Category Archives: Decision Optimization

I Wish Inventory Optimization Was Mainstream!

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A recent article on Supply Chain Digest made the claim that “inventory optimization is starting to go mainstream”. If only that were true! Consider this statement from Noha Tahomay (Vice President at AMR Research) in the first “Supply Chain Leader Virtual Roundtable on Inventory Optimization” where she says that despite clear benefits … the adoption of inventory optimization is still very limited and asks why can such a powerful tool not be more widely adopted. While she postulates that it might be due to the lack of executive sponsorship and the lack of alignment between the goals of the tools and the organizational structure, the reality is that inventory optimization is still not mainstream because optimization is still feared.

It shouldn’t be the case, because it’s not 9 years ago where you needed a PhD with his own server farm to use any of the tools, but it is. People still don’t understand it, they still mistrust it, and they still fear it. It’s unfortunate, but true. That’s why inventory planning, scheduling, and forecasting will sell but inventory optimization will collect dust on the virtual shelf. The problem is that not enough vendors are offering these solutions and the vendors are not making strong attempts to educate the market on the power and simplicity of these modern tools when that should be their first priority. It’s the same problem that exists in the strategic sourcing decision optimization marketplace … very few providers (basically Algorhythm, Combinenet, Emptoris, Iasta, and Trade Extensions) and very little effort to spread the word from any of them. Both spaces need an evangelist … like Paul Martyn was at Combinenet back in the day. If easy-to-use self-service solutions were commonplace back then, things might be different today.

e-Leaders Speak: Garry Mansell of Trade Extensions on “Strategic Procurement through Optimisation”

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Today’s guest post is from Garry Mansell and Chetan Raniga of Trade Extensions.

Lord Leverhulme, the British industrialist, famously said: “Half the money I spend on advertising is wasted – the problem is I do not know which half.”

He could have quite easily have been talking as a buyer today. Maybe not as much as half of all budgets are wasted, but the sentiment is the same and it is clear to those who work in procurement that there are opportunities to be had if you only knew where to look.

The challenge of knowing where to look will only increase as supply chains become more complicated and buyers have to consider the influence of numerous external factors – be it globalisation, fluctuating fuel prices or the economic downturn in general.

What makes it even more complicated is that most buyers are not attempting to simply minimise cost – but also to implement wider strategies. The strategies will obviously vary by company and sector, but could include developing suppliers in new markets; reducing their carbon footprint to meet environmental obligations; or managing dependency on certain suppliers.

The number of factors buyers have to consider often makes it very difficult for them to be sure that they have chosen the best solution from their available options. As a result, there is the real possibility that opportunities are missed. To minimise this risk, it is vital that sourcing professionals use the latest techniques and analytical tools which insure that these opportunities become apparent very quickly.

With traditional processes, strategic procurement is not easy. Furthermore, even if buyers try to collect strategic data other than cost, they often end up having to optimise on cost alone because of the limitations of analytical tools.

The software tools that have been developed by modern providers of decision optimization software, like Trade Extensions, can interrogate any factor in the final analysis. As a result, buyers are not limited in the types of information that they can request from suppliers and make use of. It is this freedom that identifies solutions that will be missed by more basic methods of analysis.

OPTIMISED PROCUREMENT

The procurement process always involves a number of important steps: specifying requirements, inviting suppliers, collecting bids, providing feedback to bidders, final negotiations, and the ultimate decision.

It is vital that companies complete these steps, but getting a great result from a sourcing event is determined by the analysis of data collected. This is a key strength of decision optimization software, including the software we provide at Trade Extensions. When buyers use decision optimization software, all of the offers collected can be optimised to take into account numerous factors in addition to cost. This means that strategic objectives can be met whilst keeping cost to a minimum.

ANALYSE THIS – WHY CHOOSING SUPPLIERS CAN BE COMPLICATED

Figure 1 is a very simple example that illustrates how even basic procurement projects can become quite complicated. Attempting to solve this will provide some insight into the strengths of decision optimization platforms like those offered by Trade Extensions’. (The answer is at the end of the post.)

A Simple Optimization problem
Fig. 1 – What is the lowest cost solution?

In this example, each supplier is allowed to bid for all contracts although no supplier is large enough to handle more than three. In addition, suppliers have the opportunity to offer a discount if they are awarded more than one contract – an opportunity taken up by the second and third suppliers.

Although it can be done manually, finding the cheapest combination of suppliers takes a bit of effort. (Editor’s Note: For an example of how it might be worked out, refer to the transcript of the joint optimization podcast [part I and part II] between Sourcing Innovation and Next Level Purchasing. Note the significant amount of work involved for even a simple problem.)

Now, try to imagine a procurement project with 2000 items and 1500 suppliers making numerous offers, packaging bids, and offering different discounts where cost is not the only decision criterion. In this scenario, there are potentially millions of combinations to consider. This is impossible to do manually, but modern decision optimisation software can often identify solutions to problems of this magnitude in a matter of seconds.

