Category Archives: X-emplification

The 12 Days of X-emplification: Day 7 – GPOs & Marketplaces

Little GPO, you’re really lookin’ fine
Three staplers and a printer only $389!
   “GPO” by Dot and the ‘Riba Brothers

If this is all you’re looking for in a GPO, then you’re looking for the wrong thing. It’s not selection or price, it’s service. Furthermore, the fact of the matter is that it doesn’t matter how much volume the GPO has or how good they claim to be, you’re still not going to save a fortune on office supplies!

If you’re looking for a GPO or a Marketplace, you’re looking for an organization that can not only help you with greater volume leverage, but for an organization that can help you with better processes, best practices, and supply risk. Of course, you can’t just select a GPO on these factors alone, which is why I bring you seven questions you should be asking each and every GPO that you are considering as a potential business partner.

1. Are you a for-profit enterprise?

Non-profit consortiums might sound like a good thing, especially if you’re in the public sector, but let’s face it – unless we’re already filthy rich, most of us are in business to make money, so just how driven is the non-profit going to be if the income opportunity for each of its employees, including senior management, are capped? In a for-profit enterprise, even if the buyers aren’t driven to make money, the shareholders definitely are and you can be sure they’re going to be making sure that each and every employee is doing their best to deliver value – the key to attracting and retaining your business.

2. How are you compensated?

There are multiple compensation models – including variants of buyer pays, everyone pays, and supplier pays – but some of these are dangerous. The most dangerous is, as you can probably guess from yesterday’s post on supplier networks and catalogs, supplier pays. You don’t want a GPO that provides suppliers an opportunity to bid on the provision that they have to pay a percentage of their award to the GPO, because it’s likely that the only suppliers who are going to be attracted to the GPO’s RFXs are those that are desperate – and that’s not the kind of supplier you want to be doing business with.

You want a consortium where all costs are born by the members, and preferably one that works on a fixed cost model (unless you expect the savings to be so significant that the percentage of the savings is acceptable for the next few years) with incentives if they exceed a performance baseline (then they get a percentage of additional savings beyond the baseline as a bonus). The reason you want incentives is you want them to perform above and beyond what your in-house team can do. (If you just gave them a percentage of all savings, the incentive to perform is not as great.)

3. Are you vertically or horizontally focussed?

Although there’s no wrong answer from a GPO’s perspective, there could be a wrong answer depending on what you’re looking for. If the GPO is horizontally focussed on getting all of its customers the best deals on telecommunications, legal services, and marketing services but you just want a better deal on your chicken, french fries, and cups and lids, then it’s the wrong GPO for you. Similarly, if they are ultimately focussed on servicing the food-service and retail industries but you’re in the automotive industry, then it is again the wrong GPO for you.

4. What economies of scale, process, and information do you provide?

You want more than volume leverage. After all, if you’re buying a lot, the quote difference between buying a lot and buying five times that from most suppliers isn’t much. And if you’re not buying a lot, then you’re not going to get much in the way of savings – so there’s not a lot of point in spending a lot of effort on the category. The real savings is going to come if it allows you to achieve economies of scale (they can do a lot of categories you’re willing to outsource), process (they can help you in categories you want, or need, to keep control of), and information (on the market trends for the categories important to you).

5. How do you protect my confidential information?

Unless you’re just using them for office supplies, telecommunications, and temp labor services, chances are you’re going to have to share some confidential information with them above and beyond basic demand requirements to get what you need. You need to make sure that this information is protected from your competition and the marketplace at large. You want to know that they have measures to safeguard that information, which include physical, process, network, and communication security measures.

6. How much control do I have over requirements and decisions?

You want the ability to insure that you are not tied to a contract unless you have approved the project requirements, the potential supplier pool, and the communications issued at each stage of the sourcing process. A good GPO knows that the deal, as well as its bonus, gets better as volume is aggregated, and such a GPO will be aggressive in its attempt to identify and amalgamate as much demand as possible across its subscribers. You have to be sure that they aren’t too aggressive and don’t leave out key requirements in their effort to aggregate demand.

7. Do I buy through my e-Procurement system or yours? How do I integrate my system with yours?

If you have to buy through their system, you want to make sure that it meets your needs and that it’s easy to get your transaction data back into your ERP, e-Payment, and spend analysis systems. If you buy through your system, you want to make sure it’s easy to do so at the contracted rate and easy to provide the GPO with the information they need to track project success.

