Category Archives: Decision Optimization

Why You Need Mass Adoption Of An Optimization-Backed Sourcing Platform

Last week, in our post on why Higher Adoption is Where the True Value of Optimization Lies, we emphasized the importance on not just having optimization, but an optimization-backed sourcing platform that can be used by the most junior of buyers. We focussed on the efficiency, time savings, and value such a platform would bring, but didn’t give you any hard numbers. While the hard numbers will be hard to come by, SI expects that the savings that hit the bottom line from such a platform will increase by at least 150% over using stand-alone optimization, and more than likely will double what an organization would see if it just used a regular strategic sourcing platform without optimization. We know that 2.5X is not a very impressive number when vendors go around talking about 10X ROI, but the ROI that vendors promise is relative to the cost of the platform, not the ROI relative to the organization’s bottom line, and that’s what really counts.

The reality is that, at the end of the day, after COGS, depreciation, taxes, etc. are factored in, a good Procurement organization might only take 2% off of the bottom line. This doesn’t sound that impressive, unless the organization is a 10B organization where 2% is 200M, in which case it’s knock your socks off impressive. Now imagine if that same Procurement organization could increase the straight to the bottom line savings by 150% and show a bottom line savings of 5.2%. That’s another 320M in annual savings for a total savings of 520M! That’s buy everyone on the Sourcing team a custom made Jaguar savings because no other initiative is going to take that much off the bottom line.

But you don’t have to be a 10B organization to see the impact. Imagine you are a small mid-size organization with only 100M in annual spend. Instead of seeing an average year-over-year impact of 2M, you’d see 5.2M. If a fully burdened FTE is 200K and you had a small Procurement department of 5 people managing your spend, the department’s ROI would go from 2X to 5.2X in a single year, and that is quite significant.

So where are these, quite conservative, numbers coming from?

  • A Best In Class Organization has 80% of spend under management (Hackett, Gartner, etc.)
  • A Best in Class Organization will strategically source approximately 1/3 annually (due to resource restrictions) (Crowd Wisdom approximation used by many vendors)
  • A Best In Class Organization with stand-alone or hard-to-use optimization capability will only put the top third of complex, strategic, or high volume spend through the organization (Generous crowd wisdom approximation based upon SI’s interaction with optimization vendors)

As a result, (at most) one-third of one-third of four-fifths of spend gets optimized on an annual basis, or about 9% gets optimized using strategic sourcing decision optimization and the full extent of its capability.

However, if the organization has an optimization-backed sourcing platform that is configured for one-click evaluations and automatic weighted auction awards for low-cost / standard categories,

  • 98% of spend can be under management (as it can flow through the platform as easy as it can flow through an auction or spot buy RFP),
  • one half of that can be sourced annually due to efficiency gains
  • and all of this spend will be subject to optimization.

This means that about one half of organizational spend, or about 48% of spend, can get at least partially optimized on an annual basis. In other words, an organization can subject 5x its spend to optimization on an annual basis.

The net result is that an organization that adopts an optimization-backed sourcing platform that can be used by every buyer will see at least 150% more savings hit the bottom line every year. Why?

If we look at the numbers:

  • the average return from Procurement at a world class organization is 4.7% (Hackett Group)
  • the average return on tail spend (which is never strategically sourced) is 7.1% (Hackett Group)
  • the average return from SSDO on a strategically sourced category where the full power of the solution is enabled is 12% (Aberdeen)

This leads to the following (where we assume 20% of spend is “tail spend”):

Traditional:
09% using SSDO @ 12.0% savings = 1.0% savings
18% using SS   @ 04.7% savings = 1.0% savings
TOTAL = 2.0% savings
 SSDO Platform
38% using SSDO @ 12.0% savings = 4.5% savings
10% using SSDO @ 07.1% savings = 0.7% savings
TOTAL = 5.2% savings

Now, mileage will vary among organizations, but this example should make it pretty easy to see that optimization is a huge value driver that will have a significant impact on your bottom line when it is widely deployed.

So if you want to know what to look for in an optimization-backed sourcing platform, download Optimization: Higher Adoption is Where True Value Lies (registration required) today and find out what you need to take optimization from a success to a smashing success in your organization.

