Optimization: Is It Time to Move Beyond Sourcing?

A big focus of this blog is, of course, Strategic Sourcing Decision Optimization (SSDO), one of the few advanced sourcing methodologies guaranteed to save your organization, on average, 12% if correctly applied (as demonstrated in two back-to-back studies by Aberdeen) and the doctor‘s speciality. But it’s not the only place you can apply optimization in Supply Management to save money. Another area, as covered a number of times on SI, is Supply Chain Network Optimization (SCNO). And, of course, some companies just focus on the intersection and do Logistics optimization. But this is not everything that can be done, or should be done, especially in an age where many industries now see The End of Competitive Advantage and don’t actually own physical assets, leasing them as need be to create the products and services desired by their prospective customers.

In this situation, what matters is Asset Optimization, where you optimize a one-time dynamic network to minimize sourcing, network, and logistics costs to minimize the total supply chain costs associated with the product you wish to produce. This is easier said than done. In sourcing, you are mainly considering bids, lanes, and associated costs to compute the optimal TCO (Total Cost of Ownership), and if lifetime costs and metrics are available, or TVG (Total Value Generated) with respect to a fixed situation. In network optimization, you are optimizing the location of owned factories, supplier production centers, warehouses, and retailers to optimize the distribution costs. But in asset network optimization, you have to simultaneously consider the network and associated distribution costs, the sourcing requirements and associated production costs, and the costs of using, or not using, the resources you already have available and contracts you have already negotiated. In addition, you have to consider the risks associated with each potential supplier and location, the sensitivity of the overall asset network to each supplier and location (and is there a single point of failure), and the ability to dynamically alter the network should a failure occur or customer demands change.

Plus you have all of the difficulties associated with each type of optimization. With respect to the network, there will be many alternatives for production site, each site will have multiple, and different, asset lines, and each asset will be qualified for a certain operation with respect to a certain product. In addition, some assets will be more efficient and cost effective, and unqualified assets will have a qualification/certification step, which will require limited manpower – a variable that does not need to be modelled in traditional sourcing or SCNO models. It’s a very difficult problem that requires modelling of multiple types of variables and constraints at multiple levels at multiple times. And this last requirement makes the model even more complex. In a traditional sourcing model, you don’t really need to consider “time”, as it doesn’t matter how often the trucks deliver your product, just how many trucks are needed to deliver your product as you are billed FTL or LTL by the delivery. And it doesn’t matter what production schedule the supplier(s) use(s) as long as your products are ready on time, so only the total volume need be considered. But when you are dealing with production models, especially when trying to dynamically construct and optimize an asset network, production schedules are significant. If a certain location only has 30% of capacity left available and can only schedule it during a given timeframe, that has to be taken into account. If some of the products have to be delivered before they can complete the first production run, then there has to be a location that is able to do so. And if a continual supply is needed over nine months, the production cycles should more or less line up with minimal overlap as, otherwise, inventory costs would soar.

It’s a complicated problem, but one that is becoming more and more important in fast moving industries such as fashion and consumer electronics — and one that most SSDO providers can’t address. But I’m happy to report that there are a few optimization vendors in the space who can. One is Algorhythm, in India, that has been doing SCNO for many years, and who has built up a lot of this capability over time while working for it’s global multinational clients such as Unilever. Another, newer entrant, is Trade Extensions, that has been doing SSDO for many years and, at the request of its major multi-national clients, including P&G and Coca-Cola, built up the capability in their solution with innovative new platform enhancements since SI last reviewed their solution in 2011 that make it very easy to define the models, run the scenarios, compare and navigate the results. A few of these enhancements will be described in a future post. Stay tuned!

We haven’t been an industrial society for all that long!

Given the rapid pace of technological progress, and the ever-shortening lifecycle of the goods produced, it’s hard to imagine that, in terms relative to the age of the human race, industrialization is a very new concept. It’s only been 66 years since the introduction of the ENIAC (Electronic Numerical Integrator and Computer) on July 29, 1947, 110 years since the Wright brothers made their first flight, and only 160 years to the day since the first major US world’s fair, the Exhibition of the Industry of All Nations was held in New York City. (This occurred only two years after the Great Exhibition in London.)

