significant.

So where are these, quite conservative, numbers coming from?

  • A Best In Class Organization has 80% of spend under management (Hackett, Gartner, etc.)
  • A Best in Class Organization will strategically source approximately 1/3 annually (due to resource restrictions) (Crowd Wisdom approximation used by many vendors)
  • A Best In Class Organization with stand-alone or hard-to-use optimization capability will only put the top third of complex, strategic, or high volume spend through the organization (Generous crowd wisdom approximation based upon SI’s interaction with optimization vendors)

As a result, (at most) one-third of one-third of four-fifths of spend gets optimized on an annual basis, or about 9% gets optimized using strategic sourcing decision optimization and the full extent of its capability.

However, if the organization has an optimization-backed sourcing platform that is configured for one-click evaluations and automatic weighted auction awards for low-cost / standard categories,

  • 98% of spend can be under management (as it can flow through the platform as easy as it can flow through an auction or spot buy RFP),
  • one half of that can be sourced annually due to efficiency gains
  • and all of this spend will be subject to optimization.

This means that about one half of organizational spend, or about 48% of spend, can get at least partially optimized on an annual basis. In other words, an organization can subject 5x its spend to optimization on an annual basis.

The net result is that an organization that adopts an optimization-backed sourcing platform that can be used by every buyer will see at least 150% more savings hit the bottom line every year. Why?

If we look at the numbers:

  • the average return from Procurement at a world class organization is 4.7% (Hackett Group)
  • the average return on tail spend (which is never strategically sourced) is 7.1% (Hackett Group)
  • the average return from SSDO on a strategically sourced category where the full power of the solution is enabled is 12% (Aberdeen)

This leads to the following (where we assume 20% of spend is “tail spend”):

Traditional:
09% using SSDO @ 12.0% savings = 1.0% savings
18% using SS   @ 04.7% savings = 1.0% savings
TOTAL = 2.0% savings
 SSDO Platform
38% using SSDO @ 12.0% savings = 4.5% savings
10% using SSDO @ 07.1% savings = 0.7% savings
TOTAL = 5.2% savings

Now, mileage will vary among organizations, but this example should make it pretty easy to see that optimization is a huge value driver that will have a significant impact on your bottom line when it is widely deployed.

So if you want to know what to look for in an optimization-backed sourcing platform, download Optimization: Higher Adoption is Where True Value Lies (registration required) today and find out what you need to take optimization from a success to a smashing success in your organization.

Technology Sustentation 80: The Cloud

As SI said in our post on technology damnation 80, software was good. Hosted ASP was better. True multi-tenant SaaS was better still. But the “cloud” is, more often than not, the one step back that follows the two-steps forward.

The cloud is not a white fluffy cloud full of day dreams, it is a gathering storm cloud that could soon erupt and flood your entire operation while the hail it dispenses pummels you to a bloody pulp.

As per our damnation post, if you are not careful, you could:

  • lose your mail,
  • lose your data,
  • lose your platform, and
  • lose your customers as well as
  • lose your supply chain visibility,
  • lose your revenue stream, and
  • lose all the cash in your bank account

And you could be permanently lost at sea when the floods carry you away.

Unless, of course, you take precautions. What kind of precautions? Every kind of precaution you can take. But at a minimum:

  1. Make sure that your providers’ platforms are designed in such a way that not only is there no data cross-pollination, but that there is no access cross-pollination. This may require that the provider not only create a new instance for each client, but run it on a new virtual machine. (The database can be on one server, as long as it’s encrypted and the encryption for each client uses a unique key so that if a hacker gets through to the database through another client’s poor security configuration, and gets all the data for that client, your data can’t be decrypted.)
  2. Make sure that the provider supports encryption across all of your data, not just parts of it, and that it is up to date (and up to snuff). Even data that might be considered inconsequential can be enough to be damaging if enough bits of it are pieced together.
  3. Make sure the provider does near-real time incremental, replicated, distributed, off-site back-ups to make sure that, in the case of hardware failure (or FBI/NSA server seizure), your data is not lost.
  4. Make sure the provider has multiple real-world data centres that the platform can be run on in case one (or more) data centres become unavailable.
  5. Make sure the provider has a distributed fault-tolerant up-time monitoring solution that can detect if an application instance becomes unavailable and restore the most recent back-up to a different data centre and do the necessary re-routings in (near) real time.

In other words, security, fault-tolerance, and distributed processing and back-up are critical. Without it, you’ll be hacked, your system will go down, and you may not get it (or even your data) back.

