Category Archives: Decision Optimization

Questions to Ask your Optimization Vendor (Repost)

Not all optimization vendors are equal … and more importantly, not all vendors that claim to have decision optimization even have it (as their systems barely qualify as decision support). It’s important that you be able to distinguish between the relative strengths and weaknesses of the different products, as well as how much strength you really need, if good decision optimization is one of your driving reasons for selecting a (new) e-Sourcing solution. (And, by the way, as I have been stating since day one, it should be!)

The key with optimization is buying just what you need in the majority of your sourcing events. Optimization is still expensive compared to some other solutions, but more importantly buying too much power could severely impact your potential ROI (as it not only costs more but takes more manpower to use), and buying too little power will be equivalent of flushing that investment down the drain as it won’t solve the majority of your problems. I’m using the word “majority” because there is no general purpose decision optimization product for sourcing that will handle all of your events and solve all your problems. As with just about everything else in business, it’s the 80-20 rule. The best solution is the one that solves as close to 80% as possible at a cost of ownership that maximizes your ROI multiple. You can always do one-time projects with best-of-breed providers or specialist outsource providers for those projects in the remaining 20% where there is enough of a savings opportunity.)

Before I get to the question list, I should point out that it’s almost impossible to cover every question, as many of the questions you should be asking depend on the answers you receive to your first few questions, but I think the question list below is a good starting point.  So, without further ado, here’s the basic list!

  1. Does your product meet the four critera for strategic sourcing decision optimization as outlined in the Strategic Sourcing Decision Optimization wiki-paper (initially authored by the doctor, the all-knowing optimization king*1)? Specifically, does it support the following:
    • 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 receinves 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 it support the creation of multiple what-if scenarios and does it simplify the creation of these scenarios?
       The true power of decision optimization does not lie in the model solution, 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 costs 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. How fast is it for different average model sizes and can performance be tweaked?
       Optimization takes what it takes. That being said, if one solution takes an average of 1 hour for an average scenario, and another solution takes 10 minutes, all things being equal, if you have compressed sourcing cycles, the 10 minute solution might be better. Emphasis on “might”. This is only true if the faster solution is of the same quality – some models, and some solvers, sacrifice quality and accuracy for speed. The best solution will let you trade off “tolerance” and accuracy for speed. Sometimes it’s easy to get within 1% or 2% in a few minutes, even though that last 1% or 2% could take hours. On a model with low total savings potential, getting within 1% may be enough. And when trying to hone in on the right what-if scenario, it’s nice to get within 1% quickly and then allow the right scenario to run to completion over night after you’ve quickly analyzed half-a-dozen scenarios and settled on your preferred scenario. Thus, tweaking ability is very important.
  4. If it supports “real-time” is it “true” real-time or “near” real-time.
       Thanks to significant advances in processor and hardware performance as well as off-the-shelf optimizer technology (like ILog’s CPlex), it’s now possible to rapidly re-build and re-solve moderately sized models using off-the-shelf modeling languages in seconds, allowing for e-auction tools that keep the model relatively small and simple to incorporate decision optimization in near-real-time by simply re-building and re-solving the model every 30-60 seconds (depending on model-size) on a high-powered dual or quad core server with an appropriately configured and optimized CPlex 10. However, this is NOT true real-time optimization and could rapidly break down if the model gets too big or too complex. (For example, real-time optimization requires the ability to merge model construction and model solution in such a way that a new bid can be introduced as a parameter change that does not require the optimizer to rebuild the sparse model matrix and start the solution process over from scratch.)
  5. Describe two or three scenarios you have encountered where you could not model the situation exactly for companies in our vertical, how you worked around the issue, and how accurate the result was.
       No optimization model can handle every real-world scenario 100% accurately. If a vendor representative says so, he’s either lying through his teeth or not competent enough to be selling the product. (Note that: I’ll have our support expert get back to you on that is a good answer from an average sales representative.) This is about the only way to get a decent idea of how appropriate the tool is for you. If the scenarios were complex and the constraints based on business rules you hardly ever, or never, use, then the solution is probably okay for you. If the scenarios were simple and the constraints based on business rules you use all the time, it’s probably not the tool for you.
  6. Can we do a pilot project before committing to a long term license?
       If you like what you hear, but are still unsure, or are having problems getting the budget approved, a pilot is often the way to go! (Note that I did not use the word “free”. You should be willing to pay for services at a rate that is sufficient to cover the provider’s cost for this pilot – especially considering that many of the companies that offer affordable optimization offerings are only able to do so because they keep their costs and overheads down – and if they gave free services away to everyone who requested a free pilot, they would have to increase their costs, and that would be a detriment to everyone, including you, in the long run.)
  7. We’re having problems understanding how this fits into our business or what the best solution for us is. Would you be willing to demo your solution to, and answer questions from, our consultant who understands both our needs and decision optimization technology?
       Let’s face it – just like the right decision optimization tool can deliver huge savings multiples on your investment (10X or more), the wrong tool will simply represent a six (or seven) figure cost that yields little return. If you can’t tell the difference, and there’s no shame in admitting you can’t if you’ve never used this type of technology before, then you should bring in a consultant who can to help you select the right technology, and ensure you are appropriately trained on it, until you are self sufficient and saving an average of 10% to 12% per project put through the tool.

