Category Archives: Decision Optimization

Anticipatory Demand Planning is Good, but Anticipatory Shipping?

SI can believe that Amazon patented a Method and System for Anticipatory Package Shipping (US Patent 8615473) but can’t believe it would use this for more than a small number of items. Nor does it believe the system would be implemented as outlined in the patent as filed, at least in the short term.

It took Amazon 7 years to turn its first profit, and while Prime is currently very profitable to Amazon (which makes $78 more in profit per year per Prime customer, on average, than non-prime customer according to CIRP’s market research – Source: Wired), those margins would drop substantially if Amazon started shipping tens, or hundreds, of thousands of packages a year that no one wanted. Amazon does have an efficient distribution network and probably has the absolute best deals with postal and courier services that can be papered, but every shipment costs money and every unnecessary shipment eats into profit. Returns cut into profit margins enough, how much are returned shipments to nowhere going to cost?

Thanks to big data, predictive analytics is getting better by the day, but it’s still hit and miss at a granular level. While it’s pretty easy to use correlation data across a large customer base to predict that you are likely to desire an item, it’s harder to predict whether or not you’d actually buy it, and if you would, at what price point, assuming you don’t already own the product in question. (It’s always telling the doctor he wants books and media he already owns.)

As a result, any predictive analytics at the individual consumer level are going to be hit-and-miss at best. Predictive analytics work best across a large consumer base with a lot of data where one can predict that, on average, 5 in 100 people who match a profile will buy the product from Amazon.

And, from Amazon’s viewpoint, the best use of the predictive analytics is on new releases, as the bulk of sales in many of its categories, and books and media in particular, are in the weeks immediately following a new product release. With the right data and the right algorithms, it can not only predict how many units it is likely to sell against its current customer base, but if the demand is enough, how many in each region that is associated with each distribution center and how the orders will likely track over time on a daily basis.

In this, and only this situation, would anticipatory shipping, and in particular, anticipatory packaging, make sense in the short term. For example, if Scott Adams were to release a new Dilbert book and Amazon predicted 200,000 copies would be sold in the first 3 weeks, and expected that it would get 50,000 of those sales, pre-packaging 40,000 for shipment and then distributing those across it’s DCs such that each DC received a number of books proportionate to the expected sales in the serviced area would be a good idea. All Amazon would have to do to speed up shipment would be to slap the delivery address on the boxes as the orders came in and have them ready to go in the next pickup for local delivery.

In the future, once the system is fine-tuned and its delivery partners have the technology to replace a unique delivery address identifier with a specific delivery address on-the-fly, Amazon can pre-ship a set number of these pre-packaged items to the local post office or delivery company every day, which can, in turn, load those packages onto the appropriate courier truck each morning as the addresses in the system are updated with consumer delivery addresses sent over by Amazon upon each purchase.

But not everyone would get faster shipping service. In order to prevent too many unnecessary shipments and loss, Amazon would have to err on the side of caution and pre-package (and pre-ship) less unit of an item than it expected to sell, and restrict the anticipatory shipping and packaging to only those items expected to have a large sales volume. In most cases, the best Amazon will do is optimize the distribution of inventory across its warehouses. However, this can still take a day (or two) off of average delivery time, so this is still a good start.

Any differing opinions?

Where Is Your Greatest Risk? Not Where You Think It Is.

As per a recent piece by Simchi-Levi, Schmidt, and Wei in the current issue of the Harvard Business Review on managing unpredictable supply chain disruptions, there is little correlation between how much a firm spends annually on procurement at a particular site and the impact that the site’s disruption would have on company performance. In reality, the greatest exposures often lie in unlikely places.

Moreover, in many supply chains, these exposures are typically not realized until a low-probability, high-impact event — such as a Hurricane, Earthquake, SARS outbreak, or other mega-disaster — occurs. In these situations, companies find out that they significantly underestimated the impact and are not adequately prepared because their traditional models for evaluating and preparing supply chain risk break down as there is typically a lack of historical data for low probability, infrequently occurring, high-impact events. (Big companies have to deal with poor supplier performance, forecast errors, and transportation breakdowns everyday and traditional risk models can thus adequately predict, and allow the organization to prepare for, these impacts.)