The 12 Days of X-emplification: Day 6 – Supplier Networks & Catalogue Management

A number of vendors have a number of representatives whose sole job is to pound on your door and tell you about all the advantages of a supplier network – advantages that, as a few of you have unfortunately realized, never materialize unless you have the right network with the right suppliers participating. And even then, the high fees associated with some of these networks, which are often hidden and don’t show themselves until after you’ve sunk a significant investment into the project, should make anyone question how valuable they really are.

The negativity out of the way, implemented properly, a supplier network can provide you with a host of benefits with respect to multiple aspects of supplier management – relationship, performance, and information (to name a few) – that are simply unattainable by any other technology on the e-Sourcing and e-Procurement marketplace today … but only if it’s done right. The reality is that when it comes to supplier networks, we are often holding the sharpest double-edged sword of them all. If it’s done right, it can slice though inefficiencies and costs like a hot knife through warm butter; but if it’s done wrong, you stand to lose a lot more than just your investment – your productivity, key suppliers, and even brand reputation can vanish faster than the last drops of dew on a hot spring day!

That’s why the questions posed below are so important. If you don’t understand why you need to ask them, and the reasons the desired responses are so critical, you could end up selecting a supplier network or catalogue management solution that is entirely wrong for you and your organization. Since this could actually move you significantly backwards on the innovation curve, I think it’s critical that you cut through the buzz and hone in on the real benefits as quickly as possible when making your assessments.

1. Does the supplier network / catalogue solution support integration with your suppliers’ current web-catalogue solution? And what’s involved?

Most suppliers today already have electronic catalogues, despite the myth that some vendors might be propagating. After all, do you really think they manage their price lists using paper-based general ledgers? They manage it using databases*, and most of them make their standard pricing available over the web. The less sophisticated will use flat files, which can be downloaded through batch processes over FTP by clients on a regular, if not daily, basis. The more sophisticated will have a full website with client login and dedicated pricing. Thus, when a vendor says most suppliers don’t have a catalogue, what the vendor means is that most suppliers don’t have a catalogue in their (proprietary) format.

However, data transformation is not nearly as difficult as most people will make it out to be – after all, even Excel supports multiple file formats, and your average analyst is quite adept at successfully importing any text-based flat file format. Plus, most of the bigger vendors will support a standard such as EDI (if they’re old school) or XML (if they have accepted that the times they are a-changing’), so how hard should it really be to load a catalogue into a supplier network?

The correct answer is – it shouldn’t. It should be a 5 minute exercise. If your potential technology vendor says it takes on average a day to a week to enable a supplier and add a catalogue, they don’t have a modern supplier network. A modern supplier network uses the network that’s already in place – the world wide web and the internet on which it is based – and connects to supplier catalogues in their native format. This makes integration as simple as entering the URL to the supplier catalog, specifying the connection protocol, selecting the default file or data record format, and entering the information required (such as user name and password) to meet the security requirements. This should literally be a 5-minute task if the connection protocol, file format, and security protocols are all based on accepted standards. If there are slight modifications of the standard, it should simply be matter of selecting the closest configuration and specifying the necessary changes – a task that should only take a few hours if the application makes use of modern agent technology and business process management.

* As much as I may hate to admit it, Microsoft Access is a database. A rudimentary one, but a database nonetheless.

2. Does the supplier network / catalogue solution support the integration of multiple catalogues into one coherent view?

Not only should it be trivial to add a supplier’s pre-existing catalogue to the network, or enable them to create a catalogue in any format they choose, but it should also be trivial to browse all of the catalogues simultaneously in one coherent view. After all, would Amazon be as popular as it was today if you had to go to one page to search for books, another to search for DVDs, and another to search for CDs? And then make each purchase separately? How popular would e-Bay be if you had to go to eBayCDs to buy and sell CDs, eBayClocks to buy and sell clocks, and eBayBeenieBabies to buy and sell beenie babies? And more importantly, what if you could only search one seller at a time?

