This is the fifth and final part of a five part series that revises and ties together key ideas outlined last year on Sourcing Innovation 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 is NOT Direct or Indirect — It is Strategic and Complexity!.

In this series we’ve been discussing the need for a modern optimization-backed sourcing platform by first explaining how it’s not a suite, it’s just sourcing, then explaining how it’s not sourcing, but strategic sourcing, and, finally, that it’s not just strategic sourcing but optimization-backed strategic sourcing in order to master the complexities of the modern global supply chain.

We’ve also spent a significant amount of time going into detail as to why first generation suites, which were typically nothing more than a loosely coupled set of pseudo-related modules organization around a theme, did not make a modern platform, and certainly not one that could be called a modern optimization-backed sourcing platform for strategic sourcing of complex categories across modern global supply chains.

But, as per our last post, there is still one more argument against the need for a modern optimization-backed sourcing platform that we need to address. Specifically, the argument that only custom-manufactured direct categories are complex enough to need a complex solution and that the average CPG or indirect category won’t benefit from an overkill solution.

This argument is flawed. And rather than try to attack it, we’re going to get right to the point. The right way to source a category has absolutely nothing to do with whether it is a direct category for your organization or an indirect category for your business. Nor does it have anything to do with whether or not it is a category regularly sourced by your GPO or whether or not the GPO has it under contract.

Remember, as per our last post, even the categories that were traditionally seen as the simplest indirect categories are sometimes actually among the most complex “direct” categories that the organization possesses! In SI’s paper on Complex Sourcing: Are You Ready, we elucidate how even a category such as paper is among the most complex categories that the organization can source.

Secondly, what is indirect for your organization is direct for another organization, and a supplier in particular. Calling it indirect only masks the fact that, at some point in the supply chain it is a complex direct category and if your supplier, or GPO, is not approaching it correctly, a significant amount of money is being left on the table.

While there are some that would very much like to forget that before the introduction of e-Negotiation (e-RFx and e-Auctions), a number of “indirect” categories used to cost organizations millions — such as tires in automotive, lights in aviation and printer ink in back offices everywhere — this is not the right thing to do. We have to remember that these organizations never understood how much these “secondary” categories were really costing them and that, sometimes, 100% profit margins were the norm, because they often did not have the ability to go out to market like we do today.

Thirdly, while a product organization might see services as indirect as such a category would be labelled as non-core, and, similarly, while a service (or financial) organization might see a product category as indirect as it too would be labelled non-core, if such service, or product, is essential for the organization to deliver the product, or services, the organization profits on to the end consumer, how can such a service, or product, really be non-core?

For example, if successfully selling that next generation cellphone requires augmenting the supplier’s design team with a new design team that can enhance usability above the competitor’s product without sacrificing a low-price point or quality, that is a critical service and should not be treated as a secondary outsourced indirect category. Similarly, if delivery of your big data analytics services requires a specific high-end laptop configuration that can not be easily met by all providers, and a sub-par configuration would result in delays or service degradations, this is not a category that can be thrown over the wall to a GPO either.

In other words, direct or indirect has no correlation to the complexity of a category or its strategic importance to the business and, thus, should not be used to determine the appropriate sourcing strategy or sourcing platform. The right way to initially classify a category is to use a basic measure that that captures its strategic importance and its complexity and any category with a measure that exceeds a certain threshold must be strategically sourced. The rest can be sourced using simple spot-buys or other traditional methods provided that they are not too complex, or too strategic in someone’s view, for these traditional methods.

And, as such, there is no argument not to use an optimization-backed sourcing platform on every single category that the organization needs to source.

This is the fourth part of a five part series that revises and ties together key ideas outlined last year on Sourcing Innovation 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 Why Your First Generation Sourcing Platform Is Not Ready For Modern Sourcing.

As per our earlier posts, first generation sourcing platforms, circa 2005, were a miracle cure for the average Sourcing organization that was drowning in data and demands to save, save, save without enough time or resources to tackle even a fraction of the categories that needed to be under management.

For example:

• First generation Spend Analysis systems helped the Sourcing team identify the largest spend categories and the largest organizational suppliers, which were prime candidates for the first strategic sourcing evens put through the new sourcing platform.
• First generation RFX systems helped the Sourcing team capture more data from more suppliers than ever before and not only better qualify potential suppliers but collect more detailed bid breakdowns for analysis.
• First generation e-Auction systems helped the Sourcing team put non-strategic high-dollar categories with very little complexity out to bid for quick savings success.
• And, most importantly, first generation decision optimization systems allowed the sourcing team to build realistic cost models, capture constraints, and devise realistic award scenarios that identified real savings.