Higher Adoption is Where the True Value of Optimization Lies

Today, Sourcing Innovation (SI) released it’s latest optimization paper, sponsored by Keelvar, on Optimization: Higher Adoption is Where True Value Lies (registration required).

As SI has said repeatedly, optimization is the ultimate sourcing strategy, but optimization is still grossly under-utilized. And this is a crying shame. Because of this, an honest appraisal of its failure to become the de-facto standard approach in all mature Procurement functions is overdue. That’s why, unlike most of SI’s papers to date, this paper looks at the softer side of optimization and starts out by taking a look at why adoption rates are historically low before discussing what is changing in the marketplace and how a radical increase in adoption could be just around the corner. An increase in adoption that is sorely needed if the true value of optimization is to be realized.

So, while previous papers focussed on defining complex sourcing and what comes next, this paper focusses on what is critical to drive adoption: the needs of the average buyer and supplier. It discusses the need for flexibility, speed, and simplicity above feature-bloat and power. The need for user-friendliness over functionality (as only a few categories require the full power of today’s optimization engines). The myths that have been holding you back. And what a modern platform needs to increase adoption not only by Procurement organizations but, more importantly, by users within a Procurement organization. The maximum value is obtained when everyone uses the optimization-backed sourcing platform. Not just a few super-users.

We discuss, for example, how a platform that supports an instant analysis after each RFP is submitted that presents the lowest total cost of ownership taking all costs, capacities, and business constraints into account provides a buyer with considerable value as the buyer can go straight to negotiations, or contracting. These new platforms prevent the buyer from having to waste countless hours on side-by-side comparison reports and off-line analysis to identify the best buy for the organization. This usability allows the platform to be applied to every category, which not only gets more spend under management, but, at the end of the day, pushes more savings straight to the bottom line.

SI strongly recommends that you download Optimization: Higher Adoption is Where True Value Lies (Registration Required) today and then, if you don’t have such a platform, do something about acquiring such a platform.

For example, the vendors who have a true optimization-backed platform will happily demonstrate the power of their platforms on one or more categories you have run in the past. Pick a direct or indirect category (not transportation or packaging, every optimization vendor can do these over-analyzed categories well) where you’ve had issues due to stakeholders not being happy, actual savings being far less than expected, supplier relationships fraying, etc. Then, contact one of the few optimization-powered sourcing solution providers, provide your data, define your constraints, and watch them demonstrate in a matter of minutes how much you could have saved.

But since that won’t be enough, because every CXO says you could always do better in hindsight, kick-off a low-cost paid trial (see SI’s previous post on why paid pilots are the future) on a few jointly-selected current, critical, categories that typically hide large savings opportunities that the organization has never been able to tease out. As the provider helps you run these events on their turn-key SaaS cloud-based offerings, you’ll quickly see the power, the ease, and the real-world results that you can use to build an internal case for acquisition of an unlimited platform license that will quickly be followed by mass adoption. And since it doesn’t cost six (or even seven) figures to get started anymore, there’s no reason not to do it.

Re-introducing Keelvar, An Optimization Backed Sourcing Platform

Last summer, we introduced you to Keelvar, a provider of an optimization-backed Sourcing Platform with a strange name that produced uncommon results. A client of Keelvar’s with 30 year’s experience in ocean freight sourcing remarked that it was like their first generation sourcing suite on steroids, so Keelvar is definitely a platform that should be on your radar.

A spin-out from a research laboratory that built a next generation solver, Keelvar was formed as a SaaS (Software as a Service) company in 2012. Unlike the majority of sourcing optimization software providers, they realized from day one that the solution wasn’t a better optimization module, it was a better sourcing platform where ease of use was the most important driver of adoption. Their Founder and CEO, Alan Holland, believes that “every sourcing event with a possible split-award should be optimized but in a completely transparent manner so that it’s easy for both buyers and suppliers” to understand the award recommendation and the reason therefore.

