Category Archives: Decision Optimization

To Reduce Risk: Collaborate, Relate, Invest, & Optimize

A recent Inside Supply Management article on “The Global Reality of Geopolitics” noted that terrorism, war, disease and political unrest are just some of the geopolitical pressures that supply management executives face today. The geopolitical risks for most multi-nationals are increasing daily, and most of their supply chains, which still assume flexible JIT models will always be possible, are still not prepared.

To prepare your supply chain, you need to identify, assess, and put a mitigation in place for each likely or significant threat. One way to assess the threats, according to Celina Realuyo of CBR Global Advisors, is to look at its impact from a space, time, and depth perspective. With globalization, unless multiple countries adopt the same protectionist measures, there are no boundaries. As a result, disease outbreaks can spread rapidly around the globe. Today’s marketplace is 24/7. As a result, most leaders are in response mode instead of strategic planning mode. A problem usually produces multiple instantiations as it ripples through the chain. Thus, a solution that solves a second level effect may not solve the base problem. Thus, if a problem is unrestricted by boundaries, relevant to the market, and related to manufacturing, it’s probably significant as its repercussions could quickly spread throughout the supply chain. Another way to assess threats is to consult experts to assess severity and likelihood.

So how do you mitigate the threats? According to the article you:

  • Collaborate with the C-suite
    It can be extremely difficult to price and protect against certain types of (geopolitical) threats, so you need all of the experts in the room who understand the potential repercussions. To get them, you’ll need the C-suite’s support.
  • Invest in Expertise
    If you don’t have risk experts in-house, get them. In the interim, bring in consulting experts to help you.
  • Establish Local Relationships
    You need to work with your suppliers to identify all of the relevant geo-political and location-based threats, their potential impact, and their potential likelihood. Otherwise, you could be panicking for no reason or ignoring a potentially explosive situation.

And it’s not a bad start. However, I was really disappointed that there was no mention of Optimization, which is very relevant in risk analysis. You see, where risk is concerned:

  • You’ll never be able to mitigate all the risks.
  • You’ll never have enough money to implement all of the mitigations you identify.
  • You never know precisely when a risk might materialize or how much it will really cost.
  • No matter what you do, you’re still going to experience disruptions.

Thus, the only way to come up with a mitigation plan that’s going to truly minimize the cost of future supply chain disruptions is one that uses simulation, modelling, and optimization. Now, it’s true that there’s very few solutions on the market to help you at this point, but it’s where you need to get to. Decision Optimization isn’t just for Logistics, Sourcing, and Supply Chain Planning. It’s for much, much more.

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Reverse Auctions Are On The Rise Again … Is This A Good Thing?

CAPS Research just released a snapshot on the “Use of Reverse Auctions” which illustrated that more organizations are using reverse auctions and that their usage is on the rise at almost half of the companies currently using them. Specifically:

Are you currently using reverse auctions? Yes 50%
No 50%
(Yes) Has the amount of spend through reverse auctions over the last two years …? Increased 46%
Decreased 26%
Stabilized 28%
(Yes) Do you plan to continue using reverse auctions? Yes 100%
No 0%
(No) Have you previously used reverse auctions? Yes 46%
No 54%
(No) Do you expect to start using reverse auctions within the next two years? Yes 29%
No 71%

In short, 50% of companies are using reverse auctions, 15% more plan to start in the near future (29% of 50%), and close to 25% of companies (46% of 50%) are pushing more spend through reverse auctions than they used to. So, not only have reverse auctions received a passing grade (65% of companies are giving them the thumbs up), but they are being graded on a steadily rising curve. Believe it or not, this scares me.

While I will gladly admit that they have their place (especially for small or non-strategic commodity buys where the savings associated with another, more strategic, type of sourcing event would not outweigh the manpower, system, and opportunity costs to support the more strategic sourcing event), they are not the savings panacea that some vendors and consultants make them out to be. While it’s true that it’s rare not to see a landed cost reduction the first time you run a reverse auction if you run the event properly, it’s also a rarity to see repeated cost reductions on the same category in future reverse auctions (unless the production cost or market value of the commodity in question is falling at the time) because all a reverse auction does (when successful) is take fat out of the supplier’s margin. (And if you don’t pre-qualify your suppliers, it might also take quality out too!)

The fact of the matter is that real, sustainable, cost reduction comes from product and supply chain optimization and innovation. That’s why strategic sourcing decision optimization not only delivers a cost reduction of 12% above and beyond what a reverse auction delivers but also delivers cost reductions on repeated applications.

In other words, you should continue to use reverse auctions where they make sense, but only where they make sense. Otherwise, like many of the early adopters who had high hopes, you might be very disappointed.

