We recently discussed the criticality of optimization in
It’s Not Optimization, It’s Strategic Sourcing, explained that Even “Simple” Categories Hide Extreme Complexity, and pointed out Why Your First Generation Platform is Not Ready for Modern Sourcing in the hopes that you would understand that you need to be ready for Complex Sourcing.

But Strategic Sourcing Decision Optimization (SSDO) is only one area where optimization can be applied to add organizational value. There are at least half a dozen other areas where optimization can be successfully applied in a progressive organization that is a leader in its industry. In this post we’ll outline some of the best opportunities, a few of which have been covered before, and in future posts over the next year we will dive deeper as we introduce you to some of the companies exploring the use of optimization in these areas to bring your operations the same level of savings that your SSDO vendors are bringing the Sourcing and Procurement organization.

Inventory Optimization

Inventory optimization can be defined as the act of balancing supply and demand uncertainty to meet a desired services level at a minimum level of investment. But this is easier said then done. Not only do you have to consider the myriad of carrying costs that need to be balanced — warehouse rental costs, labour costs, and depreciation costs — but also take into account the costs associated with stock outs, alternate distribution costs if inventory is improperly distributed, and lead time costs, and try to balance them all.

Production Optimization

Optimizing inventory is a good start when it comes to reducing overhead costs, as inventory carrying costs can be as high as 25% by some estimates. However, production costs can also be unnecessarily high if production is not optimized. Production line down time is costly, and a production line goes down every time it is switched up to produce a new product (or a new variation). Thus, it’s not always best to plan production by order volume, but by total volume for a period, optimizing production runs to maximize throughput (and worker time), minimize downtime, and, most of all, minimize switching times. Especially if order volumes vary and part of the year would otherwise require overtime to meet demand.

Demand Optimization

The counterpart to production optimization is demand optimization. Not only does it cost the organization hard dollars to carry inventory unnecessarily or use poor production plans, but it also costs the organization hard dollars to product unprofitable product lines or cater to unprofitable customers. For each product line there is a production cost, a marketing cost to increase demand, a cost of goods solds (COGS), and an opportunity cost from not producing a potentially more profitable product line. Demand optimization is optimizing what product lines to produce, how much to invest to shape demand, and when to produce those product lines. It optimizes organizational profit by focussing on profitable product lines and marketing activities versus marginally profitable or unprofitable activities.

And these are only a few categories where optimization can increase performance, and profit. In part II, we will tackle three more areas. Stay tuned.

First generation sourcing platforms, circa 2005, were a miracle cure for the average Sourcing organization that was drowning in data and demands to save, save, save without enough time or resources to tackle even a fraction of the categories that needed to be under management.

First generation Spend Analysis systems helped the Sourcing team identify the largest spend categories and the largest organizational suppliers, which were prime candidates for the first strategic sourcing evens put through the new sourcing platform.

First generation RFX systems helped the Sourcing team capture more data from more suppliers than ever before and not only better qualify potential suppliers but collect more detailed bid breakdowns for analysis.

First generation e-Auction systems helped the Sourcing team put non-strategic high-dollar categories with very little complexity out to bid for quick savings success.

And, most importantly, first generation decision optimization systems allowed the sourcing team to build realistic cost models, capture constraints, and devise realistic award scenarios that identified real savings.

Many organizations that acquired these suites and applied them successfully saw year-after-year returns of 10%+ on the spend brought under management. And a few are even seeing some savings today, but just like the second auction saw little savings and the third auction saw a price increase, the year-over-year return is dropping. Why? Because while these first generation platforms were infinitely more powerful than anything that had come before, they weren’t designed to capture the full extent of complexity in an average category — complexity that has been considerably increased since the early days of sourcing due to increased outsourcing, increased globalization, increased regulation, and a constantly evolving global marketplace.

The following staples of first generation sourcing platforms just don’t cut it anymore.

• Limited Form-Based Data Collection
  that don’t allow the full breadth of responses a supplier could provide to be captured
• Built-in Static Reports (with limited 2-D graphing options)
  that don’t evolve as organizational needs evolve
• Single User Sourcing Events
  that don’t take into account that complex categories require entire teams
• Limited Approximations
  that force high order cost approximations and don’t capture true cost definitions
• Fixed Workflows and No Templates
  that don’t adapt to organizational needs

If you want to know what is needed in a sourcing platform to handle the full extent of the complexity in today’s categories, download Sourcing Innovation’s recent paper on Complex Sourcing: Are You Ready, sponsored by Trade Extensions, and find out once for all why optimization is the plan and not just something reserved for a handful of strategic events.