The power of a catalogue application rests in its ability to reduce complexity – not in its ability to create it! If you need to buy handhelds, chances are you can buy them from your electronics vendors, your office supplies vendors, and your cell phone carriers. Do you really want to search all three catalogues separately for the best deal? No! You want to be able to do one search across all catalogues and have all of the results compared side-by-side in one consistent view. Consumer comparison web-sites have been doing this for close to a decade – so why shouldn’t your “enterprise” product do it – and do it better? After all, you’re paying for the enterprise supplier network* – so you benefit from it!

* If it’s supplier funded, then you’re paying even more! And don’t let any snake oil salesman convince you otherwise. After all, if I have to fork over 1% of all transaction costs in “network fees”, then I’m going to have to raise my best price by 1% to cover that. Let’s say you buy $10M worth of goods from me through the network. That says it’s costing me $100,000 to serve you. That says I have to charge you $100,000 more to cover that cost of doing business. That says the cost of doing business through the network with me alone costs you $100,000! If you have a network, you probably have at least your top 20 suppliers in it. Let’s say you do a total of $250M of business through the network. Since every supplier pays the same fee, this network is costing you $2.5M a year … for what is nothing more than a catalogue! To put this in perspective, you could have a small team of call center workers in India maintain the different vendor catalogues for you manually for about 1/10th of that. That’s why the following question is probably the most important question of all!

3. Is it expensive for suppliers to use the supplier network / catalogue management solution?

The answer you want to hear is “No – it doesn’t cost suppliers anything to use our network. There are no fees for vendors, and since we can integrate with all of the following standard protocols and data formats, you can link to the catalogue that your average supplier, who has upgraded their technology in the last five to seven years, already has in place with virtually no effort on your part or theirs. And if they don’t have a catalogue, they can use these tools to build one either locally on their machine, for upload in a standard file format, or over the web through an easy to use GUI.” This is because just about any other answer costs your supplier money, which, one way or another, will cost you.

If it’s costly for the supplier, either in terms of dollars or resources, one of two things are going to happen. The supplier is going to refuse to join the network, which is going to prevent you from realizing the benefits that you hoped to realize by selecting the network, or the supplier is going to factor in the cost of doing business with you through the network. (And if you have a contract in place that fixes prices for the mid-term, then the costs of using the network go up even more, since the supplier will have to increase their prices even more when the current contract expires to make up for the losses they are going to take in the near-term!)

The reality is that, unlike BI and other e-Procurement technologies where you only need to capture the 20% of suppliers who constitute 80% of the business in order to see a return, supplier network technologies are only beneficial if you have at least 80% of your suppliers enabled because most of your time is spent dealing with suppliers who are not enabled! If a supplier is enabled in your technology, then most of the transactions are automated and time is only spent dealing with exceptions. If a supplier is not enabled, then every transaction requires a time-consuming interaction. So adoption better be a no-brainer for your supplier community if you want your network to be a success.

4. How did you amass all of the suppliers currently in your network?

There’s at least one vendor whose primary selling point appears to be the number of suppliers in its network. The question is, how did they get all those suppliers to sign up, are the conditions for joining and the costs of membership the same today as they were when these suppliers first joined, and are the conditions for joining and costs of membership applicable to the business environment today?

If the network was almost free in the past, and conditions for membership rather lax, as that can be enticing to a large number of suppliers looking for a new market (as the cost of trying the network out is low and the risks nominal), that can explain a significant membership gain in a short time-frame. However, if after a certain membership size was met, the network all of a sudden introduced a five figure annual membership fee and a transaction cost of 0.5% or more, chances are good that not only did the rate of membership increase start declining rapidly, but that you’re going to have a hard time convincing all but your largest volume suppliers, who are not already in the network, to join.

5. Does it allow for override pricing based on business rules?

It might be the case that it’s easy for your supplier to maintain one catalogue with standard pricing, but hard to maintain instances with customized pricing for each client they interact with. (Especially if they are using older technology or are lacking in modern technical competence.) Therefore, it should be trivial for a user to go in and define contract pricing for, or price modifications on, each item or service that is covered under a contract. Furthermore, the user should be able to do it at the item, category, or catalogue level. Maybe you just have a simple 10% off everything deal. Then the user should be able to create just one rule and have it take effect each time pricing data is retrieved.

6. Can the solution be integrated into your current e-Procurement platform?

As I indicated in a previous post, the value of e-Procurement lies in its ability to integrate requisitions with invoices with contracts and make sure that each buy against a contract is paid at the contracted rate and that each buy that is not against a contract (but should be) is flagged and brought to the attention of the appropriate manager. Thus, it’s critical that your supply network solution provide a simple mechanism for getting requisitions out of the network and into your e-Procurement platform.

