Continuing yesterday’s post, here are six more questions to ask once you’ve confirmed the vendor really does have a real strategic sourcing decision optimization solution.

1. What do I have to do to get a good handle on how to make effective use of this technology, and for an organization of my size, how long is it going to take?

The first thing you have to do is get a good understanding of what strategic sourcing decision optimization is, what it can do for you, and, most importantly, what data you’re going to need. I strongly suggest you read the wiki-paper authored by yours truly if you haven’t already. The wiki-paper will tell you:

• The requirements of a true decision optimization system
  which will insure you don’t get taken in by a cheap imitation decision support system
• The basic capabilities a decision optimization system should have to be truly useful for strategic sourcing decision optimization
  which will insure that the decision optimization system you select is most appropriate for the problems your team faces as sourcing professionals
• The basic requirements for success when using a decision optimization system
  which include good forecasts, appropriate cost breakdowns, and knowledge of the required, vs. desired, business rules
• Ten strategies for success
  which will help you get the most out of every strategic sourcing decision optimization project

Then you need to figure out what your potential return is from strategic sourcing decision optimization. Although every project will benefit, the reality is that decision optimization is still relatively expensive technology to buy and the amount of work involved in these projects can be considerably more than an auction. This sometimes requires the time of senior professionals, which can add up. If you’re a small or mid-size company whose largest sourcing project is 10M — and you only expect to save 3%, primarily on reduced freight and inventory by way of better allocations, because it’s a buyers market and auctions work very well — then, considering that the cost of buying, maintaining, and using a good solution starts in the mid six-figures a year, it’s probably not for you. However, if you’re a global 3000 company with a dozen or more sourcing projects in the 50M to 500M+ range, and a possibility of savings of 5% to 15% per project, and your total potential savings is in the 50M to 150M range in the first two to three years, then you should identify the right optimization system for you and start using it as soon as possible.

Once you’ve decided optimization is a useful technology, and one you should be using, you need to review the categories that you will be sourcing in the next 12 months, and then rank them by dollar amount and complexity. The projects that appear in the top half of both lists will be good candidates for strategic sourcing decision optimization. (Note that if your annual spend is in excess of 1B, the doctor can tell you right now that properly applied decision optimization technology will generate ROI for you.)

Armed with the potential projects, you need to devise appropriate cost breakdowns for each of the goods and services under consideration, identify other relevant non-cost and qualitative factors, and prepare the appropriate surveys and RFPs/RFQs so that you can get projects underway relatively quickly. Optimization only achieves significant returns if done right – and this requires that you get accurate bids and cost breakdowns where the cost of the good or service is separated from the freight cost, and any relevant costs such as duties, differential costs of waste and returns, and discounts are taken into account. The extra preparation is definitely worth it when you consider that studies done by Aberdeen in 2005 and 2007 (as referenced in the wiki-paper) found that organizations that employ advanced sourcing methods based on decision optimization save an organization, on average, 12% above and beyond what can be saved in an e-Auction or basic sourcing project.

The amount of time it takes really depends upon the skill-level of the people you have. They have to wrap their minds around decision optimization for strategic sourcing, understand what it really is, how they best use it, and how they have to approach decision optimization sourcing projects and data collection to get the most bang for their buck. If they are junior buyers in skill-level, it could easily take them a few months to truly grasp the basic concept, and chances are they will never be able to take full advantage of the tool until you upgrade their sourcing skill level (through an appropriate certification program such as the CPSM or SPSM, for example). If they are senior buyers in skill-level, they should be able to grasp the basics and re-design the RFXs for the first project within a couple of weeks.

2a. How much functionality is my organization realistically going to be using in 12 months?

Your senior buyers should be using all of the functionality in the strategic sourcing decision optimization tool within 6 – 12 months. The situation now isn’t as it was when these tools were first hitting the market place 7 years ago (at which time the UI alone was so complicated you needed a graduate degree just to understand it). A good tool has a clear UI and good data import capability that allows you to specify the categories and items under consideration, the suppliers who can supply those items, the locations where you need those items (which may be done by way of groupings), and the cost breakdowns (at least by adjusted unit cost and freight cost). The tool should be able to import data from an appropriately formatted excel worksheet, or from an e-RFX or e-Auction module if it is integrated into a sourcing suite. Furthermore, modern software allows each type of constraint that can be defined to be clearly delineated, and step-by-step wizards exist to help you define the constraint appropriately.