But, as the authors point out, it doesn’t have to be this way. Companies can not only determine the potential magnitude of a disruption without historical data, but can even do so without even knowing what the disruption is. This is because, at the end of the day, the specifics of a disruption don’t really matter — only its impacts do. Be it flood, famine, or fire — you don’t care why your factory isn’t producing — you only care that it isn’t and you have to find an alternate source of supply. And it is possible to model the impact of a disruption at any point of your supply chain without knowing the event that caused it, as an impact is either going to eliminate or cut off supply or production.

To this end if, as the authors indicate, you develop a mathematical model (that can be computerized) that focuses on the impact of potential failures at points along the supply chain (such as the shuttering of a supplier’s factory or the inaccessibility of a distribution center), rather than the cause of the disruption, you can quantify what the financial and operational impact would be if a critical supplier’s facility were out of commission for, say, two weeks — whatever the reason. And that’s what you really care about.

In their paper, the authors describe a sophisticated linear optimization model that integrates predicted Time-To-Recovery (TTR) factors for each node (based upon historical recovery times for the supplier or distributor after a disruption) with Bill-of-Material (BoM), operational measures, financial measures, in-transit inventory levels, on-site inventory levels and demand forecasts for each product. When one node is removed at a time from this model, it can be used to find the supply chain response that would minimize the performance impact of the disruption (such as reducing inventory, shifting production, expediting transportation, or reallocating resources) and then calculate the resulting operational performance impact (PI). The node with the largest PI presents the greatest risk and is assigned the largest risk exposure index (REI) of 1.0 (and all other nodes are indexed relative to this value).

While you may need such a model to determine the full impact of a disruption, you don’t need such a complex model to determine the big hidden risks in your supply chain (which are often the result of sole-source supply arrangements somewhere in the supply chain, possibly at tier two or three). All you really need to do is map the full supply chain for every product you produce down to the raw material supply. Then you can quickly identify sole-source supply, single-factory or single location production, bottle-necks in the distribution network, etc. which lead to hidden risks.

And once you have identified the major risks, and collected the data to appropriately access the potential impacts of a disruption, you can build local models to analyze the extent of the risk exposure. And as you build more and more models, you work your way up to the point where you can begin working on the model described by Simchi-Levi, Schmidt, and Wei, incrementally. No big bang modelling approach needed. All you need to do is get underway with a good supply chain visibility solution, such as Resilinc‘s.

Bravo Business Center 2.0 – A Complete Category Solution for Retail Part III

As per part I, two years ago we reviewed BravoSolution’s Business Center Category Sourcing Solution that took e-Sourcing to a new level for nine common categories that provided the Supply Management organization with a considerable sourcing challenge. In addition, we noted that BravoSolution didn’t stop there and kept going until they built a solution that, capturing the years of experience and knowledge built up by their global sourcing and solutions teams (who work out of offices in ten different countries on four different continents), captured all of the common categories for entire industries. This allows a sourcing professional in those industries to use the Business Center as a complete sourcing solution and apply built-in best practices built up from decades of experience.

Then, in Part II (dot 1 and dot 2), we noted that one of the industries that the Business Center serves, out of the box, is MRO because it is a vertical that is almost tailor-made for a business centre solution. Even though, as a category, it is one of the broadest categories imaginable, MRO organizations are generally not sourcing any particular product or service in volume and success often depends not on identifying the supplier who can give you the best price at the best service level on a part, but on identifying the supplier who can give you the best average price at the best average service level of a large market basket of parts (or the supplier who can bundle the services associated with installing a related market basket of parts at a competitive rate). Part II detailed how the business centre guides a buyer through the process, automates as much as possible, and makes it as easy as possible for a buyer to take a sourcing event from conception through award.

Today, we are going to discuss the business centre solution for Retail, used by some of the largest retailers in North America and Europe. The retail solution is designed to support categories with a large number of products that need to be sourced to a large number of distribution centres which serve a large number of stores that need variable volume levels of different products. These events need to be built on sophisticated models that can fed to an optimizer because the variable demand for a product means that not only do you need to consider multiple bids from multiple suppliers and multiple lanes, but buying certain products from certain suppliers for low demand locales could result in a lot of LTL shipments that will significantly increase transportation costs and buying products that will need to be shipped great distances for repairs or warranty claims will also drastically increase TCO.

