Category Archives: Decision Optimization

the doctor’s Seven Grand Challenges for Supply & Spend Management

Seven deadly sins
Seven ways to win
Seven holy paths to hell
And your trip begins

Seven downward slopes
Seven bloodied hopes
Seven are your burning fires
Seven your desires….
  Adrian Smith / Bruce Dickinson

In my last post, which announced the cross-blog series that this post is officially kicking off, I reviewed the seven grand challenges for IT over the next twenty-five years, as laid out by Gartner back in the spring. Although they ranged from the ridiculous to the sublime, and contained a fair amount of overlap when closely analyzed, it’s a worthwhile exercise to undertake every now and again, because in order to develop a useful solution, you need to identify what is needed and the path you should be on.

This inspired me to propose a set of “seven grand challenges” for supply and spend management, in the hopes that it would get you, dear reader, to think about what is important, what problems should be solved, and where we should go. Considering how important supply management is in these troubled times, I hope that all of my fellow bloggers chime in with their ideas on what’s good, what’s bad, and, what’s downright ugly in supply chain today — because the first step in solving a problem is properly identifying it.

So, without further ado, to kick off this cross-blog series, here are the doctor‘s proposals for the seven grand supply and spend management challenges:

  • Optimization
    There are a number of challenges here. The first challenge is getting people to use solutions that are already out there. There are currently a number of offerings that address strategic sourcing decision optimization, distribution network optimization, and freight optimization quite well, and that, when properly applied, can save the average company up to 12% above and beyond the best solution obtained with auctions. The second challenge is integrating the different problems (sourcing optimization, freight optimization, network optimization, etc.) into a common framework that allows the tradeoff effects of each decision to be adequately modeled and understood in the big picture. The third problem is addressing the emerging non-quantitative regulatory and compliance requirements such as RoHS, WEEE, and GHG emission limits in a consistent and value-oriented manner within the optimization model.
  • Supplier Enablement
    This is something we still don’t have a good handle on. Beyond “supplier enablement is the provision of technology based solutions that enable the supplier to be more productive and better serve the buyer”, there isn’t yet a general consensus of what this technology needs to be, as most companies have not yet embraced B2B 3.0. I’ve argued before that, today, it’s a combination of catalogs, networks, e-Document exchange and management, and supplier portal technology, and I still think that is a good start, but enablement should go beyond enabling the exchange of information, it should improve the supplier’s operations overall.
  • Integration of the Physical, Information, & Financial Chains
    For most companies, these are three different chains. Some companies that have embraced RFID, GPS, and e-document management have taken the first steps to integrating the physical and information flows, but the technology is still emerging, the integration isn’t smooth without extensive integration and customization between a number of different solutions (and only Fortune 500 companies can even afford to consider this), and we have only started to look at the financial supply chain and how to best integrate it with the information supply chain. I think it will be a while before solutions that truly support a holistic view will emerge, especially considering that even the gorillas in the space don’t have end-to-end sourcing and procurement.
  • Solution Globalization
    Let’s face it … supply chains today are truly global, but the solutions are not. Most “internationalized” solutions are only available in a smattering of languages, most “internationalized” solutions are not plugged into real-time currency exchange feeds — and few developers have thought about the need to maintain/display multiple conversions (including the rate at the time of purchase, the projected rate, the current rate, etc.), and most “internationalized” solutions don’t help you understand how to do business with the country of interest.
  • GHG Tracking and Reduction
    Most enlightened countries have woken up to the fact that, even though we don’t know precisely how damaging each ton of GHG and / or carbon we emit is, we do know that it’s damaging and that we have to reduce our emissions. The first step is to get a baseline of the emissions produced by your operations, but for many companies, this is a multi-year effort. Better product and service solutions are needed. Also, although there are multiple proposals on the table to reduce emissions, there are few total value management models out there to help us select the right ones.
  • Risk Prevention
    Not only is risk not going away, but it’s getting worse by the year. Supply chains are getting more complex by the year, and the likelihood of something going wrong is steadily increasing. Solutions that can help a company identify risks, in real time, and identify possible mitigations and actions required to implement them, are desperately needed.
  • Opportunity Analysis
    Costs are skyrocketing, but consumer discretionary spending is stagnant at best. They key to a successful supply chain is cost reduction and avoidance, and this requires continual opportunity analysis. I envision this starting with modern spend analysis, but it needs to go beyond true spend analysis to continual innovation, since the greatest cost reductions will come from true revolutions, and not just the shrewd identification of category-based overspending. I envision that this will start with the integration of PLM with Life Cycle Analysis and Next Generation Analytics and then morph into something that none of us can envision today.

