Category Archives: Decision Optimization

It’s Not Optimization. It’s Strategic Sourcing.

Last week in my post on how The Trade Extensions Event Was Different. Their View is Different. It’s Time for Different I noted that the reason the event was different is because, unlike most purveyors of perplexing optimization software, they did not focus on their the capability, uniqueness, and savings potential of their optimization software, choosing to barely acknowledge the concept, and instead took the viewpoint that it’s not optimization, it’s just sourcing.

And as I indicated in that post, said in Monday’s Post on how It’s NOT a Suite, It’s JUST Sourcing Part II, SI has a very similar view. SI is now convinced that it’s not optimization, it’s strategic sourcing as SI believes it has become practically impossible to do true strategic sourcing without optimization.

Why? Because we have not only reached the point where it is impossible to define a sourcing event of any magnitude without hitting at least a few of the nine dimensions of complexity (outlined in “what defines complex sourcing and why does it matter” on Spend Matters) but we have also reached the point where the data collection, manipulation, and analysis requirements are so intensive that only a sourcing solution built on, and backed by, a true optimization engine is going to be able to handle the data, manipulation, and analysis required.

Now, we’re not saying that the right strategy for every event is optimization, but we are saying, as per SI’s already classic paper on Optimization, What Comes Next, that you cannot determine the right strategy without optimization to at least build and solve a baseline cost model given current market prices and expected bidder increases or decreases from the last event. For example, while a 3% savings potential might be enough for a (strategic) sourcing auction or optimization-based multi-round RFX, a 3% drop in expected product cost does not necessarily imply a 3% savings potential. If that drop is from remote suppliers that ship down lanes where costs have risen 10% and shipping is 30% of the overall total cost model, there is no savings potential. The right strategy is a renegotiation with the incumbent for a contract extension or a spot market buy. Similarly a 2% drop in price combined with a 5% drop in logistics costs could equate to a 3.5% savings potential under the right circumstances, which is substantial on a 50M+ category.

Plus, with bundled discounts, volume discounts from suppliers and carriers that take effect at different price points, different import and utilization costs for each supplier, and an ever increasing plethora of capacity constraints, mandatory award splits to minimize risk, secondary goals of minimal environmental impact, and so on, it’s often impossible to determine what the lowest cost solution is and, thus, if the cost increase associated with assigning a (greater percentage of the) award to a preferred supplier seen as being more valuable in the long term is actually worth it.

There’s just no way to do a strategic analysis and justify a strategic decision without a basic level of true mathematical optimization capability. Spreadsheets were breaking under the strain of basic sourcing requirements years ago. Now these sheets are just shards of glass — which will eventually cut you if repeatedly handled.

So if you want to source, use what you want. But if you want to strategically source, use an optimization-backed sourcing solution. You won’t need optimization for every event, but since you won’t know when you’ll need it until you have it, you still need it.

The Trade Extensions Event Was Different. Their View Is Different. It’s time for Different.

In our last post we noted that those of you following Spend Matters and Spend Matters EU will have noticed Nancy’s and Jason’s posts on the recent Trade Extensions events in London and Chicago on Managing Complexity. In these posts they made a number of interesting observations about the event and how it was different from many other customer-focussed vendor events. We summarized these in our last post and noted that while all of the differences identified were major differences between the Trade Extensions event and the average vendor event, the biggest difference was left unsaid.

The biggest difference was not in the event, or even in the unique approach Trade Extensions took in the planning and organization of the event, but in the viewpoint they took with regards to the core subject matter. The viewpoint, which is one that Sourcing Innovation has had for a long time, is simply thus:

It’s not optimization. It’s just sourcing.

It’s 2015. As indicated in a recent white paper by Mr. Smith of Spend Matters UK on “What Defines Complex Sourcing”, Sourcing is Complex. In fact, as will be clarified in Sourcing Innovation’s upcoming paper on Complex Sourcing: Are You Ready, even the most basic of categories these days hide complexity well beyond an average Sourcing Professional’s wildest imagination. In fact, even a basic print tender can hide all nine dimensions of complexity and finding the right solution is in fact a sourcing problem of the highest magnitude. (The reality is that sourcing custom made controller boards is often easier.)