Procurement Game Plan: A Review Part III.3

Charles Dominick of Next Level Purchasing and Soheila R. Lunney of Lunney Advisory Group recently released The Procurement Game Plan: Winning Strategies and Techniques for Supply Management Professionals. And even more recently, SI began it’s detailed review, in three parts, of this new Procurement Guide. So far, in our review, we’ve covered the Purchasing Professional’s 10 Commandments, organizational role, Supply Management strategy, talent, social responsibility, strategic sourcing, supplier qualification, negotiation, supplier relationship management, and success reporting. This post, which is the beginning of the end of our review, dives into techniques for improving Procurement performance and a few specialized areas of Procurement, as covered in the second last chapter of the text.

The authors define four main technologies for improving performance:

  • Procurement Outsourcing
    which is the shifting of some procurement tasks to an external organization
  • Group Purchasing Organizations
    are entities that are responsible for sourcing and managing aggregated contracts on behalf of a discrete group of companies
  • Procurement Cards (P-Cards)
    that allow organizations to take advantage of the existing credit card infrastructure to make electronic payments for a variety of business expenses
  • Procurement Technology
    that includes e-Procurement and e-Sourcing and allows a buyer to take it to the next level

Since Procurement Outsourcing will likely be restricted to tactical functions if your goal is to create a first-rate strategic Procurement Organization, since GPOs primarily offer advantages only on categories where you just don’t have the volume or the manpower, and since proper coverage of the technologies you should be familiar with and using on a daily basis is a book in and of itself, we’re going to restrict our review of performance enhancing technologies to P-Cards.

Procurement Cards are a tool that can be adopted to reduce tactical activities as they negate the need for POs and simplify payment, which can be made by the buyer placing the order. If three-way match is used (which is the matching of a Purchase Order to an Invoice to a Receiving Record), it can reduce administrative costs as it negates the need for a separate invoice review and payment by accounts payable. Of course, on the other side of the coin, a P-Card can also increase the potential for fraud.

However, as the authors note, implementing P-Cards is not as simple as calling up your local merchant account provider. Due to the ease with which a user can pay for goods not received, overpay, or open the company up to fraud (by forgetting their card at their favourite restaurant), a number of decisions need to be made before the first card is issued. As per the text, some of these decisions include:

  • should there be one spending limit for all holders, spending limit by categories, or individualized limits by buyer?
  • are there limits by transaction, day, or month?
  • are any categories restricted? exempt?
  • who is eligible for a P-Card and who is not?
  • is the P-Card limited to purchases from approved suppliers?
  • what transaction information and reporting capabilities do you require?
  • which provider(s) can meet these requirements?

And these decisions need to be made in context of the advantages and disadvantages P-Cards can provide, which include:

Advantages

  • reduced cycle times which free up your staff to do strategic, instead of tactical, work
  • faster supplier payments which can reduce a supplier’s cost of capital if they have to borrow less (and, in turn, the cost they pass on to you)
  • extended payment terms (which do not impact your supplier as you owe the P-Card provider, not the supplier)
  • less maverick buying (if P-Cards are made mandatory for certain purchases and controls that restrict payment amounts and vendors are put in place)
  • better transaction data for your spend analysis
Disadvantages

  • increased chance of theft/fraud (as it’s just another credit card)
  • longer reconciliation time (if one payment is made for multiple invoices)
  • less budget visibility (as they track transactions, not budget)
  • another system to reconcile (if they are not made mandatory for certain classes of payments)
  • move maverick buying if controls are not well defined (as Homer can now order anything he wants from Mighty Office Express Supplies [MOES] if MOES is an approved vendor with no limit)

Implemented effectively, P-Cards can be a great tool. Implemented poorly, they can be your worst nightmare.