Earlier this year, Mr. Smith asked “what defines complex sourcing and why does it matter” on Spend Matters because complexity usually means there is inherent risk and opportunity in that category or sourcing event. That’s why we have to understand what complexity is, where it is, how to identify it, and how to capitalize on it to reduce risk and generate savings.

As clarified by Mr. Smith, complexity has nothing to do with the size of the spend, the importance of the spend, the inherent risk (which is supplier independent), the urgency of the spend, or even the number of suppliers. It has to do with a number of internal, external, or commercial factors that hide complexity, often in plain sight. The nine factors are:

These are all summarized in Sourcing Innovation’s latest paper on Complex Sourcing: Are You Ready which also goes on to demonstrate how even a simple print tender hides all nine factors of complexity within it. That’s right! Your standard print category, that you believe is so simple it’s best to hand it off to a GPO because it’s too trivial to deal with, not only hides more complexity than you realize, but hides more complexity than your first generation sourcing platform can handle. You’re leaving money on the table with every Sourcing event. Lots of money. Enough to hire more talent to do more events in house and save even more money.

Intrigued? Then download Sourcing Innovation’s new paper on Complex Sourcing: Are You Ready today, sponsored by Trade Extensions, and find out how even the simple categories can hide lots of complexity that, when properly addressed, provide savings and added value in the form of risk management, supply base consolidation, and new supplier identification.

Moreover, this paper will also tell you why your first generation sourcing platform is not up to the task of handling this complexity and what to look for in a second generation sourcing platform that is up to the task of handling the complexity. Download Complex Sourcing: Are You Ready today and find out why optimization is the plan.

You’re probably thinking that this is an oxymoron, because Kraljic in his classic Harvard Business Review article on how Purchasing Must Become Supply Management^* gave us a simple four-quadrant purchasing model over thirty years ago that you’ve been happily using since you learned about it. However, as Andrew Cox has clearly explained in his latest book on Sourcing Portfolio Analysis, we now know that Sourcing is a lot more complex than one might think it is. Even AT Kearney’s Purchasing Chessboard, which is essentially a twenty-first century update to the Kraljic model that essentially breaks each quadrant into a four by four grid based upon a plethora of factors, and which gives us a 64-square breakdown, doesn’t capture the true complexity of modern sourcing.

Why? As Andrew Cox clearly states in his new book on Sourcing Portfolio Analysis, classic Sourcing analysis methodologies focus on overall supply market dynamics, but buyer relationships are with individual suppliers. Thus, it’s not just the overall market dynamics that matters, but also the power relationship between the buyer and the individual suppliers being considered. However, even this isn’t enough to make a good decision. It’s enough to select a sourcing strategy, but one still has to deal with the large variation between suppliers, products, prices, and requirements before one can select one or more suppliers for an award.

This variation can add more complexity than any two-dimensional grid can capture. As a result, sourcing a category is a complex endeavor that requires a complex tender and a platform capable of handling that complexity. However, until you understand what the dimensions of complexity are, how they can hide in your low and high dollar categories alike (and cost your organization millions of dollars if not properly identified), what is needed to deal with these complex categories, and how you determine if your processes and platforms are up to the task, not only will you not be ready for the complexity, but you won’t even know if you’re approaching the category correctly.

The reality is that even though it’s 2015 and some organizations have had e-Sourcing platforms for a decade, an average organization is still not ready for Complex Sourcing. As discussed in Sourcing Innovation’s latest paper (on) Complex Sourcing: Are You Ready, sponsored by Trade Extensions, the average organization still on first generation e-Sourcing platforms is just not ready and, moreover, doesn’t even realize they’re not ready. After all, most organizations still haven’t caught up to the fact that it’s not a suite, it’s just sourcing (Part I and Part II) and that it’s not optimization – it’s strategic sourcing and that sourcing is much more complex than they like to think it is.

To find out why you’re not ready for complex sourcing and how you can prepare for the next generation of Supply Management, download Complex Sourcing: Are You Ready today. You won’t regret it. It will really help solidify why optimization is not the execution, but the plan as detailed in last year’s paper on Optimization, What Comes Next, still available for download.

^* There are reasons that SI is all about next generation Supply Management defined. This is one of them.