The 12 Days of X-emplification: Day 5 – e-Procurement

e-Procurement is simply the automation of the basic procurement cycle using information technology and the internet. This cycle starts with a requisition, may or may not require an authorization, and centers around the creation, transmission, and fulfillment of a purchase order. Thus, it also involves goods receipts, reconciliation, payment, tax reclamation, and analysis.

Since e-Procurement is, or at least should be, very straight forward, and since the e-Procurement Wiki spends a lot of time defining the procurement cycle, necessary core capabilities, and important features, we’re just going to talk about the functionality that differentiates a true e-Procurement solution from a set of tools that don’t really provide you the value that e-Procurement is supposed to promise you. Thus, compared to many of the posts in this series, this post will be short and sweet.

1. Does it support requisitions, orders, goods receipts, invoices, and m-way matching in an integrated fashion?

You don’t just want two way matching, or even 3-way matching – you want m-way matching that gives you the ability to match all of the data in the system that relates to a given purchase order. Before the purchase order is issued, you want to make sure it matches the requisition that was authorized. Before an invoice is paid, you want to make sure that it is for the items in the purchase order, that were received and annotated in the goods receipt, at the rates agreed to in the contract, and at the rates in the current price list if the contract rate is defined as a discount off of a catalogue or market price. Thus, even 3-way invoice to purchase order, goods receipt, and contract might not even be enough functionality for every buy! And anything less definitely will not cut it!

2. Does it integrate with a modern supply network offering that lets you and your suppliers manage your catalogue and pricing as appropriate?

Let’s face it – the whole point of e-Procurement is that it’s supposed to make the process of buying easy! If you have to use a separate application to find what you need, and then manually enter that information into your e-Procurement application, that’s not easy. Moreover, the “compliance” and “decreased maverick spend” many vendors promise will never materialize, because you can’t even be sure the purchase order is correct since human error can creep in at the requisition stage. (The buyer can get the product identifier wrong, the product wrong, or even the price wrong. And if a vendor gets a purchase order with an approved purchase price that is higher than what’s in the contract, do you really think they are going to point that out?)

3. Does it integrate with your payment system and allow payments to be correlated to invoices?

A lot of the e-Procurement solutions out there don’t do e-Payment, and that’s fine, as long as they recognize that it’s not an e-Procurement solution if it doesn’t recognize payments! Simply noting that an invoice is paid is not only not very useful (especially if the supplier disputes the fact), but probably not in compliance with good accounting practice or Sarbanes Oxley. At least one system has to track complete payment information and correlate that to invoices in your enterprise, and I don’t know about you, but I thought that was procurement, and, hence, that the capability belongs in an e-Procurement application!

The 12 Days of X-emplification: Day 4 – Contract Management

Contract Management is important. If you don’t acquire the goods and services at the negotiated prices, what was the point in spending all of that time coming up with the best award and negotiating the contract? However, as a colleague of mine once remarked, most of the “contract management” solutions on the market today don’t do more than what I could do with a Microsoft Access database and a high-school programmer, which is, quite frankly, not much!

Thus, in order to help you separate the wheat from the chaff, here are some basic questions that you should be asking of every vendor that tries to sell you a contract management solution, and an enterprise contract management solution in particular (where questions 3, 5, and 7 become particularly important). The fact of the matter is, if they don’t even pass this sniff test, you might just be better off downloading a free open-source document management system and using that – because a(n enterprise) contract management solution that doesn’t support a reasonable amount of inherently useful features isn’t any better than the electronic filing cabinet that you can find in at least a dozen free open-source document management solutions.

1. Does it allow you to define your own meta-data dimensions?

If the only meta-data the system supports is contract name, uniquely generated system id, supplier, effective date, and termination date – that’s not very useful. You also want to capture evergreen renewal dates, resource dates appropriate to the commodities being sourced, the goods and services covered by the contracts, the agreed upon rates, diversity information, compliance information, and a flag on any special conditions that are not standard among your contracts.

2. How easy is it to export the meta-data, or any desired subset, in a standard format recognized by any decent modern e-procurement, EIPP, or e-payment platform?