After a whirlwind tour of the technologies employed by leading Procurement organizations, which includes e-Procurement, e-Sourcing, and (Decision) Optimization (explained by the doctor in the Inefficiency Eliminator wiki-paper and the two-part Next Level Purchasing Podcast on Supply Chain Optimization [Part I and Part II, with transcript]), the book moves into a discussion of specialized areas of Procurement where special teams are important.

These areas include Global Sourcing, Procurement Outsourcing Provider (POP) and Global Purchasing Organization (GPO) management, services procurement, and inventory management. Since a discussion of each of these topics is a post in itself, and the discussion was quite dense, we’re just going to focus on a key element of success discussed in the penultimate chapter that many books miss — Project Management. As the authors note:

As organizations have grown globally, Procurement is called upon to unify everyone with a common buying strategy. This requires that a leader assemble a team and coordinate the efforts of subordinate Procurement staff, business unit representatives, and management. There are limited resources, goals, and timelines. Does this sound like the project management discipline? You bet it does!

Project management is an essential element of successful Procurement and every Procurement professional needs to be educated in Project Management methodology (which is why NLP has a course on Professional Purchasing Project Management). This section of the chapter discusses the project charter and its importance, project plans for simple projects, project plans for highly complex projects, and risk analysis — a key part of every project plan. This is a section of the text that everyone should read carefully — twice!

At this point, the reader should have a strong understanding of the basic knowledge required for Procurement success, be aware of her weaknesses, and have a plan to address them (such as through additional [online] training, certification, or mentoring). At this point she is ready to begin her career in the Procurement workplace and become a perennial all-star, which is the subject of the final chapter of the book and will be the subject of our final post.

To be concluded!

Apologies to the Faithful, but Optimized Planning is Good, not God!

Last Tuesday, Trevor Miles published a great post over on the the 21st Century Supply Chain blog on how Optimized Planning is Good, not God!. This cannot be understated. Too many companies think that a great plan is the key to unlock the treasure chest that contains the much sought-after savings. It’s the key alright, but you have to fit it in the lock if you want to unlock the treasure chest. And the only way one gets to fit the key in the lock is if one actually reaches the treasure chest, and this requires control. You see, this treasure chest of savings sits on a pedestal at the end of a dark and dangerous dungeon filled with traps, treacherous descents, and natural horrors at every turn. Think of every dungeon and tomb that Indiana Jones had to survive, put them all together, and add in a few dozen more traps and that’s the danger an organization has to evade on a daily basis if it wants to reach the treasurer chest.

As such, an organization requires a lot of control in the form of integrated monitoring and control. At every turn, an organization has to look ahead to see what traps may lie in its path, look back to see what creatures are coming up behind it, and be aware of the foundations crumbling beneath its plan and react quickly, and correctly. The reasons this are the case is simple — nothing every goes according to plan (even if you are the A-Team as you always have to deal with the unexpected wrench to complete the plan) and even if it did, the plan is never right anyway.

Consider the quoted study from Terra Technology that shows that an average forecast is typically no more than 52% accurate. This means that even if the supply forecast was perfect, it would still be, at most, 52% accurate. That’s why an organization has to continuously monitor the plan, and as soon as significant variances arise, respond by re-optimizing the plan. That’s the only way to reach the treasure chest of savings that optimization promises. Otherwise, the savings will never materialize as they were calculated with respect to a plan that was never executed.

So check out Trevor’s post over on the the 21st Century Supply Chain blog on how Optimized Planning is Good, not God!. It’s a great read!

Safety Stock or Service Levels?

The answer is easy. Both!

A recent article in Industry Week on “The MRO Dilemma” asked if you should focus on safety stock or service levels. The answer is both.