Over the course of 4 months, this historic fair saw 1.1 Million visitors, at a time when the US population was only about 26.5 Million (as the last census in 1850 put the US population to be 23,191,876 and the next census in 1860 put the US population at 31,443,321). This fair that featured the New York Crystal Palace (which inspired poets, including Walt Whitman) that was regrettably destroyed by fire in 1858, also included the Latting Observatory that was the tallest structure in New York City at the time at 96m. It is remembered as the place where Elisha Otis demonstrated an elevator equipped with a device called a safety that would kick in if the hoisting rope broke, addressing a major public concern regarding the safety of elevators. Three years later, Otis installed the first passenger elevator in the US in a New York City store and created the reality where if you want profits to go up, help people get up!

Nipendo: Bringing O2P and P2P to the Mainstream

Nipendo, which recently secured $8 Million in funding, a provider of order-to-payment automation software, recently released a new version of its order-to-payment (O2P) platform that includes automated rules-based end-to-end invoice reconciliation. Billing itself as the Supplier Cloud* solution, Nipendo has done an excellent job of making seamless supplier connectivity a reality for its customers.

By integrating with a number of platforms, providing a supplier portal, and by offering a print package that suppliers can download and install as a print driver on their PCs to print invoices to the Nipendo solution, Nipendo makes it easy for suppliers to e-invoice buyers without having to do any sort of complex integration with yet another platform. This is a powerful feature.

But what is really great about the Nipendo platform is the fact that they took three years to build a good understanding of customer fears as well as customer needs and built a solution that not only does what it says it does, but also addresses the main customer fear points, as outlined in our last post on points to ponder when people are pushing off procurement platforms.

Reality #5: It does save money.
A proper implementation of the Nipendo platform automates the full O2P/P2P (Procure-to-Pay) lifecycle, including invoice matching, verification, and payment subject to user-defined rules, allowing O2P/P2P to be managed on an exceptions-only basis. Once supplier onboarding is complete, all tedious tactical no-value-add manual processing or review time is required unless there is an exception, which allows 80%+ of the invoices and payments to just flow. This eliminates 80% of valueless tactical manpower effort, which can be redeployed to more strategic work, as well as all of the associated costs of sending, receiving, processing, and filing paper.

Reality #4: It does integrate.
Nipendo integrates with all of the major ERP vendors — including SAP (Business One), Oracle, Microsoft Dynamix, Quickbooks Enterprise, and Sage; integrates with a number of third party supply management platforms — including IBM Cognos, Synertrade, BuyerQuest, Global Factoring, and TIS; has it’s own Print to Cloud solution (which, thank your deity, does not actually print to the cloud but allows a supplier to submit their invoice to the Nipendo platform in a common data format); and has a number of third party technology partners that can build you an integration point if you don’t have one. Nipendo realizes that in order to truly deliver O2P/P2P savings, you had to automate the entire process, which means automating it for ALL parties, which means you have to integrate with all parties and the platforms they use, and they have spent years building a multitude of integration points.

Reality #3: It will work for you – it has a customizable workflow.
You can define the exact O2P/P2P process that you use, and precisely how complex each step is. For example, where purchase orders are concerned, you can define each status and step, the approval(s) level(s) required, whether you want to be notified of viewings/approvals, actions the vendor can take, information required by the vendor for each action (comments, reasons for rejections or requests for corrections or clarifications, etc.), required attachments (such as insurance certificates, certifications, etc.), the validations executed against invoices, the variations allowed, rules for automated approval, etc. The system can be setup to match your current organizational workflow precisely.

Reality #2: Suppliers can use it. They can choose among a number of low effort solutions!
In addition to the ERP integrations, third party platform integrations, the Print to Cloud utility, and options for custom integration from a third party, the supplier also has the option to use a good old-fashioned web portal. The supplier can use the platform.

Reality #1: The solution is designed for efficiency. Not job elimination.

It’s true that if the primary reason for O2P/P2P automation is that you just want to outsource the function (using BPO – business process outsourcing) and make sure that the third party organization is actually capable of delivering cost savings (by way of reduced manpower), then jobs will be eliminated. But if the driver for paperless O2P/P2P automation is that your Procurement and Supply Management personnel are spending too much time on costly tactical activities and not value-add strategic activities, the solution will end up providing a much greater contribution to the organizational bottom line as your Procurement and Supply Management personnel will be able to focus on getting more spend under management (and through the system), which will identify cost reductions in addition to process savings.

With the recent release of their automated end-to-end invoice reconciliation functionality, Nipendo enables true end-to-end O2P/P2P process automation in an exception driven fashion. This is where O2P/P2P needs to be. Manual review of invoices adds no value, and manual payments when everything matches approved purchase orders adds no value either. Value is in the identification of issues; the creation of corrective action plans; the implementation of efficiency, service, and product improvements; and in the identification of areas for cost avoidance. Pushing paper accomplishes nothing.

