Category Archives: Decision Optimization

Are You Ready To Get Optimized But Don’t Know How? Read On!

Now that you’ve read our last two posts and understand that you need to get optimized (and analytical) if you want to get cognitive, hopefully you’re ready to get optimized but you just don’t know how.

The four-part answer is pretty easy.

1) If you are using a sourcing platform from a modern provider that offers optimization, acquire the module and start using it.

If you’re already using (SAP) Ariba, Coupa [Trade Extensions], EC Sourcing [with bidmode Inside], Jaggaer (Indirect/Direct/Advantage), Keelvar, or SynerTrade, acquire the sourcing module, turn it on, and start using it. We know that not all platforms are equal (as made clear by the Optimizer Persona in the Spend Matters Solution Maps), but all are more than enough when you are just beginning your sourcing journey. Plus, the majority of these providers are all actively developing their optimization solutions and should stay ahead of your optimization needs.

2) If you are not using a sourcing platform, get one that has decision optimization.

We gave you six names, and these six names can all help you. While we have our preferences, the right solution is utterly dependent on your organization size, industry, dominant categories, geography, and culture and which provider matches your profile the best. There’s only six names, and a relatively short RFI should allow you to quickly zero in on the 2 or 3 that are most likely the best for you.

3) If you are using another sourcing platform and it is not meeting your needs and can replace it, replace it with an optimization-backed sourcing platform.

A few of these providers have a large customer base that consist of those that have switched from another provider with a solution that didn’t meet their needs and, thus, have a lot of experiencing with change management, fear squashing, migrating your data over, and getting you up and running on the right processes quickly. Simply craft the right RFI and you will quickly zero in to the 2 or 3 providers that will likely be the best fit in this situation.

4) If you are using another sourcing platform and it is meeting your needs, can’t be replaced at the present time, or both, augment it with an optimization-backed sourcing solution just for those events where optimization is a must-have.

You just bought Source-to-Contract or Source-to-Pay Solution X a year ago and you know that Finance / Operations / etc. will not approve a new solution for at least a few years because they still believe systems should last five to ten years. In that case, you get a pin-point solution that you use to augment your current solution as a bolt-on. Two of the providers in particular that we mentioned — EC Sourcing with bidmode Inside and Keelvar — are small, mid-market focussed, pin-point best of breed optimization-backed RFX solutions that start in the six figure range (or five figures on an event basis) that can be used to augment a traditional Sourcing platform at a low cost and deliver a high value.

And, no matter what Don’t Say It’s Not That Easy. It is. Yes it’s work to create the technology RFX, reach out to the vendors, make the short-list, do the negotiations, select a (new) vendor, create a transition plan, create an integration plan, and get it done. But making the decision to get a platform that will save your organization an average of 10%+ year-over-year and taking action to do it is easy. And there’s no situation there isn’t an answer for. So, just do it. You won’t regret it.

You Want to Get Cognitive? First Get Optimized!

The new “cognitive” buzzword is getting a lot of people interested in modern Sourcing and Procurement technology, and that’s a good thing, except when it isn’t. (How can it now be? Not all providers truly offer cognitive capabilities, not all are equal among those that do, and not all are right for your organization.)

And unless you truly understand what cognitive sourcing can do, when it should be used, what technologies you need to power it, and how to properly apply it, the answer is no cognitive sourcing is right for you.

When it comes to sourcing, a sourcing solution must meet a number of requirements in order for it to be considered cognitive. It must be capable of:

  • supporting advanced cost models
    to allow for an accurate determination of should cost
  • supporting sophisticated automated data collection to populate those models from market indices, statistics bureaus, public (government) data repositories, etc.
  • supporting a large repository of trend analysis algorithms
    to help an organization understand market dynamics
  • support sophisticated analytics
    to help organizations slice, dice, and compare all the insights extracted by the cognitive platform
  • support advanced optimization
    to analyze the cost models and all the supply and logistics options available subject to business constraints

If you look at each of these requirements in comparison to an average Procurement organization with some semi-modern Supply Management technology

  • they have some cost modelling capability in their ERP
  • they have some automated data collection around risk and commodity costs through providers like D&B and Ecovadis and Market Index data providers
  • they have some familiarity with trend analysis in their inventory management systems
  • they have adopted a spend analytics platform, which may be a generation behind, but still gives them some cost insights
  • but they have no decision optimization at all

So if you really want to get cognitive, get optimized. Without a good understanding of what optimization can do, and how to use it, how do you expect to figure out when to apply, and not to apply, cognitive sourcing technology properly.

Will the Trade Wars Be Good for Advanced Sourcing?

Trump is imposing tariffs. China is retaliating. And this is just the beginning. As a result, supply risk and the need for spend forecasting is finally becoming real. But is it becoming real enough for organizations to take action? It’s hard to say. But one thing we do know is that the only way organizations can progress forward is to better understand not only the risks, but the costs.

What are the risks? Many. What are the costs? Significant. And how can you know of either? In the first case, you need to monitor the news, the sentiment of the responses in regards to the news, crowd-source some predictions, and run some advanced analytics on all this data to determine the probability of something happening — and sticking.