The article, which notes that waste is generated every time a piece of equipment breaks down or runs at less than optimal speed because of needed repairs, and that these repairs are delayed if there is not enough spares on hand, notes that more MRO inventory translates to higher inventory carrying costs but also likely higher service levels while less inventory will reduce the carrying costs [while putting] service levels in jeopardy. This is obvious.

It is also obvious that trying to maintain 100% service levels is likely not an option for most companies because that would mean you just about built a duplicate plant in your store room.

But what might not be so obvious is that the 95% service level recommended as a good target is not good advice at all. The target service level does not, as the article indicates, depend on what your company can afford, but depends on what is optimal for your company. And it is often production line / product specific. A production line producing your most profitable product line should never be down, and if that dictates a costly 98% service level, so be it. However, the turn around time on replacing a printer in the admin offices is not nearly as critical and you can accept a service level of 90%, or less, from your internal IT support, especially if they have outsourced the function to a vendor and a higher service level would increase costs 20%.

Just like you optimize your buy, you optimize your service levels. If downtime on a production line costs you $1,000,000 per hour, you spend $100,000 to make sure you have spares for every moving part that can break. If downtime on a secondary machine that is only required for custom orders, which account for less than 10% of profits, only costs you $10,000 an hour, and stocking the same level of spares would cost you $50,000, you opt for a lower service level. It’s all about optimization.

And, there are companies like Servigistics and MCA Solutions, just to name a couple, that can help you optimize this trade-off so that you’re not improving inventory carrying costs at the expense of service levels and vice versa. With optimization, you can have both … at the right levels that are the most profitable for your organization. Be smart.

Six Secrets of Successful Freight Tenders

A recent article over on Canadian Transportation and Logistics on “the five secrets of successful freight tenders” had some really great tips for getting the best bang for your buck that makes the article a must read. However, it missed one very important tip, which is probably why it claims that Freight RFPs are analytically challenging. (This used to be true, but it’s not anymore. If it’s still true in your organization, then your organization is stuck in the middle ages and it’s time to at least step up to the industrial age.)

Before we get to the tip it missed, let’s start with the tips it provided because at least one of these is overlooked on many a project.

  • Sell your freight.
    Provide as much information as possible about your freight requirements. For each product, include transport, storage, volume, and frequency requirements. The more accurate and complete the RFx, the better quote the carrier can give you. Without detailed information, carriers will build in a “risk premium” so they don’t end up with “bad freight” and both parties lose.
  • Provide enough time.
    Without enough time to analyze your requirements and consider the fit, you’ll get a rough bid that won’t be the carrier’s best proposal. Remember that, depending on the time of year, it will likely sit on someone’s desk for a week, then in pricing for another week, before someone gets to it in the third week. If detailed analysis is required by the “number cruncher”, it could take a month to get the best bid.
  • Standardize the accessorial program.
    Variety and complexity of programs can make the analysis of bid responses unnecessarily complex, as you will be trying to compare apples to oranges to potatoes. And while maybe you can force fit compare the first two, the third poses quite a challenge. Create one program with one uniform set of charges that applies to all carriers.
  • Fully analyze rate proposals across the board.
    Typically carriers will give you aggressive discounts on major lanes to lure your business, but keep discounts to minor lanes minimal, or non-existent. As a result, you may pay more for freight overall if you end up shipping more on secondary lanes.
  • Benchmark results
    Freight patterns can change, and the net result is that a new freight schedule expected to save you money costs you more in the end. “Shadow rate” your current shipments using at least your last rates (if not your last two rates) to get a feel for what freight profiles give you the best deal overall.

But most importantly:

  • Use a sourcing package that can handle freight optimization and multi-level freight bids.
    A good strategic sourcing decision optimization platform (as provided by Algorhythm, BravoSolution, CombineNet, Emptoris, Iasta, or Trade Extensions) will not only allow for full analysis of the entire freight bid, but allow for the easy import of multi-level freight bids from excel spreadsheets. More specifically, these modern packages allow a carrier to define (inter)national rates by weight, volume, or distance, and then override these by region, and then by lane. This will allow a carrier to quickly define standard bids for low-volume lanes or lanes that they are not interested in and focus in on the lanes that fit their network and that they want to aggressively bid on. A carrier can bid on a 10,000 lane global sourcing project in a couple of hours. This decreases response time and increases bid quality.