Category Archives: Decision Optimization

The Value of AfterMarket Service in a Down Economy

MCA Solutions recently released a white-paper entitled “The Value of AfterMarket Service in a Down Economy” by Morris A. Cohen, the Panasonic Professor of Manufacturing and Logistics at The Wharton School of the University of Pennsylvania. In it, the author puts forward initiatives for your service business that he, and MCA, believes will generate revenue and profit for your business in 2009.

Aftermarket service presents some unique opportunities that make it a prime candidate for delivering value in the current financial climate. When you consider that many companies have slashed their budgets for new product and service acquisitions, it should be obvious that many companies will be looking to get more life out of their current products and services and looking to aftermarket service providers to help them.

According to the white-paper, increasing your market share of aftermarket parts and services will allow your company to generate a more predictable, high-margin revenue stream that will also increase customer satisfaction and retention. In addition, leading enterprises such as Cisco Systems, KLA-Tencor, Boeing and Tellabs have proactively undertaken strategic service management initiatives and have seen ROI benefits (in as little as two months) that include:

  • Cash flow improvements of 10%
  • Inventory reductions of 15% to 50%
  • Service level improvements of 5% to 20%
  • Customer retention through new and differentiated service offerings
  • Dramatically increased service revenues
  • Higher levels of global coordination

So what are some of the areas of opportunity?

  1. Reconfigure the Service Supply Chain to Respond to Changing Costs and Customer Requirements
    Best-in-class companies view inventory as a competitive weapon
    and typically employ multi-echelon inventory optimization and other resource deployment strategies to achieve superior product and service availability.     However, these days, service
    providers must also look to optimize the design and configuration of their service support network (locations, repair capacities, customer assignments, etc.) as a key strategy for achieving the lowest total cost and maximized customer service solution    .
  2. Reduce Overhead and Increase Time-to-Value Through Outsourcing and SaaS
    Service providers can expand their capability with a lower cost structure by outsourcing non-core capabilities to their suppliers. Logistics, warehousing, IT services, etc. can all be outsourced to low-cost, high-quality providers — freeing you up to focus on what you do best.
  3. Reduce Cost Through Optimization of Service Value Chain Resources
    Companies who use traditional planning tools developed for finished goods supply chains often hold far too much inventory with the wrong mix of parts. Getting the right mix of parts in the right places can lower overhead costs, improve service, and increase overall service profitability.
  4. Increase Revenue Generation with Customer-Focussed Service Offerings
    In a downturn, customers demand higher levels of performance from aftermarket service providers. This can be achieved through appropriately designed differentiated service offerings on a pay-per-performance model that will set you apart from the competition.

These are all great suggestions and each of them will help you save money while increasing the value you can bring to your customers. For more suggestions, as well as insight into how to approach each of these areas of opportunity, I recommend checking out the full white-paper that dives into these opportunities in detail. It’s worth a read.

Crossing the “Valleys of Despair” in Advanced Planning and Scheduling

Last summer, the Supply Chain Management Review ran a good article on “How to Succeed with Supply Chain Planning” that is very timely now as smart companies acquire advanced software systems to help them save money in this downturn while their dumb counterparts cut the budget and stick their heads in the ground like ostriches waiting for this golden opportunity to just pass them by.

APS tools are not a new invention, having been around in one form or another for at least ten years. The difference is that today, you have on-demand best-of-breed options from companies like Kinaxis, MCA Solutions, and Servigistics in addition to the old standby solutions from the big ERP players like Oracle, SAP, and SSA Global. However, enterprise deployments are still time consuming, typically requiring three to six months for the on-demand options for mid-size manufacturers and nine to eighteen months for the on-premise options for large manufacturers. However, many implementations, especially on-premise installations on top of on-site ERP installations, still follow a well-defined pattern with periods of difficulty that the authors identify as “valleys of despair”.

APS tools are important, especially for organizations that manufacture or supply products to end-customers, because, as the article points out, they can significantly decrease operational costs and noticeably increase on-time delivery and customer responsiveness. For example, after implementing APS, one electronics company found that it could respond to demand changes in minutes, as opposed to weeks, and increase on-time delivery by 15%. However, the improvements are only realized if the tools are properly implemented. While proper implementations can save millions, improper implementations can cost millions and, if you’re really unlucky, cause bankruptcies. (Remember the Nike fiasco? Or the Aris Isotoner kerfuffle? Or the Foxmeyer implosion?)

So what are the valleys of despair and how do you react to them?

