Category Archives: Market Intelligence

My Solution Is Not One of The Six Strategic Sourcing Samurai. Am I Screwed? Part II

In Part I we noted that SI understands that it’s last few posts have probably caused a lot of soul-searching and panic among practitioners and fear and loathing among vendors, who don’t have an optimization based Sourcing platform and, in the viewpoint of SI, don’t have a platform that supports true strategic sourcing, and then began to discuss the panic and fear. We then noted that the simple answer was that the average organization was probably not screwed, but the full answer would take quite a bit to preamble to explain — preamble that we’re in the midst of.

We left off noting that SRM is only one way to identify additional value, or, in some cases, reduce unexpected loss. Contact Lifecycle Management (CLM) is another way. Strategic Sourcing identifies savings. Procurement prevents unnecessary overspend. But CLM prevents unexpected loss. The total cost of a good is total landed cost plus utilization/processing cost plus COGS (cost of goods sold) plus return/warranty cost plus reclamation cost at life end. And it’s a total loss if the good is lost. In order to prevent savings leakage, an organization has to manage the lifecycle of the goods being purchased for the length of the contract, especially if returns and payment reclamations need to occur. This is where CLM comes in. It makes sure contracted terms are adhered to, the lifecycle is monitored, supplier relationships are appropriately managed, and, where appropriate, risk is monitored and managed. (For more details, see the Contract Lifecycle Management series over on Spend Matters that was co-written by the doctor and the maverick.)

Then there is sustainability. Finding ways to reduce energy and water consumption, to switch to renewable resources, to avoid suppliers or products that are not in compliance with appropriate regulations (and that could result in the organization being hit with multi-million dollar fines), is also strategic and very valuable.

If the Sourcing platform in use by your organization supports one or more of the above strategic activities, your organization is definitely not screwed as it can use that platform to identify additional sources of strategic savings and strategic value. As will be discussed in a future joint series between the doctor and the prophet, there are many approaches to sourcing and, with the exception of first generation e-Negotiation, each brings significant, unique, advantages that are very valuable.

However, if all the organization has is a first-generation e-Negotiation platform that is nothing more than an RFX and/or e-Auction with a little bit of reporting and a primitive supplier portal, then, at some point, it may find itself screwed. While the first e-Sourcing event on any category will almost always identify (significant) savings, those savings don’t reappear the next time the event is run. The fat can only be trimmed from the margins once, and then the organization has to get strategic to find sustained savings. Fortunately, the majority of providers do not fall in this category, because this means the majority of organization with a sourcing platform can confidently say they made a good choice — and just need to acquire supplementary optimization capability for where it is needed.

The full answer is thus: as long as you are not stuck on a pure first-generation e-Negotiation platform, then you have a platform that will support continued savings identification, cost control, and/or value generation when appropriately used. If you are, then you will need to augment it as soon as possible because, as explained in the last paragraph, from a savings perspective, you need to consider the platform a one-time use on a category basis. By the time you cycle back to the first category in the queue, you will need a more advanced solution.

My Solution Is Not One of The Six Strategic Sourcing Samurai. Am I Screwed? Part I

SI understands that it’s last few posts have probably caused a lot*1 of soul-searching and panic among practitioners and fear and loathing among vendors, so today it’s going to address the panic and fear (but not necessarily the loathing*2).

The short answer is: probably not.
The full answer takes quite a bit of preamble to explain.

First of all, many organizations carry the misconception, often reinforced by traditional analysts and big-X consulting companies, that the only way to find considerable savings, avoid unnecessary cost, and add value is through strategic sourcing. This is only one of many methodologies, and underlying technologies, that Supply Management can use to save money, control cost, and add value. It’s a powerful methodology, but just methodology.

