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Category Archives: Miscellaneous
The Right Way to Cost Cut
I enjoyed this recent McKinsey Article that noted that companies should start any cost-cutting initiative by thinking through whether they could restructure the business to take advantage of current and projected marketplace trends (for instance, by exiting relatively low-profit or low-growth businesses) or to mitigate threats, such as consolidating competitors. This is much better than the usual practice of cutting equally about everywhere because quick head count reductions often come at a price: missing the opportunities that crises can create to improve business systems or to strengthen parts of an organization selectively.
Also, in some cases, efforts to complete merger integration or to use the new economic situation as a spur to renegotiate supplier or other long-term contracts can yield substantial economies. In the authors’ experience, savings of up to 20 to 35 percent in selling, general, and administrative costs are possible with such measures if companies select the right tactics to support their strategies. The reality is that intelligent cost cutting need not reduce the overall scale of the savings that organizations can achieve. By shifting the focus from organizational structure to current and future strategic needs, it makes for smarter savings, even at companies that have already started down another path.
So don’t be another dumb company. If you have to cut, cut smart.
The Role of Optimization in Strategic Sourcing – Preparing for Optimization
This series discusses the recent report from CAPS Research on “the role of optimization in strategic sourcing”. The primary goal is to highlight, clarify, and, in some cases, correct parts of the report that are important, confusing, or incorrect to insure that you have the best introduction to strategic sourcing decision optimization that one can have.
This chapter starts off by explaining the buyer and supplier data requirements for decision optimization and it does a good job. The five data requirements it lists for a buyer are spot on:
- accurate historical data and projected volumes
this allows you to not only create accurate baselines, but to perform a “sanity” check on the demand forecasts you are given - complete list of requirements
these will form the foundations of your model constraints - minimum quantities and timeframes
these not only specify minimum model awards, but help you determine what suppliers are qualified - complete specifications
these are necessary for the suppliers to submit accurate bids - identification of locations and individual demands
these define the minimum set of bids your suppliers need to submit
Next it goes on to discuss a number of optimization model issues including those of model size, complex sourcing events, small and standard buys, and the optimization sweet spot. The report did a good job on these issues, but three points need to be clarified.
While it is true that many moderately sized problems will still be challenging for a desktop or laptop, moderately sized problems can easily be solved in a matter of minutes (and sometimes even seconds) on average mid-end servers. Furthermore, today’s high-end servers can handle problems that are quite large indeed. And while it may still be the case that no single provider can handle all of your strategic sourcing decision optimization needs, the 80% solution is still a great one — license a solution that gives you 80% coverage and then utilize a second provider for large, custom, high-dollar events where the ROI will dwarf the additional cost.
The report correctly states that while it is quite possible that the software will not find ‘provable’ optimal solutions for the model, the software can nearly always find good solutions that will be ‘near optimal’. However, it does not state that those ‘near optimal’ solutions will be ‘provably’ near optimal, which is always the case with MILP optimization (that is the foundation of the majority of strategic sourcing decision optimization products on the market today). Since MILP solvers start by finding the optimal solution to the relaxed linear model, the distance of each successive solution from the absolute lower bound (which can be increased every time a solution sub-space is fully explored) is always known. So even though there may not be enough time to fully explore the potential solution space and find the provably optimal solution, the solution returned is provably near optimal within a certain tolerance.
Finally, the statement that most e-purchasing suites have an optimization module that can address the large number of bidding opportunities in this area is laughable. There are dozens (and dozens) of providers who offer e-sourcing and / or e-procurement suites (just check the resource site), but only a handful that offer (true) strategic sourcing decision optimization. When it comes to strategic sourcing decision optimization, you’re pretty much limited to Algorhythm, Bravo Solution (Vertical Net), CombineNet, Emptoris, Iasta, or Trade Extensions … only four of these can be considered suites … and only four are self-service. While I expect that we will see more providers with true optimization offerings as part of their suites in the future, until the utilization of strategic sourcing decision optimization becomes mainstream, I don’t expect any new providers will emerge.
Next Part IV: Implementation Issues
There are Analysts and There are Analyst Firms … Guess Which One You Really Need to Understand?