The BravoSolution Business Center Solution for Retail allows the sourcing organization to define all of it’s distribution centres, all of its stores, the stores served by each DC, markets, the markets served by each store, the warehouses for each supplier, and the DCs that the supplier warehouses are able to serve. It also allows the sourcing organization to define all of the items that it buys, all of the supplier products, the mapping from supplier products to buyer items, categories for its items, and categories for the supplier items. All of the distribution centres, stores, warehouses, items, products, and categories can be uploaded from an (Excel) datafile, and so can starting prices.

It also allows for the easy definition of a very sophisticated discount model that can capture any convoluted discount the supplier can come up with. In addition to the standard volume rebate by product, volume rebate by spend, volume rebate by category, volume rebate by category spend, and volume rebate by supplier spend, suppliers will often offer new store discounts, co-op discounts, payment discounts, EDI discounts, in-store promotion discounts, defective discounts, and cross-product discounts where a discount will be offered on X for every unit of Y purchased. The workflow, and interface, is set up to allow for easy capture of any, and all, of these discounts.

The workflow also allows for the definition of (additional) item attributes which can be used in qualitative constraints in the optimization model, which will allow a sourcing professional to create models which will only include eco-certified items, validated suppliers, etc. in the award. It also supports price targets, so that a buyer can determine the impact of a proposed price decrease in an optimization model and use this information in fact-based negotiations.

Once all of the stores, distribution centers, warehouses, items, products, and categories are in the system, project definition is extremely easy and, as with MRO, the sourcing specialist is walked through the project which starts by identifying the categories being sourced, verifying the dc-store structure, uploading the projected demand, selecting the suppliers, verifying the supplier-warehouse buyer-distribution center and supplier-product buyer-item mappings, defining any bidding requirements the supplier has to meet, sending out the RFX, verifying the responses, and pushing the responses into multiple pre-defined optimization models, which will include base-line and incumbent models. The sourcing specialist can then create additional what-if models, including what-if models on target pricing, go back to the suppliers for a subsequent bid round, and continue the optimization (and bid-rounds) until the specialist is ready to make an award (and push the award into the contract management module).

As with MRO, the Business Center for Retail is optimized to make sourcing, and re-sourcing, of all of the retailer’s categories as easy and painless as possible so that, if needed, less critical categories can be driven by a junior buyer (under the guidane of a senior buyer) and free up the senior buyer to focus on the high-value and strategic categories. In addition, BravoSolution’s Global Team has the experience to get this solution up and running for even the largest of retailers in a matter of weeks. It’s a quick way for a large retailer to start advanced sourcing and get it’s costs under control.

Bravo Business Center 2.0 – A Complete Category Solution for MRO: Part II.2

In Part II.1, after noting how BravoSolution transformed a solution that was a complete category management solution for nine (9) somewhat disparate categories, to a complete vertical solution for five different verticals (with more coming in the future) that was based on the collective decades of experience of their global sourcing team (working out of ten offices in four continents) in those verticals, we noted how in BravoSolution’s Business Center, the basic templates are loaded and ready to go. All that an organization has to do to get started with a basic event is upload its item list, market baskets, list pricing for each supplier (and current / previous bid discounts), and current contracts; define it’s service level equations and cost-vs-service level trade-offs; and define its bidding guidelines and key milestones, and a basic event is ready to go!

In addition to being able to capture all of the categories, sub-categories, and items of interest, the platform can also capture all of the buyer locations — organized by region, state, and city — and supplier service locations — also organized by region, state, and city — and the platform allows a buyer to restrict which service locations can service a buyer location and the supplier is still able to define further restrictions still based on the supplier’s capabilities. In addition, a supplier can also suggest alternate items, with alternate pricing, for each item (over those selected by the buyer) and a buyer can accept or reject the alternates that are proposed. These alternates can have their own pricing, discount, and shipping & handling rules as well. For any category, sub-category, or item with a price that is largely driven off of one or more market costs (like steel or energy), the supplier can specify the relevant price index(es) and the percent that the market cost is driven off of the index(es). So, if a steel part is 50% steel, 10% energy, 25% specialized labour, and 15% other, the supplier can indicate that steel, energy, and specialized labour are the primary cost drivers, link them to the buyer recognized indices, and indicate the threshold change at which a price will need to increase or decrease. The buyer can then accept, or reject, the bid and if accepted, do multi-year what-if scenarios and make optimized multi-year awards that take expected cost increases or decreases into account, reducing the number of sourcing events and freeing up its strategic sourcing team for more strategic value-add activities, such as supplier performance improvement.