  1. The Solution Doesn’t Work
    The first crisis occurs right after the design phase when expectations collide with reality. When the solution is run for the first time with a production data set, the project team is likely to get an unwelcome surprise: seemingly unintelligible output, often accompanied by system performance problems. APS systems are complex pieces of software and it takes time to properly configure the solutions, to load all of the data, to tweak performance so that run times aren’t excessively long, and to work out the kinks. Even with the best efforts, it will take a few iterations before performance enters the expected range. The key is to remember the great advice given to us by The Hitchhiker’s Guide to the Galaxy and Don’t Panic.
  2. No One is Using the Solution
    The second crisis occurs right after the solution moves into production. The business users — the supply planners in the supply chain organization — find it difficult to interpret the output and are confused by the planning model and solution behavior. After a brief struggle, many users revert to the comfort of familiar spreadsheets and abandon the solution altogether. The key to success is to establish a comprehensive training program that starts before the design phase (allowing the supply planners to provide input into model formulation), continues through development (allowing the power users to perform user testing), and goes right up to deployment (ensuring that the planners will be able to fully, and properly, use the system).
  3. The Business Has Changed
    The final crisis occurs after one or more business conditions change and the models in the APS no longer reflect operational reality. If the planners don’t understand how the changes affect the APS model and outputs, they will “drift” away from the solution. The key to crossing this valley is to form a permanent support team and insure that they work with planning regularly to update and adjust the model as needed.

It’s a great article and I highly recommend you read it in its entirety.

On the Eleventh Day of X-Mas … (Introducing Trade Extensions)

On the eleventh day of X-Mas

my blogger gave to me
another vendor hyping,
blog posts worth keeping,
l’il hampsters dancing,
thoughts for a shilling,
strategies for winning,
tactics for saving,
five golden rings,
four little words,
tri-focal lens,
two boxing gloves
and a lesson in strategy.

Allow me to introduce you to Trade Extensions. Founded in Sweden in 2000, it offers an optimization-based negotiations platform to European clients (from Sweden and a base of operations in the UK), and now, American clients through its office in Houston, Texas.

Trade Extensions offers a self-service on-demand e-Sourcing platform that is available on a per-event basis and backed up by industry leading optimization algorithms designed by scientists with expertise in algorithms, combinatorial optimization, and micro-economics. Like many other platforms, it offers full featured e-RFX, e-Auction, and sourcing project management, but unlike the vast majority of e-Sourcing platforms on the market, optimization is embedded into the RFx bid evaluation and auctions. It’s your favorite sourcing platform on steroids.

The auctions are lot-based, and support as many items, associated attributes, and prices as you want per lot. In addition, pricing, and ranking, can support arbitrary formulas and comparisons can be made against bid logs and historical transactions. Lots are also color-coded, with yellow indicating fields that only the user sees, brown indicating historical data fields that only the user sees, and green indicating fields that the bidder sees. Example fields include name, description, bidder-entered, type, min-value, max-value, decimals, required, distance-to-bidder, and rank-displayed-to-bidder.

The underlying optimization is sufficiently sophisticated and qualifies as true strategic sourcing decision optimization, as per the requirements set forth in the wiki-paper. It supports a number of different types of constraints, called rules, that are based on filters that can act on any attribute. For example, it supports hard limit capacity rules, soft limit allocation rules, meta-allocation “chunk” rules, and composed rules that specify limits on specific lots or lot components. The rules are template-based, which permit them to be saved, copied to, and applied to any relevant scenario. The filters can work on bidders, lots, bids, plants, and lot fields, among others. Furthermore, it can support alternative bids … allowing tiered bids and certain types of matrix bids. And in addition to standard sourcing and freight optimization, the underlying platform can also support limited multi-level supply chain optimization … which is more than most platforms give you!

Analysis is flexibile and powerful, supporting as many scenarios, and comparisons between scenarios, as you like. The analysis screen also allows you to see the status of each scenario, the award volume, the lane allocation, historic costs, savings, applied rules, and solver data. Reporting is above average and allows you to create your own report templates using a plethora of fields, matrices, formulas, and reporting rules.

Now it’s not perfect, as it doesn’t yet support certain types of discounts through the UI that are occasionally useful (although I’m told the underlying model can support them), certain types of mixed freight bids (which, in reality, don’t occur that often), and the UI isn’t designed to support distribution network optimization (but hey, what tool is?), but it’s definitely a tier-1 solution, and it’s nice to see that there’s more than one company who understands that, to be truly useful to the average buyer at the average organization, strategic sourcing decision optimization needs to be powerful, embedded in an e-Sourcing platform and user-friendly. And, they are improving it every day, unlike some “competitive” applications that haven’t changed significantly in years.

Furthermore, unlike most of their competitors, it’s very affordable. They have an event-based model and an unlimited usage model. Their event-based model starts at 0.5% of the value of the tendered goods and services for a full-service event, and drops to as low as 0.3% of the value of the tendered goods and services for a pure self-service event (if multiple events are committed to). Ongoing licenses start at only 10,000 Euros / month for unlimited use (for up to 10 users). Considering that it was only a few years ago where events started at 100K and annual licenses at 50K a month for less functionality — just for optimization — and Trade Extensions’ platform also contains extensive RFX and Auction support built-in, it’s certainly worth investigating if you have optimization needs.