The starting premise was that the average user wasn’t advanced enough to use the first generation strategic sourcing decision optimization (SSDO) solutions where optimization was a standalone module and you needed to be an optimization platform expert to set up the models and run the sourcing event. It had to be intuitive and easy. Moreover, these average buyers have much simpler categories. As a result, the models were simpler than what some of the first generation expert providers were throwing at them, and, moreover, the majority of these models for standard, “simpler“, categories were fairly standard and could even be mapped to a default template by a senior buyer that the junior buyer could start with, and sometimes use unaltered.

Unlike many platforms, the optimization-backed sourcing platform walks the buyer through a simple process for creating and executing a sourcing event that even a junior buyer will feel comfortable with, detailed in our introductory Keelvar post. This process is as easy to use as a powerful, weighted, RFX tool or e-Auction, which is something that cannot be said for the majority of optimization solutions on the market that still require a solid understanding of the underlying mathematics and operations research. It’s sourcing for the every-man.

And it’s not just for the mid-size company anymore. If you will recall, when SI first reviewed the solution, SI identified it as the perfect solution for the lower-end of the mid-market. However, over the last six months, the usability and power has been steadily improved, and now SI will also identify it as a perfect solution for the entire mid-market and a candidate solution for the Fortune 500 / Global 3000. Keelvar, which has a US presence in addition to its UK presence, has acquired a number of Global 3000 clients for whom the solution is perfect for. For the majority of categories, and spend, in these organizations, there is no need for overkill optimization and the solution is a perfect fit. That’s not to say that it can’t handle the more complex categories either, with a number of global logistics events for some of the world’s largest shippers already under its belt, just that it is perfect for those enterprises where the majority of events are not that complex and can be templated for the average buyer.

Plus, the Kevlar platform is under continual development and improvement. Not many SSDO platforms can say that either. When optimization is one module in a set, providers can’t focus constant development on it. When optimization powers a single platform, it’s a different story.

Any company that chooses Keelvar gets a solution that allows all spend to be subject to the appropriate level of optimization, which is what allows Keelvar to get fantastic results for some organizations and why they have progressed so fast. If you have a traditional, heavy, solution that can only be used by a small set of dedicated resources on a few large categories, the organization will struggle to get 10-20% of spend under optimization-backed management which means, at the end of the day, the savings potential of the solution (expected to save 10%) is a mere 1-2% on the bottom line. But if you have a solution that is lighter, streamlined, and useable by everyone in your organization, you can get 80% of spend under optimization-backed management. And while the simpler categories won’t hide the same opportunity, even if you squeezed out a mere 6.25% average savings, that’s still 5% to the bottom line and a much better investment. At the end of the day, it’s not the line item count that the product can support, but the amount of spend that flows through it. And the bravado claims by first generation solutions that their solution can support tens of thousands of line items have done more harm than good.

Keelvar is an agile company and is developing new product features and global coverage quickly. New developments in the last six months include …

  • RFI with bulk editing capabilities.
  • Bid data sanitizer to detect, correct and prevent erroneous bidding (via automatic identification of outliers).
  • Enhancements to multi-round RFQ capabilities.
  • Large scale e-Auction support for hundreds of lots and bid upload capabilities.
  • New support portal to cater for the growing global customer base.
  • Partnerships with benchmark data providers in Global Logistics.
  • A partnership with an e-Sourcing Suite provider.
  • New offices in South America and Australia (which give it a presence on four continents).
  • Paid trial offering for Global 5000 companies (and, as per a recent SI post, paid pilots, under the consulting budget, could be just what you need to prove the value of an optimization-backed sourcing platform and get investment $$’s to upgrade your platform, and your results).

As one of the few companies aggressively developing an optimization-backed sourcing platform, and one of the few companies in the Supply Management space focusing on adoption first, Keelvar is one of a handful of global companies that might just lead Procurement out of the dark ages (in which Procurement seems to perpetually exist as a resident of the Island of Misfit Toys) and into the enlightenment.

Mass Adoption of Optimization via Modern Sourcing Platforms

In a previous post, we addressed three common misconceptions about sourcing. In this post we expand upon those corrections we provided to give you six pillars of a properly designed optimization-based sourcing platform.