True sustainable savings, cost avoidance, and value generation come from Strategic Supply Management. Supply Management encompasses Sourcing, Procurement, Logistics, Contract (Lifecycle) Management, Supplier Relationship Management, Sustainability Management, and other strategic activities that manage costs and generate value. Thus, strategic sourcing is only activity at the disposal of a Strategic Supply Management organization — and for an organization beginning its sourcing journey, it’s not always the best one.*3

If the organization does not have it’s e-Procurement under control, sometimes the best place to start is with a strategic Procurement process backed by a leading e-Procurement solution (with e-Invoicing and m-way match). Why? Because, as per AMR’s (now Gartner’s) classic series on Reaching Sourcing Excellence, 30 cents, or more, of every dollar of negotiated savings never materializes. If the organization is only capturing 60% of negotiated savings, then what’s the point of using an advanced solution to identify a 5% savings if only 3% of the savings is going to be captured? It would get the same year-over-year improvement if it did a simple e-Auction, identified a 3.33% savings, and captured 90% of it. This is where a great Procurement process, and solution, comes into play — specifically, one that makes it easy for buyers to find contracts, place timely orders (and avoid expedited shipments), see the impact of going off-contract (and be visually guilted into making the cost-effective decision unless there is a strong reason to do otherwise), and use the system (versus avoiding it). With this type of a solution, there will be no off-contract spend because a buyer wasn’t aware of a contract, wasn’t aware there was a more cost-effective product, wasn’t able to figure out how to use the system, etc. There won’t be overspend due to duplicate invoice payments, overpayments due to off-contract rates, or over-payments due to undelivered merchandise with a good m-way match e-Invoicing component. And so on.

However, simply capturing the majority of savings identified in a sourcing event does not guarantee that the organization is capturing all of the savings available to it or controlling spend. For example, the savings quoted is simply the best price that the supplier feels that it can offer today – but that may not be the best price the supplier could offer if it was more efficient. The supplier might not be lean, might be quoting off of an inefficient design (that it could improve through a joint-design initiative), or might have an outdated quality control process leading to a higher rate of defects then is necessary. That’s why great supplier relationship, powered by a leading SRM platform (that, by definition, also captures SPM and SIM data) can also provide great value.

*1 some to say the least
*2 first generation e-Negotiation platform providers are going to loathe SI, but there’s nothing to be done about that — it was their choice to stand still while their peers continued to innovate
*3 bet you never thought that the doctor, the leading advocate of SSDO since this blog went online in 2006, would say that, eh?

The Six Strategic Sourcing Samurai

In our last post, we made the bold statement that it’s not optimization, it’s strategic sourcing and the even bolder statement that SI believes it has become practically impossible to do true strategic sourcing without optimization.

This is probably scary for those of you that are looking for a strategic sourcing solution and just figured out that, if the doctor is right*, then most of the organizations on your RFX list are not going to make the cut because while there are dozens of Sourcing platforms on the market, there are only six (6) that have true strategic sourcing decision optimization that implement all four (4) pillars defined in the classic wiki-paper that formally defined strategic sourcing decision optimization (SSDO).

So who are these six strategic sourcing samurai? They are the six remaining companies that took the time and effort to not only research and build a solution, but take it to market and wait while the market caught up with the vision that a few pioneers had fifteen years ago — a vision of true best-cost global sourcing from a total cost of ownership (and, more recently, from a total value management) perspective.

They are:

  • BravoSolution (acquired VerticalNet, which acquired Tigris)
  • Determine (formerly Selectica, which acquired Iasta)
  • IBM (acquired Emptoris, which acquired MindFlow)
  • Keelvar
  • SciQuest (which acquired CombineNet)
  • Trade Extensions

It’s not a long list, but it’s an important list. Furthermore, one can be sure that there will be more companies to add to the list in a couple of years, especially since there are a number of advanced solvers out there — such as CPLEX, Gurobi, XPress, etc. — to build solutions on; a number of 3PLs — such as APL, Schneider, etc. — that have very advanced logistics optimization solutions; and a few companies — such as LLamasoft, Oracle, etc. — that have very advanced Supply Chain (Network) Optimization solutions (which is not the same as SSDO). Optimization is spreading, and as more companies realize its power, it will continue to spread. However, now that the early adopters have proven the power of decision optimization, the question is, are you going to be a leader, and one of the first to capitalize on it, or a laggard, and watch as your competition moves faster, captures more market share, and generates a greater year-over-year profit based on the advanced cost reduction and cost control methodologies that optimization provides?

