Category Archives: Decision Optimization

Why You Should Optimize Your Supply Chain

Besides the host of reasons this blog has provided you with in the past, which include:

if the supply chain isn’t optimized, it might not be nimble enough to keep up. As per this recent McKinsey article on building the supply chain of the future, ““the competitor that’s best at managing the supply chain is probably going be the most successful competitor over time“. Furthermore, as supply chains are becoming more splintered, they are getting harder and harder to manage by the seat of one’s pants, which increases the management complexity. In many organizations, instead of increased agility, this actually leads to increased inefficiency as managers struggle to manage the complex splintered chains efficiently.

But if supply chain optimization is employed, the splintered chains can be quickly optimized. But more importantly, an organization can progress beyond managing splintered chains to managing supply chain segments, which is likely the ultimate key to supply chain success in the years ahead. Think about it … if the origin and destination of goods has to continually adapt due to changing low cost locales and emerging (consumer) markets, then the ultimate key to quick adaptation will be to just change the relevant segments of the (splintered) chains and not the whole chains. If the organization was sourcing from Thailand but switches to Vietnam, but is still shipping to the US, why should the whole supply chain change? Maybe it’s still the same ocean carrier, and all that changes is the port and the carrier that gets the goods to the port. And if the organization has general contracts with a number of different international carriers, it will be quick to run an optimization and build the modified change from available segments.

And that, in a nutshell, is why you need supply chain optimization.

Why You Should Optimize Your Logistics

Because half of the time (on average), that truck you use is running empty. But you’re still paying for fuel, maintenance, driver time, etc. Consider this statistics from a recent article on “How to Combat Logistics Inefficiencies in Your Organization” over on Environmental Leader.

  • 25% of all freight vehicles in Europe run empty
  • 50% + of all freight vehicles in Europe run only part-full

As the article states, this is a monumental waste and has a staggering negative impact on the environment. In Europe, freight transport is believed to account for 1/4 of all carbon emissions. That’s 25% — and one sixth of the emissions are 100% unnecessary (as the equivalent of half the trucks are running empty and road transport accounts for 1/3 of the emissions). Given that road freight alone accounts for about 420 Million tonnes of CO2 per year in Europe (more than the entire carbon footprint of some countries, including South Africa, and 1/3 of global road freight emissions), that’s a lot of environmental damage!

And don’t tell me it’s not your problem, or that it’s your logistics carrier’s problem, because it’s not. It’s your freight, and you can do something about it. When you send out that RFI that asks if a carrier can service a given route, also ask if they currently service that route, how many trucks travel down the route on a weekly basis, and what % of trucks go FTL, LTL, and empty each way. Then you can define empty transport costs, carbon costs, and efficiency discounts in your sourcing model based upon how many empty trucks you will create or get rid of. If there are no full trucks going to the vicinity of your warehouse now, then the carrier will have to add trucks which will go to your warehouse empty, adding cost and carbon to your supply chain. But if there are full trucks going to the vicinity of your warehouse that always leave empty, you will be increasing the efficiency of the carrier while reducing the overall carbon footprint of the logistics carrier’s operation — and be in a position to potentially negotiate even better rates. And while the exact breakdown of FTL/LTL/empty on any lane varies by week, carriers on top of their game have these stats for the last month, quarter, and year at all times. The data is there. You just have to get it and make use of it. (And with a good optimization platform, you can!)

Trade Extensions Keeps Extending the Platform

The fact-sheet based RFX module is not the only improvement that Trade Extensions has made since it last traded up its UI and improved its optimization and reporting capabilities. Since Trade Extensions was last covered on Sourcing Innovation, it has made a number of significant improvements to its platform, including:

  • RFI-driven supplier data requests
  • multiple dimension ranking in e-Negotiation
  • integration with Google Earth
  • more cost support and new incumbent rules in optimization
  • conversion of all reports to OLAP reports and implementation of a new n-way comparison report

RFI-driven supplier data requests

In the Trade Extensions platform, supplier data collection can be configured to be dependent on supplier responses. If a supplier indicates that they don’t have a certain capability (or don’t wish to bid on particular item or category), then they don’t see the associated fact sheets (which they can download as an Excel Spreadsheet if they like). Also, if they indicate they do perform a certain function, the RFI can be configured to request additional information.

