In our last two posts on Beyond Sourcing Optimization we noted that Strategic Sourcing Decision Optimization (SSDO) is just one area where optimization can be successfully applied in a progressive organization that is a leader in its industry. An average enterprise organization is ripe with opportunities for the application of optimization technology — optimization technology which can easily add up to 5% to the bottom line if properly applied.

RiverLogic, which is advertising prescriptive analytics technology and enterprise optimization, is one such company that is tackling enterprise optimization. Advertising holistic decision support that performs simultaneous optimization of the entire business model, the optimizer is capable of integrating demand, production, and inventory optimization into a single holistic optimization model that, when run, optimizes production and inventory against demand to maximize profit by optimizing revenue against production and inventory (carrying) costs.

As one may have gathered by our previous post, this is no easy feat. Production optimization requires one type of model that understands production line throughput, machine utilization overhead costs per hour or unit, associated workforce requirements, associated costs during regular and over time, raw material inventory costs, and logistics costs at different production levels. Inventory optimization is a different type of model that must take into account the myriad of costs that contribute to the amortized inventory carrying cost and that include, but are not limited to, warehouse overhead costs, labour costs, and depreciation costs and balance these against logistics costs from more or less frequent orders. Finally, demand optimization is its own beast as one has to have a relatively good understanding of the different types of marketing spend and how each will influence market demand, the costs of production at various volume levels and delivery commitments, the associated lifecycle costs including outbound distribution costs, warranty and service costs, and any end-of-life reclamation costs (if one or more locales in which the product is being sold have mandatory reclamation or recycle laws for the product or one or more of its components). Now, one can create a mega-model that encapsulates inventory and production costs into the demand optimization, but it’s not easy, and that’s why few companies have tackled this problem (just like few companies have tackled true SSDO). And most that have tackled this problem do so by building custom models for their clients that require individuals with advanced degrees in Mathematics or Operation Research to run.

However, the RiverLogic platform, like leading SSDO platforms, comes with this model “out-of-the-box” and all a user has to do to build a basic model is get the data. At this point you’re probably thinking this is a show-stopper as

• the amount of data required to populate such a model is extremely extensive and
• outside of the ERP, no one system has even a fraction of the data required.

RiverLogic understands this perceived dilemma as well and that’s why their platform integrates with over a dozen major ERP and Accounts Payable systems because when you get down to it, that’s where the majority of the cost data required for a holistic demand optimization model, that simultaneously balances inventory and production, resides. Once the proper integrations are done, the model can be run out of the box and the organization can instantly see relative to its demand forecast the optimal production and inventory levels (and, as a bonus, the optimal distribution plan and cost model as logistics are also accounted for in this holistic model). This will allow an average organization that has not simultaneously balanced these models before to shave at least an extra 5% to 15% off of overhead costs and, if one or more of these models haven’t been run before, even more. And these savings will trickle down straight to the bottom line the instant the plans are updated.

But the power of the platform doesn’t stop there, like the best SSDO solutions, it also supports powerful what-if optimization that allows the organization to see how production and inventory plans change if the demand projections were to change, if more money was allocated to marketing, or if the estimated impact of marketing campaigns were more or less successful than initial predictions. This model can be run any time and plans updated dynamically, taking effect with the next (automated) order upon publication to the demand / inventory / order management module of the ERP(s) that the platform integrates with.

Now that leaders like you are using decision optimization in your Sourcing and advanced spend analysis in your planning, you’re ready to apply that knowledge and capability across enterprise operations and, as such, are ready for the enterprise optimization (and prescriptive analytics) that innovators like RiverLogic are offering. RiverLogic is one of the handful of companies you’re going to be hearing a lot more about in the coming year
and one that should definitely be on your radar as you look to take cost control across the enterprise (because what good is saving 10% on a category if poor operations just eliminate that savings after the deal is signed?).