Recently Dan Gilmore, Editor of Supply Chain Digest, published a “first thoughts” piece on Understanding Supply Chain Analysts. In it he made a number of valid points, including:
- Analysts can provide useful information and insight
- Analyst research / opinions can have a significant impact on how a company views specific technology vendors and options.
- Technology vendors often change product roadmaps and messaging to match what they think the analysts want to hear.
- Some analysts are primarily vendor focussed on their client base while others are “consumer” focussed and others still sit somewhere in the middle.
- Most analysts today will not write any “negative” research/opinions on a specific vendor for fear of the fire and brimstone it would bring.
The last point is both scary and true. Printed negative opinions in the analyst community are going extinct. However, negative opinions are still strong in many of the top analysts in our space. So what gives?
What gives is the analyst firm. Today, most of the top analyst firms frown seriously on quoting or printing any negative opinions and, in some case, have steadfast policies banning the public iteration of a negative opinion about any past, present, or potential client in fear of the fire and brimstone wrath that could result in the termination of funds or, where some of the more successful analyst firms are concerned, a frivolous lawsuit against their flush bank account.
Before you engage an analyst you need to understand, at a minimum, the following about their firm:
- Revenue Model: Vendor-Driven, Enterprise Buyer Driven, Consumer Driven, or some combination thereof
- Management Team: Primarily Former Analysts or MBAs
- Ownership: Management &/| Employees, Private Equity, or Public Equity
- Clients: Who are they?
Why? Each of these will have an impact on organizational policy and, as such, on the analyst focus and their freedom of speech. For example:
- Vendor Driven Revenue Model
The analyst firm will likely be very careful in what it allows to be conveyed about any of its clients. - MBA Management Team
The analyst firm will likely be more focussed on profitability metrics than on quality research. - Private Equity Ownership
The bottom line will likely be the most important success metric the analyst firm is judged against. - Vendor X is a Client
Any “research” produced will likely echo the importance of whatever the vendor says in its marketing and positioning, regardless of what is said.
In comparison:
- Consumer Driven
Since none of the vendors being reviewed are clients, and since the analyst firm’s revenue will likely be linked to the credibility of their research, the analyst firm will be less likely to censor itself. - Former Analyst Management Team
The analyst firm will be more focussed on quality research than on profitability metrics. - Employee Owned
The analyst firm does not have to meet external success metrics and can set their own agenda. - Vendor Y is not a Client
The analyst firm does not have to worry about subscription renewal fees.
Essentially, if you understand the firm, you understand the level of trust can you put into an analyst report and, more importantly, the level of openness you can expect if you engage the analyst in a one-on-one conversation. In the second case, a good analyst will likely give you the full monty.
The Role of Optimization in Strategic Sourcing – A Brief Introduction
As hinted at in Supercalifragilisticexpialidocious this summer, in this series that I will be starting next week, I will be digging into the recent report on “the role of optimization in strategic sourcing” from CAPS Research. This report, which is the most extensive effort I’ve seen by anyone [other than myself and my efforts here on this blog, in the wiki-paper, in the e-Sourcing Handbook, and the NLP sponsored podcast (part I, part II, and transcript)] to define the role of strategic sourcing decision optimization, provides a great introduction to someone just getting started with this very valuable, but still under-utilized, technology.
That being said, there are some statements in the report that need to be highlighted, some important points that were missing, some statements that were misleading (at least in my view), and some statements that were, frankly, just plain wrong. In this series, which will focus on some of the finer points of this report, I, as an expert in strategic sourcing decision optimization and a practitioner who has (single-handledly, in the first case) designed two of the leading systems on the market this decade, will focus primarily on those statements that need to be stressed, added, clarified, or corrected. The hope is that upon reading the report and this “editorial”, those of you who have not yet tried strategic sourcing decision optimization will understand, at least at a basic level, what decision optimization is, what it does, the value it can bring, and why you should be using it as part of your sourcing process to save an average of 12% above and beyond what you’ll save if you are still relying on e-RFX and (reverse) auctions alone.
Finally, before we begin, while the report thanked Ariba, CombineNet, Emptoris, and Iasta, you should be aware that Trade Extensions and Algorhythm are major players and that, as far as the doctor is concerned, Ariba does not have a true strategic sourcing decision optimization solution that meets the basic requirements outlined in the wiki-paper.
Next, Part I: Optimization in the Strategic Sourcing Process.