Category Archives: Decision Optimization

7 Sourcing Secrets More Than 2 People Should Know

A recent article over on Cracked listed “7 Secrets Only Two Living People Know” (for some reason … that the doctor must admit he doesn’t understand in a few of the cases). While entertaining, it did cause me to ask why there are so many truths in sourcing that most people still don’t seem to get. Since some days I feel like only 2 people know the following, I decided I should do my own post on 7 sourcing secrets more than 2 people should know. Because you really, really, really should know the following sourcing “secrets”. After all, they’re truths, even if no one’s bothering to tell you. So without further ado, here they are:

1. Spend Analysis is flexible Data Analysis, not canned reports on a data warehouse populated via automated classification

Real spend analysis is the ability to dive into your data and find out not just where your true spend is higher than it should be, but why. This requires you to have the ability to slice, dice, and cube your data on any dimension you can think of, because you’re never going to know where the losses are until you find them. (After all, if you knew where your holes were, wouldn’t you have plugged them already?) Canned reports on a static data warehouse can only tell you how fixes you’ve already implemented are working, not where the holes are. Furthermore, “automated classification” just doesn’t work. Any good consultant worth his salt can load your data into a real data analysis product and find two dozen mistakes in twelve minutes. You need the ability to define and redefine mapping rules on the fly as all automated classification can do is fix previously identified mistakes. It can’t identify new ones. Software isn’t intelligent. People are.

2. e-RFX is electronic support for the full information and quote gathering cycle, not just bid collection

If all your e-RFX does is allow you to collect bids, it’s not e-RFX. It’s e-RFQ, and a poor e-RFQ at that. It should allow you to create questionnaires, surveys, and entire RFX packages with closed and open-ended questions, allow you to compare responses side by side, and allow you to collect not only all of the pricing, but all of the discounts, rebates, and promotions the supplier offers. It should help you manage the process, guide you through it, and support data import and export in open formats so that you can also use analysis, optimization, and contract management tools.

3. A Reverse Auction is simply an online auction event, it’s not a substitute for proper sourcing project management

I follow the space closely and not a month goes by where I don’t see an article on how Company XYZ is now refusing to participate in online auctions. When you dig down, this is because they had a horrible experience. When you dig deeper still, you find out it is typically either because Company ABC simply threw an auction tool at the supplier and told they had to bid through the tool or lose all their business or Company ABC threw up an auction tool and said they’d award to the lowest bidder but ended up going with a different supplier, usually the incumbent, after the auction closed.

I find this appalling, because e-Auctions, like e-RFX, are not only a great time saver, but a great way to bring parties together from around the globe and allow them to participate in an e-Sourcing event that, when run right, is more transparent, educational, and profitable for all parties concerned than traditional methods of sourcing where you get bids by phone and fax until you find three bids you like and then meet in a room to “negotiate” until a deal is struck with a winner. (And I use the term “negotiate” loosely because old style purchasing methods usually boil down to the party with the most leverage beating up the party with the least leverage.) But this is only true if the event is run right. This takes proper project planning and management. Tools can facilitate the process, but they can’t replace it.

4. Decision Optimization is for everyone, not just for math geeks

I’ll admit this is my own personal bandwagon, but having seen savings of over 40% and ROIs of over 400 on a number of projects, and average savings in the 10% to 20% range and average ROIs of 5X to 10X or more, I think I have a good reason for riding it. Despite the fact that true self-service decision optimization for sourcing has now been around for almost a decade, it’s still the “black sheep” that almost no one uses — and it’s a real shame because now is the time you need it most. Furthermore, the new tools coming out of the leading providers are a lot more usable than the first generation tools and can be easily used by any college graduate who can build a cost model and specify some business constraints. In other words, if you have the pre-requisites for strategic sourcing, you can use these tools to save time, to save money, and make better, more informed, decisions.

5. Contract Management is just a new name for document management with integrated monitoring, it’s not a replacement for contract managers

Lately I’ve noticed how contract management is coming into vogue. And while that’s a good thing, it’s important to understand what contract management is and isn’t because it seems that some vendors, and some publications, are promoting the new offerings as the latest and greatest tools to solve all your contract woes when the reality is that these tools are nothing more than document management tools with monitors and alerts. I won’t deny the importance of having a good contract management tool that can monitor expiration dates, contract pricing, and, most importantly, invoiced pricing against contracted rates, but these tools, even if they contain sophisticated contract creation capabilities, can’t replace a contract expert, a master negotiator, or a good spend analysis tool that can uncover devious work-arounds by less-than-reputable vendors looking for a way to make back that buck they gave up in negotiations. (For example, I’ve talked to a number of consultants who told me how they found that some office supply management vendors regularly changed SKUs to bill you twice as much for that pen as it’s really worth.)