As I indicated above, the whole point of contract management is to make sure that spend is against contracts AT contracted rates. The only way this is going to happen in practice is if your e-procurement, EIPP, or e-payment system knows what the rates are and includes them as part of it’s n-way match algorithm that determines whether or not an invoice should be (automatically) paid as-is. The reality is that no one in AP is going to look-up and enter the rate for each item before an invoice is paid, because chances are they don’t even know where the contract is, or even what contract it’s covered under. In reality, if engineering or production indicates the goods were received, the invoice is marked for payment. And if the invoice is at a rate 10% over what was agreed upon, there goes another chunk of the realized savings that your bonus is based on. Therefore, it’s critical that the content management system can export, on a regular basis, current contracted rates for goods and services which can be imported into the relevant systems in an automated batch fashion, and approved by the appropriate administrators with a single click. Then the n-way match will happen against valid contract data, and you can be sure that everything bought on contract is bought at the contracted rate – allowing for significantly more realized savings (than the industry average of 30% to 40% reported by many of the analyst firms).

3. Does it support free text search? And does the free text search work?

You can’t meta-data everything, and even if you could, you wouldn’t want to. The only data that should be in meta-data is identifying information, agreed upon prices, important dates, diversity, compliance, and “special clause” flags that allow for quick identification of the right contract under targeted searches and easy export of the data needed by e-Procurement and Spend Analysis systems. Thus, when a particular question arises whether or not a certain service is covered under a contract, or a special case is covered by a 150-page contract*, you want to be able to perform a simple search on the contract text that will take you to the relevant subsection and clause. This requires a free text search – that works. It needs to be “smart”. For example, if you search for screw, you don’t want results that include “screwdriver”, and if you search for “tire”, results on “tireless” are even less useful!

Furthermore, it should work on contracts not natively created in the tool. These days, it’s going to be in a standard office document format, RTF, HTML / XML, or PDF – and since lots of free libraries exist for searching and indexing such content, there’s no excuse for the vendor not to be including this capability! (If the vendor is stoned enough to say that’s not true – that no one makes available such extensive functionality for free, just point out that Open Office is free across multiple platforms and it supports all those file formats, and many more!)

* I’m not saying your contracts should be 150 pages (in fact, I would say that they probably shouldn’t even be 15), but the reality is that many corporations have contracts this big (or bigger) because many lawyers appear to believe that their worth is measured on how complex and convoluted the contracts they draft are!

4. Does it support proactive alerts – on contracts NOT composed using the standard templates or built-in functionality?

Let’s face it, alerts are only useful if you can define alerts on every contract and, moreover, define them for every event you need to be alerted to. Once you install a system with “alerts”, users will quickly fall into the mindset that everything is fine unless they get an alert, so if you can’t program every event they need to monitor into the system, the installation of such a system will result in a large number of balls being dropped in the short term. Even worse, you might not notice that the ball has been dropped until something catastrophic happens. (Like an automatic evergreen renewal with a vendor who is not REACH compliant!)

5. Does it support buy-side and sell-side contracts?

From an enterprise perspective, a contract management solution that only manages half of your contracts isn’t much of a solution! This is another reason why you need flexible user defined meta-data – sales is likely going to be interested in different data than procurement is.

6. Is it easily accessible and usable by everyone in the organization?

If only a few users have access to it, it isn’t even as useful as a central filing cabinet. At least then all of the personnel could theoretically walk to the cabinet, find the contract, and if they need a copy, make a copy on the local photocopier and put the original contract back. Let’s face it – it’s not just procurement that needs access to an average contract over its life span – it’s legal, research and development, engineering and production, accounts payable, and business analytics, among others.

This means that you should be wary of any solution that is sold “per seat”, because you’re going to need a lot more seats than you have buyers in procurement.

Furthermore, it needs to be easy to use. Just because IT and Procurement might be power users, doesn’t mean accounts payable or legal is. ( After all, e-mail might still be new to them. ) If the primary navigation isn’t a dumbed-down GUI, chances are it won’t get used. (And again, I refer you to the free open source document management solutions if you want a solution that probably won’t get used.)

7. Does it support the creation and management of initiatives such as risk management and IP-based revenue generation around your contracts?