On the Eighth Day of X-Mas … (Supply Chain Trends in 2009)

On the eighth day of X-Mas

my blogger gave to me
thoughts for a shilling,
strategies for winning,
tactics for saving,
five golden rings,
four little words,
tri-focal lens,
two boxing gloves
and a lesson in strategy.

Hot Technologies in 2009 Will Be Spend Analysis and Decision Optimization

Given the current economic climate, organizations will start to adopt these technologies despite their concerns that they are too complicated (which has not been true for years) or too expensive (which is also not true). The emerging leaders in low-cost self-service optimization, like Iasta and Trade Extensions, will take off, as will services companies, such as Lexington Analytics and Opera Solutions, that use leading spend analysis software like BIQ.

Emerging Technologies in 2009 Will Be Specialized Marketplaces and Focussed e-Sourcing Offerings

You’ll not only see an emergence of vertical specific marketplaces like MFG and Co-exprise Energy, but commodity specific marketplaces like cBoxBid.

Sustainability Will Be a Component of Every Sourcing Event

Thanks to Walmart, customers are demanding sustainability, and thanks to the EU, many nations around the globe are in the process of defining and implementing environmental regulations like RoHS and WEEE.

Your Favorite Vendor Will Not Be Around in a Year

This year has seen a couple of big vendors, with credit lines cut off due to bank failures, lost lawsuits, and VC belt-tightening, go through a number of layoff rounds. Two of the largest vendors in the space, despite claims of “regrouping”, are in serious trouble and could soon be on the block … along with a dozen small companies that took too much VC money, and sold too little product, in the last few years. Some have great products, and will be sorely missed if they don’t get sold and close their doors, but it’s a harsh reality when you don’t manage for frugal growth, don’t continually focus on innovation not just in products but internal operations as well, and don’t bring in outside expert help when you need it. (It’s too bad that some of these companies don’t understand that consultants are cheap. Unfortunately, many of these same companies are being run by first-time entrepreneurs — who don’t really understand the difference between a start-up, a small company, and the mid-size or large company they came from.)

You Get More Thoughts for a Pound Than You Do for a Shilling

Twenty times more, to be precise.

On the Sixth Day of X-Mas … (Cost Reduction Strategic Sourcing Strategies)

On the sixth day of X-Mas

my blogger gave to me
tactics for saving,
five golden rings,
four little words,
tri-focal lens,
two boxing gloves
and a lesson in strategy.

Six tactics that you can use to save in today’s marketplace are:

  • Reverse Auctions on Commodity Categories in Competitive Markets
  • Sealed Bids on Strategic Purchases of Custom Goods or Services
  • Decision Optimization on High Value Goods
  • Process Re-engineering with Strategic Partners
  • Lane Optimization
  • Distribution Center Optimization

Reverse Auctions on Commodity Categories in Competitive Markets

A recent post on Supply Excellence asks “if you are not sourcing, why not?” … and it’s a good question. Many key commodities that go into the parts you buy, and the energy your suppliers are using to convert raw materials into finished goods, recently hit two, three, and, in some cases, four year lows thanks to the recent decline in global demand. For some categories, it’s the best sourcing market we have seen in years as far as reverse auctions are concerned. So review the reverse auction selection criteria over on e-Sourcing Forum, where you can also find details on reverse auction strategy and reverse auction basics, brush up on the key steps to successful e-auctions, and get sourcing!

Sealed Bids on Strategic Purchases of Custom Goods or Services

If the category is strategic, and you can not use a reverse auction or open-bid methodology and have suppliers compete solely on price, because quality will be just as important, use a sealed bid.

Decision Optimization on High Value Goods

As outlined in my recent posts on e-Sourcing Forum and here on Sourcing Innovation where I asked if you can really afford to leave millions on the table, strategic sourcing decision optimization typically saves you 12% above and beyond what you will save with your best reverse auction, and, even today, still saves you up to 40% on some categories … which is an awful lot of bling if we’re talking about a 100 Million category. So review the decision optimization wiki-paper, select an appropriate solution, and start saving.

Process Re-engineering with Strategic Partners

Streamline processes and increase productivity. This allows you to increase spend under management and the savings you can generate. And if you’re worried about resistance, check out this post on overcoming worker resistance in process improvements.

Lane Optimization

Make sure you are using the right lanes at the right service levels from the right carriers. Otherwise, you could be considerably overspending on your transportation. As Dan Kowal pointed out in his recent Supply Excellence “sourcing opportunities during recession direct indirect logistics” post, the Baltic Panamax Freight Index has dropped 90% since May of this year. The market is rife with opportunities.

Distribution Center Optimization

An inefficient distribution network is costly. Save big by optimizing your network. For details on how, see my post on Bob’s Unique Talents.