Your intermediate buyers should be able to master the basic constraints in this time-frame, and be well on their way to improving their sourcing decisions and relative skill levels.

Even though the tools have improved significantly, strategic sourcing decision optimization, by its very nature, requires a more advanced skill level than other tools in the e-Sourcing suite and your junior buyers may not be up to the challenge. You will need to provide them the training they need to upgrade their sourcing competence to an intermediate level before you can expect them to master the tool, even though your technologically savvy junior buyers will be able to get a reasonable grip on the basics of setting up a scenario and defining simple constraints in a rather short time frame. You have to remember that the use of strategic sourcing decision optimization is advanced sourcing, and this requires more than just a friendly tool – it requires buyer skill.

2b. How much functionality do I really need?

When it comes to model development and solver capability, as much as you can get. This is still a developing technology, and even though you can achieve considerable savings above and beyond an e-Auction just with what’s out there today, there’s still a long way to go.

When it comes to add-ons, it depends on what the company is offering you as an add-on. If it’s services, then, considering you should have guidance on your first few projects, you should strongly consider them if they’re reaonably priced. If it’s custom integration services to your RFX or e-Auction platform, then, assuming these are the right RFX and e-Auction platforms to be using, and the integration is priced competitively, then this is also worth considering. However, if the add-on an enhanced solver module, I’d ask why this isn’t part of the base offering (as it should be).

However, one thing that is important to note, if it’s not easy to load the data into the tool, it likely won’t be used at all. Thus, it’s important to make sure that not only is the import or ETL tool included as part of the basic functionality, but that the import functionality is also easy to use.

2c. And how does this functionality solve my #1 pain today, which is X?

If you’re looking at strategic sourcing decision optimization, chances are you are seeing diminishing savings from your sourcing projects and need a way to improve returns. What you’re looking for here is an answer not based on technical competence, but on sourcing experience. You want the vendor to tell you that their product has been applied successfully by companies in a number of verticals on a number of categories and that, based upon their experience in and around your industry, they expect that you will be able to save in the 5% to 15% range on a well-defined set of categories. You want to know that they have the experience to help you select the right categories to start with that will help you get some quick wins and support for the new technology.

3. How much training is my team going to require to effectively use the software? How long is it going to take them to absorb this training?

It should not take more than a week to get your intermediate and senior buyers up to speed on how to use the tool. However, the training is not really going to be absorbed at a deep level until your professionals apply the tool on a few projects, which should be done under the guidance of an experienced professional who can insure that your team is tackling the project in an optimal manner. Thus, it will probably take a few months, at the minimum, for your senior buyers to truly master the tool.

4. How much is this software REALLY going to cost me in the first year and each subsequent year?

Although real strategic sourcing decision optimization has been around for almost seven years, it only became usable in the last few, and due to its relatively low adoption rate to date, and continued development, it’s still a reasonably new offering. You should expect to be paying in the mid six figures per year, depending on the power of the solution and your hardware and solver license requirements. (Most platforms are built on top of industry leading solvers, such as Ilog’s CPlex, which can run 25K to 50K per license. Plus, you need high end servers if you want to build large models and have them solve relatively quickly. Thus, even an on-demand offering is going to be pricey if you want dedicated solvers and hardware, which you could need if you have large models or intend to use the platform significantly.)

Furthermore, since this technology is still emerging (like real spend analysis), updates should be regular and maintenance will be higher than for e-RFX and e-Auction, so you are probably looking at maintenance (for behind the firewall or ASP solutions) in the 20% range.

Installation should not be time consuming, and should not require more than a few days of consulting. (On-demand should be free if you’re using a basic service that uses shared optimization resources, but if you are asking for dedicated resources, you should expect to pay for some consulting time as a dedicated resource will need to deployed to get this done.)