And yes, for maximum benefit you should combine their application with decision optimization, which I’ll address on Monday with Part VII on The Role of Optimization in Strategic Sourcing.

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The Role of Optimization in Strategic Sourcing – Optimization Results, Spend Applicability and Business Cases

This series discusses the recent report from CAPS Research on “the role of optimization in strategic sourcing”. The primary goal is to highlight, clarify, and, in some cases, correct parts of the report that are important, confusing, or incorrect to insure that you have the best introduction to strategic sourcing decision optimization that one can have.

This chapter overviewed some of the results obtained by numerous companies as a result of optimization and provided a number of cases studies, including a few that included non-cost elements. A few of the examples are worthy of note. They include:

  • the company who used optimization for cost avoidance in an inflationary market and achieved an ROI of 28%
  • the company that saved 120 Million on a 3 Billion spend, a savings of 4%
  • the company that saved 600 Million

The latter two cases are significant as they demonstrate that returns of up to 100 ROI (in extreme case) are possible since a number of providers now offer unlimited usage licenses for (well) under 1 Million a year. Now, professional services could run up the costs by a factor of 10, but it should still be clear that the ROI claims of 20X to 40X that some providers have stated they have achieved (on certain events for certain clients) are possible.

The cases that were described in detail are very illuminating and the following are worth noting:

  • A National Freight Sourcing Event
    A company decided to rebid 2,200 freight lanes, in an event which was opened up to 65 bidders. The company, which expected a 3% to 6% price increase if they stayed with incumbent suppliers, realized a 5% price decrease, a cost avoidance of 8% to 11%.
  • A Film Packaging Event
    The company required over 2,000 different film packaging items across 70 “families” in an event that was opened up to 45 suppliers. The company was able to involve more suppliers while breaking the price down into 25 cost coefficients per material family, demonstrating the power optimization can bring.
  • Product Containers
    Containers for product across 100 locations were needed. A savings of 8 Million was realized.
  • Ocean Freight
    The company utilized 600 ocean shipping lanes and 3 container sizes per lane. Before the event began, the suppliers projected 10% to 15% cost increases. In the end, price increases were only 1%, a 9% to 14% cost avoidance.

Next Part VII: Optimization and Reverse Auctions

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The Value of Capability Coherence in One Industry

A recent article in Strategy+Business on Cut Costs, Grow Stronger had the following graph which I think is just great:

Any guesses as to what most of the companies on the line (and, specifically, those closer to the upper right of the line) have in common? Anyone?

These companies were all early adopters of strategic sourcing decision optimization. Think about it.

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The Role of Optimization in Strategic Sourcing – The Optimization Sourcing Cycle

This series discusses the recent report from CAPS Research on “the role of optimization in strategic sourcing”. The primary goal is to highlight, clarify, and, in some cases, correct parts of the report that are important, confusing, or incorrect to insure that you have the best introduction to strategic sourcing decision optimization that one can have.

In this chapter, the optimization enhanced sourcing cycle is enhanced. The first issue is cycle time. According to the report “at one company, the time from first exposure to the optimization concept to completion of the first pilot run was one year … this is probably fairly typical“. While this is likely true at larger companies, it needs to be clarified that while it takes some companies a while to first buy into the concept and then acquire a solution, a good provider can take you through a pilot on a moderately sophisticated category in under 6 weeks.

The typical cycle times for each activity in the bid cycle given for the example company are worth noting:

  • one day to five months for internal customer engagement
  • one to five weeks for RFQ finalization
  • one day to four weeks to finalize bid submission screens for suppliers
  • one day to two weeks to permit bid revisions and close bidding
  • one to three days to clean bid data
  • one to two weeks for analysis and award recommendations

This says that cycles varied from two weeks and three days to over eight months, which demonstrates that simpler events will not take very long while you should plan for up to six months for very complicated events like rebidding all of your global freight lanes in a single project. (And yes, modern solutions are powerful enough to do just this. A customer of Trade Extensions recently conducted a self-service Billion Dollar event that consisted of 65,000 items, 60,000 transport destinations, and 400,000 bids from over 100 suppliers.)

Finally, as the report states, the total time to complete the sourcing process will be directly related to the number of scenarios tested and the number of rebidding cycles and solving the model with constraints can take from a few minutes for smaller, less complex buys to several hours for large, complex buys. Thus, the more scenarios you want to analyze, the longer it will take. However, you can still run through more scenarios in a day than a spreadsheet would allow you to do in a week, or a month, for more complex models. So while it can take a week or two to analyze all of the meaningful scenarios for a larger project, it’s a drop in the bucket compared to the analysis time if you were still using unmanageable spreadsheets.

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