3 Reasons STEM Education is the Future of the Logistics Industry

Today’s guest post is from Lauren Willison, the Director of Admissions at Florida Polytechnic University.

Today’s logisticians require more than a just basic planning and routing skills to succeed. This is due in large part to the continued development of cutting-edge technology such as robotics and automated machinery, which requires logistics employers to look for professionals with advanced technical expertise. Universities are matching this demand by offering logistics degree programs that focus on STEM subjects — science, technology, engineering, and math — in a hands-on learning environment.

A higher education in STEM offers the best training for the logistics field because it offers students tactical knowledge to improve logistics management and adjust to an evolving industry landscape. Here’s how:

Extensive Training in Technology

The STEM disciplines are unique in the academic world because they are quick to change and adapt to evolving industries and careers. STEM-focused institutions stay up-to-speed by offering students exposure to emerging technologies such as 3D printing. According to EFT’s 2015 3PL and Contracting Report, 19.2 percent of manufacturers and retailers use 3D printing in their businesses; however, only 1.5 percent have the expertise, knowledge and services to use these technologies effectively. STEM students have the opportunity to use 3D printers, for example, and practice producing exact replicas of parts and products. Increasing proficiency with new technology allows STEM-educated logisticians to make faster, cheaper, more reliable and more sustainable deliveries.

Cross-Disciplinary Education

An interdisciplinary education builds well-rounded logisticians and supply chain professionals who can eliminate the skills gap in the field. Although STEM focuses on four subjects, a STEM education provides in-depth training in a wide range of technical subjects that logisticians should know. With courses ranging from hazardous materials management to Six Sigma applications, students can apply textbook concepts to in-class activities modeled after real-world problems.

Logistics is no longer a field where employees can rely on just hard skills. Soft skills, such as time management and leadership ability, is essential to move forward in a logistics career. A STEM education develops a healthy combination of both skill sets, and provides a more managerial perspective on production and services in logistics. Students in STEM learn to efficiently manage logistics processes by studying concepts such as product design, inventory control and capacity management. During the process, they also learn how to work in teams, balance heavy workloads and think strategically to improve shipping and distribution processes.

Low Student-to-Faculty Ratios and Internships

Universities wholly dedicated to STEM often boast better student-to-faculty ratios. This means students receive more individualized attention from their professors, from extra help on assignments to career advice. Students who take advantage of this dynamic gain a more wholesome perspective on the logistics industry.

Additionally, some STEM universities will partner with key players in the logistics and supply chain industry. This opens up research and internship opportunities and allows students to gain valuable field experience. An internship, particularly one with a prominent or well-respected logistics company, gives students the chance to apply new skills, excel in the field and play an active role in improving the way society manages logistics.

Thanks, Lauren.

Procurement Sustentation 11: Postal Services

As per our infrastructure damnation post on Postal Services, public postal services, even though not widely used by most large enterprises, are necessary to prevent private monopolies and to force the private enterprises to be more competitive than they would otherwise have to be.

More importantly, they are often vital for large retailers that depend on direct to consumer sales (and shipping) as, sometimes, public sector service prices (for large retailers who cut good deals) are better than private sector prices, and just as quick (as many postal services have enough carriers to cover every door 5 days a week without having to add staff or miss promised delivery dates in peak seasons).

But the costs might skyrocket as many postal services go deeper and deeper into the red, and look to stabilize themselves through increased package costs (and USPS rates recently went up rather significantly in the US for parcels), and those retailers not ready for this may find themselves losing customers hand over fists who balk at shipping prices that dwarf the costs of the products they are buying. Even if the retailer has the volume to negotiate only a slight increase, any increase can be devastating.

So what can a retailer do?

The first thing it needs to do is try to lock in long term price agreements with the public sector postal services it is dependent on. That way, if prices do rapidly rise, it has the time to negotiate the best deal it can with private carriers if it has to go the private route.

The next thing it needs to do is start negotiating with multiple private carriers that can handle its volumes and try to negotiate deals as good as it has in the private sector and switch about half of it’s volume to the private carrier who wins. That way it has both options, and can even switch back to the public sector if the private sector option because more costly or risky.

Finally, it has to explore in-store or near-store pick-up options. For example, Amazon is exploring locker pick-up in urban locations that can be as fast, or faster, than direct-to-door shipping, and cheaper too. Multi-channel delivery options are the key to perpetual success.