5. You say you care about your customers and that you are going to provide great service. Prove it!

Ask for references. Talk to them. If the vendor has an upcoming user meeting or conference, ask to go to it. Ask for examples of results their customers have achieved on the platforms recently, and how they can help you achieve the same. But most importantly, ask them if they’ll help you with your initial pilot project at a reasonable consulting rate and see what kind of results they deliver – with their tool.

6. Can I take it for a test drive or a short term lease?

Considering that this software is usually either web-based or a fat client that runs on your desktop, there shouldn’t be any problem for your provider to set you up with a single instance, or copy, for you to use on a pilot project – which they should be comfortable with you undertaking at a low consulting rate – equal to the cost of the consultant that guides you through the pilot project.

7. Can I buy it or implement it in pieces?

Just like you should ultimately buy the entire e-RFx or e-Auction tool functionality up-front, you should buy the entire functionality of the strategic sourcing decision optimization tool up-front as well, but I’d hold off on buying dedicated hardware and solver resources until you’re ramped up and ready to maximize usage of such resources, as a single dedicated high-end machine with a dedicated CPlex license will cost you (well) over 50K a year in additional cost. If you’re maxing out your solver, dedicated resources can be worth it when you consider the ROI that accompanies strategic sourcing decision optimization. But if the hardware is just sitting there, that money is better spent on consulting services to help you get up to speed on how to maximize use of the tool.

Not all optimization vendors are equal … and more importantly, not all vendors that claim to have decision optimization even have it (as their systems barely qualify as decision support). It’s important that you be able to distinguish between the relative strengths and weaknesses of the different products, as well as how much strength you really need, if good decision optimization is one of your driving reasons for selecting a (new) e-Sourcing solution. (And, by the way, as I have been stating since day one, it should be!)

The key with optimization is buying just what you need in the majority of your sourcing events. Optimization is still expensive compared to some other solutions, but more importantly buying too much power could severely impact your potential ROI (as it not only costs more but takes more manpower to use), and buying too little power will be equivalent of flushing that investment down the drain as it won’t solve the majority of your problems. I’m using the word “majority” because there is no general purpose decision optimization product for sourcing that will handle all of your events and solve all your problems. As with just about everything else in business, it’s the 80-20 rule. The best solution is the one that solves as close to 80% as possible at a cost of ownership that maximizes your ROI multiple. You can always do one-time projects with best-of-breed providers or specialist outsource providers for those projects in the remaining 20% where there is enough of a savings opportunity.)

Before I get to the question list, I should point out that it’s almost impossible to cover every question, as many of the questions you should be asking depend on the answers you receive to your first few questions, but I think the question list below is a good starting point.  So, without further ado, here’s the basic list!