Sourcing involves identifying the plethora of options available, defining the cost model breakdowns, capturing all of the data, allowing suppliers to define their own proposals, capturing all of the buyer constraints and capacity restrictions, and creating various scenarios that represent different workable options. All of this requires an optimization platform.

The reality is that strategic sourcing requires a lot of analysis, and the only sourcing platform that can support the analysis required is one based on optimization. But it’s not necessarily about the optimization. Sometimes it’s about the requirements capture. Sometimes it’s about the data collection. Sometimes its about the modelling. Sometimes its just creating and costing scenarios. And sometimes, which could be a small fraction of the time, it’s about the optimization.

It’s not optimization, it’s strategic sourcing. You can’t do sourcing without optimization, even though you can do optimization without sourcing. That’s why the Trade Extensions event focussed on Sourcing. Whether or not the end of Procurement is nigh. How to effect change to keep it relevant. How to source responsibly. And what some best practices to achieve that goal are. If you can not strategically source, you cannot optimize. Don’t try to preach optimization before one understands the importance of true and proper strategic sourcing.

That’s also why Trade Extensions commissioned a book, The Strategic Sourcing Lifecycle: An Introduction, written by the doctor, which they will be giving away FREE as an e-Book download through their TESS Academy. (Stay tuned for more information on when this will be available.) It’s not optimization, it’s sourcing. And we’ve reached a point where most firms that claim to have Sourcing don’t.

Why You Should Not Build Your Own e-Sourcing System, Part IV Decision Optimization

In Part I, where we noted that Mr. Smith was right in his recent post on “thinking of building your own esourcing system please don’t” over on Spend Matters UK where he pleaded with those organizations, and particularly those organizations in the public sector, who thought they could build their own e-Sourcing system not to. We gave a host of reasons on why they should not because, like Mr. Smith said, they are

  • going to waste OUR money building it,
  • waste exorbitant amounts of money keeping the system up to date and compliant with ever-shifting legislation, and
  • only feed those dangerous delusions at best (and possibly create an epic disaster as 8 of the 11 greatest supply chain disasters of all time were caused by technology failures, and 6 as a result of software platform failures)!

Realizing this isn’t enough to convince the smuggest and most deluded from considering the notion, we are diving in and addressing some of the difficulties that will have to be conquered, one primary module at a time, ending today with Decision Optimization.

The simple fact alone that there have never been more than seven software providers on the market at any time selling a true strategic sourcing decision optimization (SSDO) platform, compared to the dozens that have offered spend analysis and the hundreds that have offered some form of e-Negotiation should be enough to make you cower in the closet and pee your pants. But if it isn’t, let’s start by examining the requirements for a true SSDO platform, as outlined in the e-Sourcing wiki-paper.

  • solid mathematical foundations
  • true cost modelling
  • sophisticated constraint analysis
  • what-if capability

As the doctor clearly said in the wiki-paper, the tool must be based on a sound (correct) and complete algorithm (capable of analyzing every possibility, not just statistically relevant or likely possibilities) that analyzes an accurate representation of the problem and not a (heuristic) simplification thereof. Generally speaking, a decision support tool built on mixed integer linear programming or constraint programming techniques will meet these rigid requirements and provide true decision optimization while tools based on heuristic techniques, evolutionary methodologies, or simulation models will generally not meet these requirements. In other words, you need top notch A+ mathematical knowledge and computing theory knowledge in the operations research, logistics, and sourcing domains, and these individuals are very few and far between. We’re talking a rarity of about one in ten million. Do you really think that individual is in your basement wasting his life doing your IT support? Really?

True cost modelling is more than just breaking a cost component down into a list of factors and asking for a value. Many cost factors are dependent upon sophisticated calculations, such as fuel surcharges based upon the distance and the weight or contingent labour charges with overtime calculations, expenses, etc. Complex formulas will need to be supported, and the logic just to determine the proper evaluation sequence will be quite sophisticated in itself.

And what-if capability is more than just making a copy of a scenario and changing a cost or a constraint, it’s the ability to compare scenarios side-by-side and understand the driving forces behind the cost and the award. Why is the constrained scenario 10M more than the unconstrained scenario? Which constraints are driving the costly award? What is the true cost of a constraint — it’s not just dropping the constraint and seeing how much is saved. That’s the cost of the constraint when all other constraints are present. It’s really the cost of the constraint against the unconstrained scenario. And so on.