And the best thing about the solution is that the entire workflow is mapped out and easy to follow by even the most novice buyer on the sourcing team. First, the buyer is walked through setting up the guidelines for the supplier and customizing the workflow. This involves sending out an intent to respond (to avoid wasting time creating RFX sheets for uninterested suppliers), creating the general instructions for the event, identifying the milestones (steps) and target dates for completing each milestone (step), drafting the announcements for the various milestones and tracking their distribution, and selecting/creating the appropriate training materials for download by the suppliers (which can include step-by-step instructional videos for each step of the process).

Then the RFI is initiated to collect basic supplier information, product and service capabilities, service history, and standard pricing practices. Based on this, a basic product and service level evaluation is conducted (which insures that minimum required service levels can be met and that minimum quality levels are achievable), and any suppliers that don’t meet the minimum requirements are eliminated before the RFQ. At this point, the required service areas are defined (based upon the uploaded and/or historical service areas that can be defined at the region, state, and/or city level), the market baskets (and the component categories, sub-categories, and items and their mappings to default, pre-approved, supplier items) are finalized, discount categories are created, and any required shipping & handling rules are created.

The RFQ is then sent out and the suppliers can either enter their bids through the supplier portal, or download an Excel sheet, which can include their historical bids (if they bid in a previous event) that they can complete offline and upload if it’s easier. The suppliers can then define any general or (basket specific) discounts through the portal in a powerful and flexible manner on their list-price bids (which makes bidding for them as easy as cutting and pasting their list-price bid-sheet into the Excel sheet and then defining their discount categories, versus having to create multiple pricing sheets for each type of discount). Finally, the suppliers can fill in their shipping and handling costs and requirements (such as minimum order size, service location restrictions, etc.) and submit their bid. Optionally, the suppliers can also specify the dependence of high-dollar, or variable, categories on price-indices and additional discounts for alternate payment terms.

When all of the suppliers have bid, or the cut-off date is reached, the buyer can then push all of the bids into BravoSolution’s Collaborative Sourcing Solution into a pre-built, ready-to-go, optimization model that, based on the predefined service rules, cost trade-offs, and preferred contract length, will compute the optimal solution. The buyer can then create multiple what-if scenarios to determine the cost dependency on service level (or vice versa) or the potential savings with different contract terms. Once an award scenario is chosen, it can be saved, pushed into the contract management solution, and template contracts generated for each supplier in the award scenario.

It’s a very well thought out solution for MRO optimized to make sourcing, and re-sourcing, as quick, easy, painless, and error-free as possible so that, if needed, it can be driven by a junior buyer (under the guidance of a senior buyer) and free up the senior buyer in the organization for more value-add or strategic activities. And with the decades upon decades of experience in BravoSolution’s Global Team, they can get it up, running, and customized to your specific organizational needs in a matter of weeks. If you are an MRO organization, or an organization with a large MRO spend, BravoSolution’s MRO Business Center is definitely a solution to look at closely.

Bravo Business Center 2.0 – A Complete Category Solution for MRO: Part II.1

In Part I, we discussed how BravoSolution, realizing the limitations in their original, ground-breaking business center solution, enhanced the solution to be a complete solution for certain verticals that have standardized, predictable workflow-driven processes at the heart of their categories. We discussed how they transformed a solution that was a complete category management solution for nine (9) somewhat disparate categories, to a complete vertical solution for five different verticals (with more coming in the future) that was based on the collective decades of experience of their global sourcing team (working out of ten offices in four continents) in those verticals.