Multiple dimension ranking in e-Negotiation

Most auction platforms rank by bid, volume, or another relevant factor to the buyer. The Trade Extensions platform can be configured to rank (and report on) bids on multiple dimensions, such as supplier and location or supplier and quality. This makes it easy to quickly see how a bid stacks up against multiple relevant factors.

Integration with Google Earth

Often times when I hear about integration with Google Maps or Earth I say “that’s nice” because it usually doesn’t add much value. But the TE implementation actually makes Google Earth useful. Not only can you quickly see the lanes, relative volumes [by line thickness], and carrier distribution [by line colour] at different scales, but, with a click, you can pop up a box that provides the full details of what is flowing down the lane (products, volume, from, to, frequency, total weight, etc.). A warehouse manager can quickly zoom into her facilities and see what is coming and when. It can take a scenario with thousands of allocations and make the information quickly comprehensible.

More cost support and new incumbent rules in optimization

Relative and absolute fixed, on-, cost support has been greatly improved in the application. A buyer can define a cost on supplier selection, on a certain volume threshold, on a specified property, etc. This allows for incredibly detailed and accurate costing formulas to be created. Trade Extensions has also added four new incumbent rules to the optimization solution, two new allocation and two new keepers. The user can now choose to allocate an incumbent volume at least equal to what they have now, or to the current percentage of volume, or to incumbent proportions and allow redistribution between incumbents, or between winners in incumbent proportions.

Conversion of all reports to OLAP reports and implementation of a new n-way comparison report

When Trade Extensions last traded up their UI, they had just implemented their new OLAP reporting feature and were in the process of converting their existing reports. Now that the OLAP reporting feature has been fully implemented, all of the reports have been converted and the new report creation facility is complete, allowing users to define their own OLAP reports on the dimensions of their choosing. Also, the user can now create arbitrary n-way comparison reports and “glue” reports together from existing report definitions.

And Trade Extensions has no intention of slowing down. In addition to a commitment improve SIM/SPM/SRM, Trade Extensions is also working on:

  • auctions – simplifying them for low-end spot buys
  • e-Negotiation – instant messaging, better charting, etc.
  • enterprise features – search across projects, track cross-project metrics, integrated BI
  • roles – admin, project manager, buyer, viewer, etc.
  • new project types – to simplify auction setup
  • on-demand training – the wiki is under constant development and walkthrough videos will soon be available

It should be an exciting year for this European company that has just started to gain traction in North America (where they opened a new office last year).

Trade Extensions Trades Up to a Fact Sheet User Interface

Trade Extensions is another company that has refused to sit still during the downturn. Even though it did a complete overhaul of its UI in late 2009 (when it traded up its UI and e-Negotiation Management Capabilities), it realized that was just the first step of many that would be required to make its application more useful and more useable across the Supply Management Organization. Trade Extensions has been working hard to break out of the “complex transportation optimization” niche that they started in and has developed a fully functional Sourcing and Supply Optimization solution because they see the value that an organization can receive when optimization-based sourcing events are undertaken across the board.

While Trade Extensions started as a niche Strategic Sourcing Decision Optimization platform in the early naughts, it has expanded into a full suite solution over the years and now includes one of the most powerful RFX modules on the market, real-time optimization-powered reverse auctions, contract management, and OLAP spend analysis (which rivals many of the other suite spend analysis solutions on the market and a few of the pure-play solutions as well). And while they don’t yet have much of a SIM/SRM/SPM solution, they recognize that as a weak point and it is one of their top priorities for the coming year.

In addition, while they don’t yet have category RFX solutions or a centralized data management facility (or “Business Centre”), they are planning to introduce new project types to simplify RFX and Auction setup and their new support for fact-sheet based RFX and reverse auctions makes data management significantly simpler and takes them further down the data management path than many of their e-Sourcing Suite provider brethren who have been standing still for the last few years.