The three pillars of a properly designed optimization-based sourcing platform that we addressed in our last post were:

  • Useable by everyone, including the most junior of buyers
  • Affordable as any other sourcing platform
  • Efficient, decreasing event set-up time by at least a factor of 2 to 3

In addition, an optimization-based sourcing platform is also:

Powerful

Optimization is powerful. A modern optimization engine can solve sourcing problems to 99.9%+ optimality in a matter of minutes, even if they require tens of thousands of variables and hundreds of thousands of equations to describe. The platform is effectively evaluating hundreds of thousands, or millions, of different award splits in a matter of minutes.

Valuable, more so than any other sourcing platform

Simply put, optimization gets amazing results. Even if the category has been negotiated repeatedly over the last ten years, and it looks like the savings opportunities are razor thin, with the ability to analyze more suppliers, more bids, more transportation options, more value-add options, more constraints, and more supplier-specified opportunities, optimization can often identify an additional savings of 10% or more. In fact, the year-over-year average savings from optimization alone on the categories it has been applied to has been clocked at 12%, more than any other sourcing platform.

Insightful

With optimization, you can create different scenarios, with different suppliers, constraints, and goals and see how the optimal awards differ as the problem definition changes. This inspires a sourcing analyst to look at the problem in different ways.

However, the first three statements in particular are only true if the platform used by default is an optimization-backed sourcing platform . Classically, optimization solutions have been implemented as stand-alone platforms. These were powerful, and when used by the right senior resources who set up the right sourcing events, these platforms generated amazing results, but they were very difficult and time-intensive to use compared to an e-RFX or e-Auction platform. The model had to be set up. RFX data had to be imported. The data had to be validated and cleaned. The model was then run, altered, and re-run until an acceptable baseline was found. Then multiple what-if scenarios were run until a final award scenario was identified. Then the award scenario had to be exported to the sourcing platform so the suppliers could be notified and the contract(s) drafted. All of this was very time consuming. As a result, the platform was not useable across the sourcing organization, was not very affordable as it had to be supplemented by other sourcing platforms, and this process was definitely not efficient.

For mass adoption of optimization, it needs to be supported by an RFX and/or an e-Auction platform for data collection, by analysis and reporting for result presentation and exploration, and needs to be integrated with contract management and the supplier portal for negotiations and communication. In other words, optimization is the engine that powers the modern sourcing platform, it is not a stand-alone solution.

That’s why a modern optimization-based Sourcing platform, and not a standalone optimization module, is the silver lining that Procurement has been waiting for. What does this platform look like? Stay tuned!

Optimization: What’s changed since 2009?

If you’ve done your research you have likely figured out that it requires a PhD to use optimization. That it is so expensive it should only be used by experts for high value categories. And that the time required to set up optimization for a sourcing event prevents you from using it for more than a handful of events.

All of the above statements were true in 2009. But these statements are completely false today, and have been false for a while now.

Let’s take them one by one.

Optimization requires a PhD.

Modern tools do not require a PhD, a Masters or even a Bachelor’s Degree. A properly designed optimization solution should be usable by junior buyers as it should hide the complexity and simply provide one-click evaluation. With built-in rules, workflows, wizards, templates, and other modern usability features, optimization can be as simple to use as an e-Auction on an average category for a junior buyer.

Optimization is very expensive.

While it used to be the case that optimization solutions were expensive, sometimes costing six (or even seven) figures for a single event, this was pre 2010. Today, mid-sized organizations can receive 40 events with unlimited users for that or unlimited events for a small number of users. Take your pick.

Optimization makes a sourcing event very time intensive.

Modern tools have intuitive web-based workflows to make event creation a task conducted in minutes. While it might take a long time to set up a complex event with dozens of suppliers, hundreds of line items, thousands of lanes, and hundreds of constraints, not all events are that complicated. Many categories are only bid to a few suppliers, need to be shipped using the two or three existing contract options, and don’t have a lot of constraints. This allows the model to be set up, the data imported, and a baseline solve completed in a matter of hours, not days. Moreover, if the model is set up as a template, it can be copied and reused over and over again, and setup is a matter of minutes. Done right, optimization decreases the amount of time it takes to set up a sourcing event by a factor of two or even three or four.

In other words, optimization has become mainstream and should be considered a default strategy for all sourcing events. And what does a modern solution look like? That’s the subject of our next post.