But this pails in comparison to constraint support. As per the e-Sourcing wiki-paper, (at least) four constraint types are required, and these are not easy to define (and definitely not easy to build in a real instance of a model against a real sourcing event). For example, complex constraints cannot be implemented by a simple equation (pair). Some constraints require four, seven, eleven, or more related equations in a group of equations to be implemented. And these equations have to be consistent with every other equation in the model, of which there could be tens or hundreds of thousands thereof.

In other words, building the model is an almost mythical feat. There’s a reason there’s never been more than seven vendors offering a true strategic souring decision optimization solution and that the rarity of individuals who can even attempt to do so is at least one in ten million. Sometimes building a strategic sourcing decision optimization model requires as many as six impossible things before breakfast on a daily basis. The definition of a simple model of decent complexity requires about 10 pages of intertwined equation (template)s. They make modern MCNF (Multi-Commodity Network Flow) models look like elementary school math in comparison. In other words, they are about ten times the complexity of the following single page MCNF model (taken from D. Hejazi’s PhD thesis), which is enough to earn you a PhD.


Complex MCNF Model.
And, compared to the model you need, this is the easy button. Still think you can do it in-house?

Just What Can Strategic Sourcing Decision Optimization Do?

That You Can Not Do Without It?

the doctor has explained this many times, but it seems that some people still have difficulty understanding exactly why they need this technology. However, a recent article over on CNN on Hello Games and their upcoming ambitious sci-fi adventure game No Man’s Sky might help him explain the necessity of decision optimization to you.

In the recent article 18 quintillion planets: The video game that imagines an entire galaxy, CNN explains how the next generation of open-world gaming is expanding to take on the entire universe and offer players an online game with 18,446,744,073,709,551,616 algorithm-generated planets. That’s a number so large that a person would have to live 584 Billion years to visit each planet for a single second. That’s also the number of possibilities that an analyst might have to consider if she wanted to consider every possible selection of suppliers, products, carriers, lanes, pricing tiers, and allocations to optimize the entire spend of a global Fortune 500 multi-national corporation.

A large multi-national organization might

  • deal with 10,000 global suppliers
  • operating in 100,000 global locations
  • shipping to 20,000 retail outlets and warehouses
  • with 50,000 different global carriers at their disposal
  • to transport the 50,000 unique SKUS required to meet their needs
  • that can ship over an average of 10 lanes between point to point
  • at 2 different LTL rates and a FTL rate
  • and 4 different volume tiers

and this generates 600 quintillion different ship-from, SKU, carrier, lane, price break, ship-to combinations.

And, with appropriate category definition and model partitioning, Decision Optimization can handle this complexity.

Get it now?

Benchmarks Will Re-Define (Re-)Sourcing .. but that is Just the Beginning!

Today, benchmarks are used to determine how well an organization has performed to date. While constant measurement is important, it doesn’t really add value. Tomorrow, benchmarks will be used in conjunction with optimization to not only measure progress, but to help the analyst determine the most appropriate method for re-sourcing an existing category that will be the most likely method for delivering additional savings going forward.

Tomorrow, before a category is re-sourced, an optimization will be re-run on market-adjusted historical data to compute a market baseline, which is the proper definition of a benchmark, that will be used to determine a if there is a potential savings opportunity using strategic sourcing decision optimization. If there isn’t, then a better approach will be defined for the category.

More specifically, the current market pricing for the commodities, as defined by the benchmark, will be compared to current organizational pricing and the differential will be used to adjust all of the historical prices for a baseline optimization. In addition, the distribution model will be updated as appropriate (with new lanes, new carriers, and new temporary storage options added) and current rate tables will be included. If this baseline optimization indicates a reasonable savings opportunity, then the category will be re-sourced using a multi-round negotiation process backed by strategic sourcing decision optimization.

If, on the other hand, this baseline indicates that costs are likely to rise, then the organization knows that it should change the sourcing approach and instead try for a contract extension at current, or only slightly increased, rates.

More details can be found in SI’s recent white-paper, sponsored by Trade Extensions, on Optimization, What Comes Next, but this is just the beginning. Automated Optimization, Stratified Optimization, and TVM Optimization will find opportunities that your organization never knew existed (and never will without these techniques).

To find out how optimization, when taken to the next level, will completely redefine your strategic sourcing and category management, download SI’s latest white-paper on Optimization, What Comes Next.