Optimisation ultimately involves buyers asking interesting questions to test the implications of choosing different combinations of suppliers. The list of potential questions is limitless. One minute a buyer could be considering the result based on price, company size and payment terms and seconds later they could see what the result would be based on price, environmental rating and supplier capacity.

This type of rapid optimisation capability implies that many different possible scenarios can be considered in a very short amount of time. This also implies that the software is flexible enough to allow buyers to run scenarios and optimise against revised offers while they are negotiating with suppliers in the final stages of a tender. For example, a buyer can quickly advise a supplier how much they would need to reduce their prices (or perhaps reduce their lead-time, for example) in order to win a certain amount of business.

This is the type of data analysis that allows buyers to solve their own challenges while providing them with a reassurance that they have chosen the optimal solution based on the given constraints and supplier proposals. This approach puts buyers firmly in control by allowing them to manage the millions of individual pieces of data they collect. This allows them to achieve their strategic objectives through optimisation. And that’s why we believe that decision optimisation is the key for those buyers who want to emerge from the recession victorious.

Answer to the Optimization Puzzle (Fig. 1)
The lowest cost solution is 493.2 with the following combination of suppliers:
Supplier B: Contracts 1 and 5
Supplier C: Contracts 2, 3 and 4

Thanks to Garry and Chetan.

Supercalifragilisticexpialidocious … At Least One User Understands Decision Optimization!

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CAPS Research recently released their focus study on “the role of optimization in strategic sourcing” by Larry Giumipero and Philip Carter. I’ll dig into it in future posts (in the fall; I’ll let you enjoy what’s left of the summer before I get into the heavy stuff), but for now I’d like to say that I was thrilled to see this quote in chapter 9 on the future of optimization:

The vision is to push optimization to all buyers. The eventual goal is to run every item we buy through the system.

For those of you who are Christian, I urge you to shout Hallelujah from the rooftops! This is how it’s supposed to be. Every sourcing professional is supposed to be using decision optimization on every sourcing event … even if all they do is run an unconstrained scenario to understand what the lowest cost option is and how their preferred award stacks up. (While it’s okay to spend 10% more for 20% more value, unwittingly spending 20% more for 10% more value is not a smart move. Ever.)

I was also very pleased to see that at least one user thought that optimization could be used to optimize the entire supply chain (as it can) and that

We are always looking for international sources and new suppliers to run optimization.

Supercalifragilisticexpialidocious!

Simulation and Modeling Can Help You Go Lean AND Save

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As regular readers know, I’m a strong proponent of analysis, modeling, and optimization because I know from experience the significant cost reductions these technologies can bring to any procurement department when properly applied. That’s why I was delighted to see this recent article in Industry Week on “leveraging lean designs” that illustrated the effectiveness of 3-D models.

The article noted how Chrysler Group LLC used 3-D simulation software to model it’s Toledo North Assembly plant during the design phase and came up with a model that cost only $54 per square foot, about 30% less than the industry average (at the time) of $75 per square foot. Not only can modeling software help you find plant designs that are more efficient and that allow your workers to be more productive, but it can help you save considerable dollars in their construction.

Getting Ready for the Recovery … Whenever It May Be

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Industry Week recently ran an article on “repositioning your business for the recovery phase” that noted that it could be years before volumes return to the near record highs of 2007 and that many companies will need to restructure their operations if they wish to return to profitability. Specifically, companies need to focus on activities that are not dependent on volume to be profitable. The article recommends the following:

  • Design Cost Optimization
    Focus not on the design process but on design changes that can reduce production costs. This will reduce costs across the board.
  • Make vs. Buy Decisions
    Rethink what you make vs. what you buy. Now might be a good opportunity to offload non-core product design, process engineering, and quality control activities that are inefficient and costly for you but more efficient and affordable for a (new) strategic supplier.
  • Fixed Asset Productivity
    Optimize the effectiveness of your fixed asset portfolio. Increase equipment utilization and effectiveness, decrease required warehouse space, and get rid of, or lease out, unused or unprofitable assets.
  • Reduce Working Capital
    Up to 83% of working capital in your supply chain is needlessly tied up longer than it needs to be. It will take you a while to identify and make the necessary improvements to make your efficiency, so start by making sure you’re not paying more interest and fees and working capital loans than you need to. If you’re not sure how good your bank’s offer is, try The Receivables Exchange and see if you can get a (much) better offer.
  • Re-Analyze Your Business Model
    What was your optimal business model last year might not be your optimal business model this year. Re-analyze your products, markets, and regions and change your strategy accordingly.

Which is a great start, but don’t forget the basics:

  • Analyze Your Spend
    Do a real spend analysis, possibly with the help of a leading spend analysis consultancy, to find out not just where you’re spending money (direct, indirect, operations, etc.) but where you have the biggest cost savings opportunities.
  • e-Source
    e-Source those direct and indirect categories with the biggest cost savings potential.
  • e-Procure
    implement e-Procurement to save time and money … a good solution can automatically insure that you don’t pay more than the contracted price or miss an early payment discount you intended to take advantage of