And now for the painful reality check – everything I’ve described so far can be accomplished by a high-school programmer with Microsoft Access and a few open source libraries. There’s nothing special or hard about the basic requirements that we have covered to this point. That’s why this last point is so important. If it doesn’t have built-in project management, or integrate with a project management tool, and enable you to undertake initiatives with respect to your contracts, it’s not a very sophisticated solution.

Although it is true that any solution that satisfies the requirements implied by the last six questions is useful, and probably a lot better than what many of you have today, it’s important to remember that such a solution is not a very sophisticated solution. Contract Management is another area where the vendors have been primarily selling sizzle and not steak for a long time now. Thus, even though the solution you need is a lot more than what most vendors are currently offering, it’s not a sophisticated solution and not one you should be paying more than five figures for (as you can get open source content and document management solutions that come pretty close for free).

Of course, even integration with project management isn’t that hard to do at the level I’m suggesting, but it is a step or two above trivial and hence justifies the foundations of a true enterprise contract management solution, whatever that shapes up to be.

8. How hard is it to get the data AND contracts out of the solution?

From a procurement perspective, a contract is only useful if you’re complying with it to realize the negotiated savings. If you can not easily export the data you need to check, and enforce compliance, in a format that is compatible with the ERP, e-Procurement, and / or e-Payment systems you use, it’s not that useful.

In addition, there might come a day when you have to change systems. Maybe a better system comes along, maybe it’s an equivalent system that costs significantly less, or maybe the current provider stops supporting the system. If there’s no simple way to export ALL of the data and attachments into a logical file and directory structure, chances are that the only way you’ll be able to get data into the new system is to manually enter ALL of it again. If you’re a large organization, this is one project you never want to have to undertake – especially since it should not be necessary with today’s technology!

The 12 Days of X-emplification: Day 3 – Optimization

As I highlighted in Questions to Ask your Optimization Vendor, not all optimization vendors are equal … and, more importantly, not all vendors that claim to have decision optimization even have it! Thus, not only is it important to know what to look for when searching for a true strategic sourcing decision optimization, it’s also vital to know what to ask and what answer you want to hear.

In this post I’m going to cover five key questions that you should ask of every vendor you are considering. Some of these overlap the questions I x-emplified in my previous post (which you should re-read), and a few of them are new. Of all of the topics I am covering, this is probably one of the least understood – and since this is one of the few technologies with the capability to allow you to reduce your spend year-over-year when properly applied – this situation has to change.

1. Does the application satisfy the four pillars of strategic sourcing decision optimization?

As outlined in the Strategic Sourcing Decision Optimization wiki-paper, the four pillars of strategic sourcing decision optimization are:

  • Sound & Complete Solid Mathematical Foundations
       such as simplex algorithms and branch-and-bound;
       many simulation and heuristic algorithms do not guarantee analysis of every possible solution (sub)space given enough time, and, thus, are not complete in mathematical terms
  • True Cost Modeling
       many bidders bid tiered bids, discounts, and fixed cost components – the model must be capable of supporting each of these bid types
  • Sophisticated Constraint Analysis
       At a minimum, the model must be able to support reasonably generic and flexible constraints in each of the following four categories
    • Capacity / Limit
         allowing an award of 200K units to a supplier who can only supplier 100K units does not make for a valid model
    • Basic Allocation
         you should be able to specify that a supplier receives a certain amount of the business, and that business is split between two or more suppliers in feasible percentage ranges
    • Risk Mitigation
         let’s face it – supply chains today are all about risk management, and you should be able to force multiple suppliers, geographies, lanes, etc. to mitigate those risks without specifying specific suppliers, geographies, lanes, etc. to take advantage of the full power of decision optimization
    • Qualitative
         A good model considers quality, defect rates, waste, on-time delivery, etc.
  • What-if Capability
      The strength of decision optimization lies in what-if analysis. Keep reading.

2. Does the application support the creation and comparison of multiple what-if scenarios?

The true power of decision optimization does not lie in the ability to find a solution to one model, but the ability to create different models that represent different eventualities (as this will allow you to hone in on a robust and realistic solution), to create different models off a base model plus or minus one or more constraints (as this will help you figure out how much a business rule or network design constraint is really costing you), and to create models under different pricing scenarios (to find out what would happen if preferred suppliers decreased prices or increased supply availability).