As for those of you that already have a previous generation sourcing solution and, for one reason or another, are locked in to it, don’t fret. A few of these vendors are quite happy to license their software as a secondary solution because, even though optimization should be used in every event, the reality is that, if the category has been well studied, the cost model is relatively simple, or the product is going out for an all-inclusive bid, the additional savings that optimization is likely to find is small and those categories can continue to go through the current platform. By cherry picking the categories with the largest (un-managed spend) and which appear to have the largest opportunities, and simply conducting those through the secondary optimization platform (and then pushing the bids and awards back into the primary platform to maintain a single database of bid and award data), it’s likely that the organization can easily identify 80%+ of all of the additional savings opportunities identifiable through optimization for a small additional investment. It’s whatever works. If the organization can get by on one platform, great, but if it can’t, or feels it can extract more value from two platforms, that’s fine too. Strategic Sourcing is for everyone, and that’s why the leading optimization vendors are quite happy to work with everyone who’s ready.

* the doctor is right. The real question is, when will your organization be ready to accept it? If your organization has not yet reached a level of sourcing maturity that, at the very least, puts it in the Hackett Group top 8%, it may not be far enough along it’s sourcing journey to truly understand why optimization is a necessary for strategic sourcing in the latter half of this decade.

It’s Not Optimization. It’s Strategic Sourcing.

Last week in my post on how The Trade Extensions Event Was Different. Their View is Different. It’s Time for Different I noted that the reason the event was different is because, unlike most purveyors of perplexing optimization software, they did not focus on their the capability, uniqueness, and savings potential of their optimization software, choosing to barely acknowledge the concept, and instead took the viewpoint that it’s not optimization, it’s just sourcing.

And as I indicated in that post, said in Monday’s Post on how It’s NOT a Suite, It’s JUST Sourcing Part II, SI has a very similar view. SI is now convinced that it’s not optimization, it’s strategic sourcing as SI believes it has become practically impossible to do true strategic sourcing without optimization.

Why? Because 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 (outlined 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 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. 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 no savings potential. The right strategy is 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.

There’s just no way to do a strategic analysis and justify a strategic decision without a basic level of true mathematical optimization capability. 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.

So if you want to source, use what you want. But if you want to strategically source, use an optimization-backed sourcing solution. You won’t need optimization for every event, but since you won’t know when you’ll need it until you have it, you still need it.

It’s NOT a Suite, It’s JUST Sourcing, Part II

In our last post we made the rather bold claim, which is probably going to irk a lot of vendors, that it’s NOT a Suite, It’s JUST Sourcing. SI likes vendors that are trying to build solutions to solve their customers’ pain points, and has chronicled the efforts of many over the years, and isn’t doing this to be irksome. SI is doing this because it’s not 2005 anymore, it’s 2015 and the nature of, and need for, Sourcing has changed. Today, Sourcing absolutely has to be more strategic and Suite Sourcing is NOT Strategic Sourcing. In today’s post, we’re going to begin to clarify why.

Then, also in our last post we outlined a hypothetical, but realistic, example in the high-tech space, discussing a typical, primary, sourcing event for a company that assembled custom-built high-end workstations for software developers and engineers. We started by discussing the primary factors that the Sourcing analyst was likely to identify as well as two strategies the analyst was likely to take. This led to a perceived event progression and a plan that looked like it was easily executable in you average modular sourcing suite. We did this to make it clear why many companies fall for the falacy that you can attack sourcing in a step-wise fashion using a modular suite, and, as a result, why some vendors still believe that a modular suite is the way to go. The reality is that, at a quick glancce, it does look like this is the right approach and that there is no reason to question it — even though there is a big reason. Namely, this approach is wrong.