MRO, short for Maintenance, Repair and Operations, is a vertical that’s almost tailor-made for a business center solution. Even though, as a category, it is one of the broadest categories imaginable as it has to deal with whatever is required to keep any and all electrical, mechanical, hydraulic, telecommunication, or other physical system operating at normal levels — be it a production line, telecommunication backbone, power center, water plant, ventilation system, or office building — from both an (emergency) repair perspective and preventative maintenance perspective. As a result, depending on the company in question, the category could include just about any product or service under the sun. However, unlike CPG categories, the organization is generally not sourcing in volume and not looking for production capabilities, innovation capabilities, partnerships, or other value-adds that are required for success in those CPG categories.

As a result, MRO success often depends not on identifying the supplier who can give you the best price at the best service level on a part, but on identifying the supplier who can give you the best average price at the best average service level over a large market basket of parts, or the supplier who can bundle the services associated with installing a related market basket of parts (as part of preventative maintenance) at a competitive rate (which not only reduces the direct costs of having to deal with two different suppliers for parts and services, but the indirect administration and communication costs).

In addition, MRO suppliers tend to quote differently than volume-based manufacturing production facilities. Manufacturers will often quote based on production tiers, or give flat discounts or rebates based on production volumes for a single product, whereas MRO providers provide list pricing, and then quote discounts based on total dollar commitments across a market basket (as individual volumes for most categories aren’t enough to merit much of a discount).

Other complexities with MRO revolve around the sheer amount of data that needs to be captured, the creation of the right market basets, defining the qualitative metrics to appropriately capture the service levels of interest, defining the equations that appropriately trade off cost vs. quality vs. service level, and defining the cost drivers for the high-priced categories that will define when costs can change in a multi-year contract.

At a large MRO company, there will be thousands of products and services that need to be quoted from dozens, if not hundreds, of suppliers. Just creating all of the required data sheets that need to be distributed to the suppliers will be a challenge, breaking them down into baskets, sub-baskets, or items with alternate specifications for the sub-set of suppliers who will only bid on a sub-set of the RFX a nightmare. For some categories, service metrics are more important than cost. For example, if an automotive production line goes down, that can cost a large automotive manufacturer seven figures a day. In this case, spending an extra $10 an hour for a service provider with a guaranteed on-site service time of 4 hours vs 8 hours is a no-brainer. Even if their cost is substantially lower, service providers who cannot guarantee a required response time can not be considered for an award in some categories. In other categories, service levels, while important, can be traded off against cost. Consider warranty repairs. A five day turnaround vs. a seven day turnaround for a returned consumer item makes very little difference to a consumer that is out of a provided product for almost a week anyway, and trade-offs can be made in cost and service level. However, these trade-offs need to be evaluated in an appropriately defined equation. While a five day vs. seven day turnaround is almost equal, a five day vs. a twenty-one day is not. Unless the twenty-one day repair cost was high double-digit percentage cheaper than the five day, an organization wouldn’t risk the customer animosity that could result. And, in some categories, costs are driven by market conditions. If the service provider is supplying mostly steel parts (of 50% or more purity) that it has to source every year, and the steel index rises 10%, then the supplier will have to raise its prices (by at least 5%) to break even. Such a supplier cannot enter into a multi-year contract and give you it’s absolute best price today unless there is a cost-correction built-into the pricing model (as it would have to eat the loss otherwise).

In other words, the MRO category has some unique peculiarities that can make using a traditional sourcing solution a royal pain in the backside as the huge amount of set-up alone can be daunting. And if the solution doesn’t allow at least some of the work to be templated and re-used, the buyers will soon revert to the classic three-bids-and-a-buy through an auction just to “git-r-done“. But with BravoSolution’s Business Center, the basic templates are ready to go and once an organization uploads its item list, market baskets, list pricing for each supplier (and current / previous bid discounts), and current contracts; defines it’s service level equations and cost-vs-service level trade-offs; and defines its bidding guidelines and key milestones, a basic event is ready to go — and incumbent suppliers don’t even have to provide a price list (if the current price list in the system is still accurate), just their discounts for being awarded certain market baskets or dollar levels. In tomorrow’s post, we will dive into the BravoSolution MRO Business Center.