3. Does the application automatically identify the most constraining and costly constraints?

Let’s face it, not every constraint has a significant impact on the optimal solution, if it even has an impact at all. Restricting the highest cost supplier to 30% of the total award is unnecessary if the supplier is not going to get any award. However, restricting the lowest cost supplier to 20% of the award could be the most restrictive constraint in the scenario, as the supplier would get 80% of the award otherwise.

The solution should identify, in order of decreasing impact, which constraints are having the greatest effect on the optimal solution and, at the very least, provide a range estimate of how much the constraint is costing you in the model. Determining the constraints that significantly impact a scenario can be done deterministically – they are at their bounds. Determining the constraints that impact a scenario moderately can be done through a deterministic comparison with the optimal solution to the “unconstrained model” (where only supplier capacities, demands, and cost constraints are included). The rest of the constraints then impact the model slightly or not at all. Calculations that take into account the differences between the optimal solution to the model and the optimal solution to the unconstrained model can be used to provide a reasonable estimate of the cost of any particular constraint. Furthermore, an exact cost associated with the removal with any constraint subset can be determined by optimizing the modified model. This brings us to …

4. Does the application support the automatic creation and solution of relaxed and perturbed scenarios?

After the constraints with the most significant impact, particularly from a cost (or risk) perspective have been identified, it’s only logical that you want to know not only how much they are costing you, but how much a relaxation (as opposed to a removal) of the constraint would save you. For example, if you allocated 30% of an award to a new vendor vs. 20%, what would you save? The reality is that you really want to understand not just the cost, but the “cost per unit” of the constraint. If you have allocation splits, you want to know the effect of minor and moderate changes to the splits. If you have limit constraints, you want to know how much you could save with increased capacity (and, thus, whether the company should be making an investment into new technology or more production lines or entering into a strategic partnership with a key supplier to lock up more capacity). If you have qualitative constraints, could you save more if vendors increased their quality by 10% across the board (which is equivalent to allowing a 10% decrease in quality level in the model)?

For each constraint type, it’s pretty easy to come up with a standard set of “perturbations” that you would want to analyze using what-if analysis. The application should support standard perturbation templates that you can use to set up an over lunch (or overnight) run against a well-formed what-if scenario that would generate a variance report that would tell you not only what constraint relaxations would save you the most, but how much a per unit perturbation against the constraint would save you and let you hone in on an award allocation that will have the lowest total cost of ownership over the life of the contract – and not just on the day you run the what-if scenario.

5. Does the application support make-vs-buy and arbitrary product substitution?

If you’re only sourcing indirect, you might not care about make-vs-buy, but you should care about product substitution. Let’s say you’re a major player in the food service industry who caters to the average joe’s love of pizza. Since few pizzas are made without tomato sauce, you’re going to need a lot of it. But guess what – if you ask a supplier for “sauce” they’re going to say “how much”, “what type of packaging”, and “refrigerated or frozen”? Chances are there are 10 different “products” for you to choose from. And it’s not as easy as just saying “whatever is cheapest” or “I’m standardizing on form factor 27” because “whatever is cheapest” will vary by production plant (some types of packaging will be cheaper in some countries than others, some plants have newer technology for certain kinds of packaging, and packaging weights and volumes determine shipping costs). Furthermore, the availability of products is probably going to vary across locations. The way to get the lowest cost is to allow a supplier to bid ALL products that can meet your needs (and, of course, account for any variances in processing costs through adjustments). Thus, you want your strategic sourcing decision optimization solution to support arbitrary product substitution.

However, if you’re sourcing direct, you’re really going to want make-vs-buy analysis. Let’s go back to Mr. Martyn’s automative seat example. Do you source the seat? Do you source seat components and assemble them? If so, how do you define a “component”? Or do you source all the raw parts and assemble them? The reality is that even in this simple problem, you have over 1000 different options. Thus, creating a model where you source the finished components, creating a model where you source specific sub-components, and creating a model where you source all the parts, and doing a comparison report on their optimal solutions just doesn’t cut it. You might find that you save 10% by sourcing the components and having a third party assemble them, but who’s to say that there isn’t a different configuration of components that would let you save 20%? If you gave your suppliers the flexibility to choose their own components and the third party assemblers the opportunity to bid on the components they think they could assemble into the final product most cost effectively, who knows what innovation they might identify? In a make-vs-buy scenario, you can’t assume you know what the proper subset of models to analyze is. You really need to analyze ALL the options available to you.