The reason being is that, in reality, the event is not going to go as planned.

Specifically, it will not be an analysis followed by an RFP followed by a single auction / optimization analysis followed by a push into the contract management system. One or more, with emphasis on the more, of the following will happen:

  • the RFX will come back and some of the requested bid fields will be empty because the supplier is no longer producing the product
  • the RFX will come back and there will be new products that the buyer did not know about with new bids (and new interdependencceis to be mapped)
  • the logistics carriers will come back with quotes much higher than expected and/or a logistics carrier or 3PL will withdraw (due to overcommitments) and lanes will vanish
  • stakeholders or key customers will change requirements post RFX issue and you will have to go back and ask for prices on next gen products, which might still be in final design stages
  • the baseline optimization will come back with completely unexpected results and once the analyst uses spend analysis to dive in, will find a number of outliers in the incumbent bid and realize that she has to go back and ask for verified or corrected data
  • the auction will end with three suppliers almost equal on baseline scoring and extensive analysis will be needed to determine which supplier gets 50%, which supplier gets 30%, and which supplier gets 20% in the 50/30/20 split dictated by the shareholders to minimize risk

In these situations, respectively

  • the analyst will have to identify a larger supply base and send the RFX to more suppliers
  • the analyst will have to research the new products and decide whether to accept them or not and then, possibly, ask the supply base to bid on (comparable) products in a revised RFX
  • the analyst will have to invite more carriers to bid and consider alternate lanes, possibly from secondary (air)ports to secondary (air)ports
  • the analyst will have to create revised specs and go back to the supply base for additional prices and options
  • the analyst will have to backtrack to the spend analysis step on the submitted data, followed by a request for bid verification and a repeat of the optimization on revised data
  • the analyst will have to go back to the analysis step to identify which bid components were strongest for each supplier and then compare that to existing supplier scorecards (to determine likelihood of on-time delivery, quality guarantees, price consistency, etc.)

In other words, the event is not going to go as planned and it’s not going to be a sequential progression from analysis to RFX to auction/optimization to award. Moreover, most events are going to see multiple occurences of the above hiccups and require an almost random workflow that uses all of the sourcing capabilities of a suite multiple times.

Moreover, the transitions back and forth will need to be seamless. If an analyst has to push data out of the optimization “module” into the “analysis” module for detailed data and outlier analysis, than push the data, with insights, back into the “RFX” module for revised RFX data collection, and than push the revised RFP data back into the “Optimization” module for revised analysis only to find out that the lane cost is coming out higher than expected in the preferred award, indicating that there is still an additional opportnity if logistics costs can be lowered, then this “modular” workflow quickly becomes a nightmare.

Plus, in this situation, the analyst will have to do an in-depth analysis of the logistics cost to determine if costs can be lowered simply by inviting more carriers to bid, analyzing primary and secondary lanes, or doing something progressive like using the organization’s sourcing expertise to help a provider lower their overhead with better insurance rates, communication plans, and office & computer supplies from the organization’s GPO contract. Then, after this analysis has been done, which will likely take the form of multiple what-if optimizations using various cost models, the analyst will have to go back to the RFP, issue the revised RFP with more options to current and new suppliers, push the data back into the optimization module and continue.

In a modern Sourcing project, one cannot separate data collection from cost modeling from analysis from bidding from optimization — it is all one integrated sourcing process that lathers, rinses, and repeats until the solution is found and the event is done. And any provider that thinks you can separate pieces out and take a modular, piecemeal approach and build up to a suite is still living in 2005 and should be approached with caution. It’s not a suite, it’s just Sourcing. And, as indicated in our previous post, and as will be discussed in more detail in a future post, it’s not optimization, it’s strategic sourcing.