6. e-Procurement is tactical, and not a substitute for e-Sourcing

There’s still a lot of confusion in the marketplace between what is e-Procurement (and how it relates to P2P, EIPP, and the other new acronyms old players are coining to differentiate their new, streamlined, offering) and what is e-Sourcing, even though it should be fairly clear cut (as I attempted to outline in this post on why it’s sourcing and procurement). A few of the e-Procurement vendors are even claiming that you don’t need sourcing at all if you use the wisdom of crowds (which is not the case because there’s a big difference between a great deal on a commodity office supply and a great deal on raw cocoa or custom circuit boards, which are not commodities). Sourcing is the strategic part of the purchasing cycle, procurement is the tactical. You need both, and one is not a substitute for the other.

7. It’s not what you know, it’s what you can learn

Plain and simple,

  • it doesn’t matter if you’ve been doing it that way for 20 years if it’s not optimal,
  • shift happens, and
  • whatever happens, the world of tomorrow will not be the world of today.

You have to keep learning. That’s why this blog is here.

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Don’t Forget to Optimize Your Packaging

Not only does packaging cost you money to produce, it can prevent you from being seen as a responsible corporate citizen concerned about sustainability if it is excessive and not reusable or recyclable. But more importantly, poor packaging can greatly increase your shipping costs. If it increases your product size by 50%, that’s at least a 33% reduction in the number of items you can ship in each truck or on each pallet. Moreover, if your packaging is poorly designed, or your box size poorly selected, your pallet efficiency might be considerably less than optimal! If a poor choice of box dimension cost you 15% or more in area efficiency, that’s going to increase your shipping costs by another 15%. Consider this example from a recent Supply Chain Digest piece on “the impact of packaging optimization on transportation management”. A simple package redesign increased the number of units that could fit on a pallet from 120 to 300 while increasing pallet utilization from 77% to 91%, which represents an 18% improvement in area efficiency. This represents a savings of 60% in transportation costs! Even if your savings potential was only half that, that’s considerable. So don’t forget to optimize your packaging.

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Sourcing Innovation Welcomes Trade Extensions as New Lead Sponsor

Sourcing Innovation is pleased to welcome Trade Extensions, an innovative provider of negotiation and decision optimization platforms, as it’s newest lead sponsor. The Trade Extensions solution, which represents the next generation of on-line, real-time, sourcing and transportation decision optimization solutions, has been growing as rapidly in depth, breadth, and usability as the company itself.

Trade Extensions, which expanded into the UK with its Cambridge area office in 2007 and into the US with its Houston office in 2008, is rapidly becoming known as the leading player in the global sourcing decision optimization market, which, as we know, is quite small in both the strategic sourcing and transportation domains (with the other players essentially limited to Algorhythm, CombineNet, Emptoris, and Iasta in the former and APL Logistics, Axxom, Llamasoft, SCA Technologies, Schneider Logistics, and TC Logic and a handful of others in the latter). Despite still being relatively unknown to the North American mass market, it has already won over some very big players including AT Kearney, BP, Colgate-Palmolive, Dow, Siemens, and Schneider (who use their platform to power BidSmart) in addition to the dozens of other big name clients it has throughout Europe and, now, through the United States as well. This is probably because it is one of the few vendors with a platform that can handle extremely large events (with tens of thousands of lanes/items and hundreds of thousands of bids) and find optimal solutions in relatively short time-frames. (The recent CAPS Research Study took care to note that most of the solutions it reviewed could not handle extremely large events.)

Their solution, which I covered on The Eleventh Day of X-Mas, is a self-service SaaS platform that can be sourced on a per-event basis or on an annual basis. In addition to full-featured e-RFX, e-Auction, and project management, it’s negotiation platform just added contract management functionality and spend analysis capabilities. It’s bid forms are customizable, each item can have as many attributes and prices as it requires and prices can be in a matrix format, it can support arbitrary formulas in price calculations, and scenario rules and filters can be defined with Excel uploads.

Furthermore, it’s a true strategic sourcing decision optimization platform, meeting all of the requirements outlined in the wiki-paper. That’s one of the most impressive aspects of their offering. Many providers who have tried to integrate optimization into real-time auctions have either failed or cut corners. They did neither. Another great capability is their constraint, or rule, flexibility. Rules can be based on filters, act on any attribute, and be created as templates which can be saved and re-used across scenarios.

Trade Extensions is another innovative company that I suspect you’ll be seeing a lot of in the years ahead.

So join me in welcoming Trade Extensions as Sourcing Innovation’s newest lead sponsor.

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.