Internally, Trade Extensions uses OLAP cubes to store its data. Thus, the user can provide data in d-dimensional fact sheets, which include 2-dimensional spreadsheets and 3-dimensional workbooks, that define data in familiar matrix notion. This is a very powerful method of data input. A user can define a fact at any level that makes sense. If the cost of interest is a single freight cost from a ship from to a ship to, the user can provide costs in a 2*2 matrix of ship from locations and ship to locations. Users can also define costs at the region or country level if they like, and if a user defines a fact sheet that relates lanes to regions, the user only needs to specify costs at the region level. Moreover, if the user so desires, once costs are specified at the region level, they can be overridden at the ship from – ship to level. The system will do this automatically if the fact sheets are appropriately defined and included in the project as it knows d+1-dimensional costs always override d-dimensional costs. In other words, if you define continents as collections of territories, territories as collections of regions, and regions as collections of lanes, the system knows that territory data overrides continent data and region data overrides territory data, if defined. Otherwise, default values from a higher level in the hierarchy are to be used if no suitable cost exists at a lower level of the hierarchy. This is important as this allows a user to only enter detailed cost data where it is required (and where it differs from default pricing for the category).

As a result, data collection in Trade Extensions’ e-Sourcing platform is quite easy. A buyer only has to define what the organization wants to collect, and a supplier only has to bid on what it can provide. Furthermore, a supplier only has to bid to a level of detail that makes sense. Plus, all bids can be formula based. So, if a supplier supplies a product in different sizes, and the price is dependent on weight or volume, it can define a formula once and re-use it on each size. Furthermore, a user can re-use any and all fact sheets from the event in other events, minimizing data collection and data entry. It’s definitely another step along the path to ultimate usability.

Next Generation Sourcing

As stated in yesterday’s post, for Sourcing to continue to have an impact in a modern Supply Management organization, it needs to be taken to the next level. And I’m not just echoing the statements of The Altimeter Group, AMR, CAPS, Greybeard Advisors, The Mpower Group, Purchasing Practice, or my own persistent ramblings over the years (as I have been pushing for Total Value Management and Next Generation Sourcing strategies since day one). A modern supply management organization truly needs to take their sourcing practices to the next level if they are going to continue to distill value from Sourcing.

When you consider that:

  • Once you institute RFX, the manpower savings from automating bids can only be claimed once.
  • By the time an organization gets to the third auction, there are no more savings to be had as the fat from supplier margins has been squeezed out.
  • Once the allocation has been optimized across the supply base in a way that minimizes unit costs, transportation costs, (interim) storage costs, etc., re-running the optimization won’t lower costs further unless something changes — such as the identification of a new supplier, an alternate material (that is cheaper), or additional demand (that increases the economy of scale).
  • Once contract management and monitoring is put in place and no invoices are paid that are not for delivered, defect-free products, at contracted rates, there is no more on-contract leakage to be stopped.
  • Once controls are put in place to stop off-contract purchases that should be on-contract (through integration of the e-Procurement system with the Contract Management system), there is no more off-contract leakage to be stopped.
  • And once spend analysis has identified all the opportunities, the savings won’t actually materialize until something is done about them. This something cannot be appropriately identified unless the appropriate information is available to the knowledge worker.

As a result, in order for a mature Supply Management organization to continue to extract considerable value from (e-)Sourcing, e-Sourcing needs to be taken to the next level. Whether you call it DDSN2 (Demand-Driven Supply Networks), Next Practices, or Total Value Management, the message is the same. Take your Sourcing to the next level, or risk decreasing returns.

So where does one start? Upgrade or bring in a modern e-Sourcing platform. For some organizations, who are already using a top-tier provider and who have purchased a suite license, this will just mean learning how to take full advantage of the end-to-end integrated functionality and improving processes. For others, using point solutions from top-tier providers, this will mean buying licenses to the whole suite and/or integrating the point solutions with other solutions they already have. For the market majority, this will likely mean either replacing existing first generation systems (from providers who haven’t made any updates to the base functionality in the last five years) or, in laggard cases, skipping first generation e-Sourcing systems entirely and starting off with modern systems that have better, integrated, functionality.

And then, once these systems are in place, processes are updated to capture more data and consider more information in sourcing decisions, in a process that one vendor on the leading edge likes to call High Definition Sourcing.

Since this process is the closest to what Sourcing Innovation believes is necessary for organizations that want to take their sourcing to the next level (and, in the words of CAPS, become value-focussed), this will be the subject of the next series of posts (starting next week). Stay tuned!