In other words, many organizations that acquired these suites and applied them successfully saw year-after-year returns of 10%+ on the spend brought under management. And a few are even seeing some savings today, but just like the second auction saw little savings and the third auction saw a price increase, the year-over-year return is dropping. Why? Because while these first generation platforms were infinitely more powerful than anything that had come before, they weren’t designed to capture the full extent of complexity in an average category — complexity that has been considerably increased since the early days of sourcing due to increased outsourcing, increased globalization, increased regulation, and a constantly evolving global marketplace. Back in the day, no one would have thought that even a simple paper tender (that’s right, paper) would encapsulate all nine dimensions of sourcing complexity as defined in “what defines complex sourcing and why does it matter” on Spend Matters.

Not only is there just no way to do a strategic analysis and justify a strategic decision without a basic level of true mathematical optimization capability that can take all costs and constraints into account, but there is also no way in a standard suite to:

• Collect the full breadth of supplier responses
  as the limited form-based data collection in first generation solutions don’t allow for expressive responses, bids, or varying from a rigid, inefficient, yes/no fixed cost template
• Create dynamic drill-down graphical reports
  as the built-in static reports with limited, if any, 2-d graphing options don’t allow for modern graphical analytics
• Conduct multi-user sourcing events
  as they were set up for non-collaborative single-user sourcing events and not modern, complex, categories that require entire teams
• Create accurate cost models
  as the limited cost models, with little or no formula support, are too primitive for many of today’s complex categories
• Support dynamic workflows
  that adapt to the categories and the organizational needs, as everything has to fit the rigid workflow or the suite cannot be used

A modern sourcing platform is needed, and by now it should be quite clear that it should be optimization-backed, but there is still one common argument that is used by many vendors to try and skirt the issue, and while it’s not valid, it can sure be convincing when spoken by a charming and charismatic salesmen — and this is the topic of the fifth and final post in this series.

This is the third part of a five part series that revises and ties together key ideas outlined last year on Sourcing Innovation 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 Optimization, It’s Strategic Sourcing.

In our last two posts we outlined a complex scenario that could not be accomplished with a traditional sourcing suite that was just a loosely coupled set of modules that did basic sourcing tasks and provided many reasons why the power of the suite did not even come close. Simply put, we have not only reached the point where it is impossible to define a sourcing event of any magnitude without hitting at least a few of the nine dimensions of complexity covered in “what defines complex sourcing and why does it matter” on Spend Matters but we have also reached the point where the data collection, manipulation, and analysis requirements are so intensive that only a sourcing solution built on, and backed by, a true optimization engine is going to be able to handle the data, manipulation, and analysis required.

Now, we’re not saying that the right strategy for every event is optimization, but we are saying, as per SI’s already classic paper on Optimization, What Comes Next, that we have reached the point where you cannot determine the right strategy without optimization to at least build and solve a baseline cost model given current market prices and expected bidder increases or decreases from the last event to determine whether or not optimization might be helpful.

For example, while a 3% savings potential might be enough for a (strategic) sourcing auction or optimization-based multi-round RFX, a 3% drop in expected product cost does not necessarily imply a 3% savings potential. If that drop is from remote suppliers that ship down lanes where costs have risen 10% and shipping is 30% of the overall total cost model, there is likely no savings potential. The right strategy is likely a renegotiation with the incumbent for a contract extension or a spot market buy. Similarly a 2% drop in price combined with a 5% drop in logistics costs could equate to a 3.5% savings potential under the right circumstances, which is substantial on a 50M+ category.

Plus, with bundled discounts, volume discounts from suppliers and carriers that take effect at different price points, different import and utilization costs for each supplier, and an ever increasing plethora of capacity constraints, mandatory award splits to minimize risk, secondary goals of minimal environmental impact, and so on, it’s often impossible to determine what the lowest cost solution is and, thus, if the cost increase associated with assigning a (greater percentage of the) award to a preferred supplier seen as being more valuable in the long term is actually worth it.

In many situations, there’s just no way to do a strategic analysis and justify a strategic decision without a basic level of true mathematical optimization capability that can take all costs and constraints into account. Spreadsheets were breaking under the strain of basic sourcing requirements years ago. Now these sheets are just shards of glass — which will eventually cut you if repeatedly handled.

That’s why you have to not only graduate from a suite to an integrated sourcing platform but, when you do so, select one with integrated optimization capability. While you won’t need to use optimization in every event, you’ll always have the option and always be able to use the advanced mathematical capability to determine both the savings potential and, sometimes, even the odds of success (as you will be able to iterate through dozens of what-if scenarios based upon expected supplier and carrier bids and proposals).

But while we have clarified why traditional suites, built from a set of loosely integrated modules, are not modern sourcing platforms ready for complex sourcing, we have not clarified why many of these suites cannot be upgraded to sourcing platforms. We will address this in our next post.