1. Does your product meet the four critera for strategic sourcing decision optimization as outlined in the Strategic Sourcing Decision Optimization wiki-paper (initially authored by the doctor, the all-knowing optimization king^*1)? Specifically, does it support the following:
   • Sound & Complete Solid Mathematical Foundations
        such as simplex algorithms and branch-and-bound;
        many simulation and heuristic algorithms do not guarantee analysis of every possible solution (sub)space given enough time, and, thus, are not complete in mathematical terms
   • True Cost Modeling
        many bidders bid tiered bids, discounts, and fixed cost components – the model must be capable of supporting each of these bid types
   • Sophisticated Constraint Analysis
        At a minimum, the model must be able to support reasonably generic and flexible constraints in each of the following four categories
     • Capacity / Limit
          allowing an award of 200K units to a supplier who can only supplier 100K units does not make for a valid model
     • Basic Allocation
          you should be able to specify that a supplier receinves a certain amount of the business, and that business is split between two or more suppliers in feasible percentage ranges
     • Risk Mitigation
          let’s face it – supply chains today are all about risk management, and you should be able to force multiple suppliers, geographies, lanes, etc. to mitigate those risks without specifying specific suppliers, geographies, lanes, etc. to take advantage of the full power of decision optimization
     • Qualitative
          A good model considers quality, defect rates, waste, on-time delivery, etc.
   • What-if Capability
       The strength of decision optimization lies in what-if analysis. Keep reading.
2. Does it support the creation of multiple what-if scenarios and does it simplify the creation of these scenarios?
      The true power of decision optimization does not lie in the model solution, but the ability to create different models that represent different eventualities (as this will allow you to hone in on a robust and realistic solution), to create different models off a base model plus or minus one or more constraints (as this will help you figure out how much a business rule or network design constraint costs you), and to create models under different pricing scenarios (to find out what would happen if preferred suppliers decreased prices or increased supply availability).
3. How fast is it for different average model sizes and can performance be tweaked?
      Optimization takes what it takes. That being said, if one solution takes an average of 1 hour for an average scenario, and another solution takes 10 minutes, all things being equal, if you have compressed sourcing cycles, the 10 minute solution might be better. Emphasis on “might”. This is only true if the faster solution is of the same quality – some models, and some solvers, sacrifice quality and accuracy for speed. The best solution will let you trade off “tolerance” and accuracy for speed. Sometimes it’s easy to get within 1% or 2% in a few minutes, even though that last 1% or 2% could take hours. On a model with low total savings potential, getting within 1% may be enough. And when trying to hone in on the right what-if scenario, it’s nice to get within 1% quickly and then allow the right scenario to run to completion over night after you’ve quickly analyzed half-a-dozen scenarios and settled on your preferred scenario. Thus, tweaking ability is very important.
4. If it supports “real-time” is it “true” real-time or “near” real-time.
      Thanks to significant advances in processor and hardware performance as well as off-the-shelf optimizer technology (like ILog’s CPlex), it’s now possible to rapidly re-build and re-solve moderately sized models using off-the-shelf modeling languages in seconds, allowing for e-auction tools that keep the model relatively small and simple to incorporate decision optimization in near-real-time by simply re-building and re-solving the model every 30-60 seconds (depending on model-size) on a high-powered dual or quad core server with an appropriately configured and optimized CPlex 10. However, this is NOT true real-time optimization and could rapidly break down if the model gets too big or too complex. (For example, real-time optimization requires the ability to merge model construction and model solution in such a way that a new bid can be introduced as a parameter change that does not require the optimizer to rebuild the sparse model matrix and start the solution process over from scratch.)
5. Describe two or three scenarios you have encountered where you could not model the situation exactly for companies in our vertical, how you worked around the issue, and how accurate the result was.
      No optimization model can handle every real-world scenario 100% accurately. If a vendor representative says so, he’s either lying through his teeth or not competent enough to be selling the product. (Note that: I’ll have our support expert get back to you on that is a good answer from an average sales representative.) This is about the only way to get a decent idea of how appropriate the tool is for you. If the scenarios were complex and the constraints based on business rules you hardly ever, or never, use, then the solution is probably okay for you. If the scenarios were simple and the constraints based on business rules you use all the time, it’s probably not the tool for you.
6. Can we do a pilot project before committing to a long term license?
      If you like what you hear, but are still unsure, or are having problems getting the budget approved, a pilot is often the way to go! (Note that I did not use the word “free”. You should be willing to pay for services at a rate that is sufficient to cover the provider’s cost for this pilot – especially considering that many of the companies that offer affordable optimization offerings are only able to do so because they keep their costs and overheads down – and if they gave free services away to everyone who requested a free pilot, they would have to increase their costs, and that would be a detriment to everyone, including you, in the long run.)
7. We’re having problems understanding how this fits into our business or what the best solution for us is. Would you be willing to demo your solution to, and answer questions from, our consultant who understands both our needs and decision optimization technology?
      Let’s face it – just like the right decision optimization tool can deliver huge savings multiples on your investment (10X or more), the wrong tool will simply represent a six (or seven) figure cost that yields little return. If you can’t tell the difference, and there’s no shame in admitting you can’t if you’ve never used this type of technology before, then you should bring in a consultant who can to help you select the right technology, and ensure you are appropriately trained on it, until you are self sufficient and saving an average of 10% to 12% per project put through the tool.