* Presumably because, even though Nipendo knows it’s not true, too many people still think that the cloud is a fluffy magic box (which it is not).

P2P: Points 2 Ponder when People are Pushing Off Procurement Platforms

As far as SI can tell, not enough companies are using good, modern, fully electronic, Procure 2 Pay technologies when they should be. Even worse, many of these companies have realized the importance of good Supply Management and adopted modern e-Sourcing and Supplier (Performance/Information/Risk) Management software. But that’s not enough. SI has been ranting for years about the fact that it’s Sourcing AND Procurement and that if you don’t implement the full cycle, you’re not only leaving savings on the table but failing to capture all of the value available to you.

Why are otherwise smart, moderately progressive, companies doing this? Because they have deep concerns that the platform won’t do what they need it to do and fears that the only reason these platforms exist is to eliminate their jobs the same way machines and automation have led to our manufacturing woes. And while they have good points, since some of the early solutions didn’t do everything they needed to do in order for the company to obtain the promised benefits, and since automation typically leads to elimination of workforce in the function, when you look at some of the current solutions and look at the goal of Procurement in the right light, their points are no longer valid.

Nevertheless, if the points of trepidation are not addressed, the solutions won’t be considered, the function will not advance, and, vendors, you won’t survive. So, because SI encourages the proper use of technology platforms to increase efficiency, eliminate non-value-add tactical tasks, and augment the capability of your workforce (which is different from replacing it), SI is going to give the vendors building these solutions a helping hand by identifying the common trepidations, the solution requirements needed, and, as a result, the message you have to get across to calm the prospective buyer’s nerves (provided, of course, that you do have the solution requirements).

Trepidation # 5: It Won’t Save Money. There will always be exceptions to manage, suppliers who can’t use it, and administrative requirements and the costs will just be shifted.
Many early systems claimed big savings, typically in the 80% range, but never really delivered. The reality is that if the organization still has to support offline paper processes, still has to review all the invoices for errors, has to have an IT person administer the system, etc., the costs just shift. A modern P2P system has to support, and be usable by, all suppliers (and not just the top X that constitute 80% of spend), has to automatically detect errors and unmatched invoices, and has to be low, or no, cost to administer for the 80% savings to materialize. Otherwise, the buying organization won’t be able to achieve the 5X ROI the system is supposed to deliver and will not want it.

Trepidation # 4: We use X for purchase orders and / or Y for payables tracking. We can’t replace these systems.
A lot early systems expected that they would be the system of record for whatever the system did, and that all the system had to do was export the payments to a flat file for importing into the finance system. This is not the case. The platform has to integrate, in a straightforward manner, with the systems the buying organization uses for Purchase Orders and Inventory Management and the systems the buying organization uses for Accounts Payable.

Trepidation # 3: It Won’t Work For Us. Our Processes are Unique.
A lot of early systems followed the Henry Ford philosophy in that “you can have any colour as long as it’s black”. This doesn’t work for organizations that have distinct invoice approval workflows, distinct payment procedures, and different master-data storage policies. While the basic workflow is the same at a high level, it is different in the implementation across companies and the platform needs to support workflows that can be customized.

Trepidation # 2: Our Suppliers Can’t Use It / It’s Too Much Work for Our Suppliers
A lot of early systems took the view that “we have a portal that accepts EDI format and that’s good enough”. The problem is that supply organizations, like buying organizations, have different systems and different processes and, typically, don’t have the manpower to support a different invoicing mechanism for each customer and, frankly, won’t. The system has to support the common processes and technologies used by suppliers in the buyer’s market. A few (small) suppliers can be given a single “portal” solution, but this has to be a minority.

Trepidation # 1: They Took Their Jobs and Now They Will Take Our Jobs!
A good P2P system, which is exception-driven and requires a buyer to only manually review invoices that don’t match POs and / or exceed a certain dollar value, and which provides mechanisms all suppliers can use to submit electronically, should reduce the tactical invoice processing effort by 80% or more. This means that if the people doing the invoice processing had no other skills, then 4 out of 5 would lose their jobs. But if these are true procurement people, their job function would just be shifted to a more strategic role as redeploying these resources to spend more time on strategic supplier management, category management, and risk management would provide the organization with a value that (far) exceeded their cost. You don’t get rid of smart people just because you got a new system. You just ask them to deliver more, which they can do thanks to the new system.