And in the second case, you build should cost models with current data, and projected data, to determine the impact of a tariff on the total cost of ownership of the product. This means that a simple RFX or Auction platform is just not enough – an organization needs a platform with deep should cost modelling and the ability to create what-if should-cost models based on projected and anticipated changes.

But even that’s not enough. If the projected increases are significant, then the organization will, at the very least, need to reallocate global supply chains to insure that products, which are currently sourced from multiple suppliers and/or locations, are being exported from and imported into the most cost effective locales the organization has access to. And if this is not enough to keep costs under control, then the organization may need to even source from additional suppliers (in different locations) or re-source the entire category (to the extent possible).

But it’s hard to figure all of this out without an optimization backed sourcing platform. Hopefully this is the kicker that is needed to get these powerful analytical platforms into the hands of more Sourcing and Procurement organizations, as these platforms are desperately needed and reduce spend on analyzed categories by an average of 10%+ year-over-year, making their ROI immense.

But, alas, only time will tell. But if bankruptcy could be on the line (when a tariff wipes out the entire profit margin), maybe this time these platforms will finally take hold.

How Many Billions Are Lost Each Year to Dumb Sourcing?

Today I saw an article entitled E-Sourcing is Dead, Long Live Intelligent Sourcing Systems and all I could say is what parallel world did this article materialize from? Given that we’ve had Strategic Sourcing Decision Optimization with multi-line item support, freight brackets, and carrier support for 17 years, advanced analytics algorithms with smart trend projection and outlier analysis for just as long, and easy access to pretty much all market and public sector buy data in e-friendly countries for over a decade, this should be the case. But it’s not.

We’re not even in a position to say half of mid-size or larger organizations even have anything resembling a modern e-Sourcing solution, and only a small fraction of those have embedded optimization capability, and only a small fraction of their customers actually use it. In reality, e-Sourcing is barely alive and just coming into it’s own. After all, the oompa-loompa empire is only valued at about Two point Five Billion … and in software terms, that’s pretty puny when you consider the market valuations of companies like SAP (approx 107B) and Oracle (approx 220B) … either of these companies could easily buy out the oompa-loompas and put them back in the chocolate factory on a whim! (Which would be a shame since they make great coders.)

But regular readers will know this to be the case, as it’s been SI’s core lament for a decade now — and the market still doesn’t look poised to change. Even though, as SI has stated over and over (and over) again, the average year-over-year savings from the proper application of optimization backed sourcing is 10% across the board. That means if you’re sourcing 105M, that’s 10.5M in savings that could be yours, as soon as you can attack all 100M of spend. If it takes an average of 3 years to get through all spend, that’s 3.5M a year for easy taking. But you’re probably sourcing closer to 1.05 Billion, which means you’re overspending by an average of 105 million, or 35 Million each year. That’s a lot of money, but obviously not enough to take notice.

So obviously we need bigger numbers. How much money is lost in the economy overall each year due to the lack of application of advanced, optimization backed, sourcing? While it’s pretty hard to get a firm grasp on OPEX in the US, and how much of that is addressable by optimization-backed sourcing (as payroll can’t be optimized, only outsourced services, and taxes are taxes), the US Census keeps good data on CAPEX, and in 2015, CAPEX was 1.65 Trillion! Ten Percent of that is 165 Billion. If, and this is an overly aggressive estimate, 10% of that was optimized, that still leaves 149 Billion on the table in the US alone. The US is about one forth of the global market, and assuming CAPEX / OPEX ratios are about equal, this says, globally, that’s about 600 Billion from CAPEX alone left on the table each year because companies aren’t optimizing spend. SIX HUNDRED BILLION. And that’s a lower, lower bound estimate. Is that number big enough for you???

There Are At Least 12 Risk Disconnects … but One You Should Never Overlook!

Over on Spend Matters Pro [membership required], the maverick is running a 12-part Pro series on The 12 Supply Risk Disconnects that Destroy Value that you really should check out. These disconnects not only increase Procurement and Supply Management risks across the board, but often end up destroy all the hard-earned value Procurement tried to extract from the sourcing event or push into the contract.

All of the risks are important, but the most critical in SI’s view is the disconnect between risk and cost. Why?

  1. Not only can one identifiable supply chain disruption not only wipe out all the savings, but increase cost beyond the current solution but
  2. Only an understanding of the true cost of risk will convince most stakeholders and executives to look beyond cost, reliability, marketing differentiation, or whatever else matters most to them. Money talks, and (potential) loss is the one thing that gets noticed.

As the maverick points out, supply risk basically overlays the dimensions of external VUCA (volatility, uncertainty, complexity and ambiguity) on top of the quality value stream and you have to minimize TCO in the face of varying levels of risk. This creates the challenge of how to place a price tag on that risk and another price tag on the cost of mitigating those risks, which is driven both by the outside-in risk you face and also your current level of risk management capabilities. Which is easier said than done, but without a solid understanding of the cost of risk, and an ability to model it against the cost of a buy, you can’t truly optimize your overall total cost of ownership, of a potential buy.

But you need to, and you need to acquire an optimization-backed sourcing solution to model the true cost of each option to make risk-aware Procurement decisions. Because then, as SI pointed out in an earlier post, you can not only Define [True] Procurement Success, but enable it.