Now, I realize that these are pretty much the same problems we have been facing for the last five to ten years, but I suspect that it will be quite a while before they are solved due to the overwhelming complexity of today’s supply chains.

When the series is done, I’ll compile the “master list” of challenges and, if any of my fellow bloggers can convince me there are bigger challenges out there, revise my list.

the doctor’s Guest Posts: The Year in Review II

Since last year’s summary of my guest post contributions (in June), I’ve blogged a number of guest posts over on eSourcing Forum [WayBackMachine] as well as authored or co-authored a significant number of wiki-papers over on the eSourcing Wiki. I’ve also contributed articles to the EyeForProcurement monthly newsletter as well as Efficient Purchasing.

e-Sourcing Forum

December 2007 to June 2008

Regulations Unlimited
Strategies for Supply Chain Finance
Customs & Security
The Seven Scruples of a Sourcing Sensei
Discovering Your Leverage Points
Seven Risk Mitigation Strategies You Can Do With Smart Optimization
If it ain’t Multi-Tenant, then it ain’t got SaaS (co-authored with David Bush)
Not All Free Trade is Equal
Best Practice Freight Bidding
CSI: Corporate Social Irresponsibility
Critical Skills of Supply Chain Leaders
Devising an RFP That Works
Core Capabilities of Supplier Enablement
Is it Center of Excellence or MindSet of Excellence
Successful GPOs Are About Value, Not Cost Savings
Don’t Swing the Wrecking Ball Unless You’re Prepared for the Falling Debris
Can you really afford to leave Millions on the table?
Are You Managing Your Talent Chain?

June 2007 to December 2007

Supplier Enablement
Confucious eSourcing Project Management Tips
Brunswick Corporation’s e-Auction Best Practices
Collaborative Negotiation
Seven Tips for SaaS Selection
Incentives Motivate
Optimal E-Tool Selection
Five Ways to Take Your Sourcing to the Next Level
A Global Trade Primer
Applications of Spend Analysis
The Benefits of Purchasing Consortiums
Optimization is the Future And The Future is Now
Some Low Cost Country Sourcing Insights
Twelve Steps to Purchasing Program Predominance
Ten Tips for Talent Retention
A Case for E-Sourcing and E-Procurement Integration
Nine Steps to e-Procurement Success
Key Challenges of Tomorrow, Part II
Key Challenges of Tomorrow, Part III
Ten Common Negotiating Mistakes

Articles

Why aren’t you optimizing?, Efficient Purchasing Issue 5, Fall 2007

Why Aren’t You Optimizing Your Sourcing Decisions? EyeForProcurement August 2007 Newsletter

(Strategic Sourcing Decision) Optimization: Can you afford NOT to do it?

Last week at reSouce 2008, Iasta (acquired by Selectica, merged with b-Pack, acquired by Determine, acquired by Corcentric) provided 5 optimization case studies of recent projects that they did for, or in conjunction with, their e-Sourcing clients (who have free access to basic Decision Optimization in a basic suite license as well as access to enhanced Smart Optimization, with extensive freight support that includes support for LTL and TL at buyer-defined freight brackets, for an additional fee). In one of the projects, they only saved a measly 5.5%! That’s only 55,000 of savings for every 1,000,000. Pocket-change to your CFO, right?

Well, in case you haven’t figured it out yet, I’m being sarcastic. Iasta not only proved the twice-discovered Aberdeen result that optimization saves 12%, on average, above and beyond e-Auctions, but that, for categories with untapped opportunities, this doesn’t capture the true savings that can be extracted from categories that can’t be efficiently analyzed without optimization. Although two of the projects were below 12%, at 7.0% and 5.5% in the worst case, three of the projects were not only above average, but two were considerably above average, clocking in at 35% and 40% savings, respectively. The first project was a new national roll-out for Dairy Queen, who would have spent 29% more had they gone with their pre-optimization strategy for award distribution, transportation, and inventory management. Instead, they walked away with approximately 1.8M in savings while reducing analysis time by over 2/3rds. The second project was a national award of temporary labor contracts for a large insurance company who would have spent 25% more had they used their traditional spreadsheet analysis methodology. Instead, they walked away with 20M in savings AND reduced the analysis phase by over 75% – completing a project that normally took over a month in less than a week. Furthermore, the project that only achieved 18.2% savings was also quite significant – as it was on a 110M hardware category for Conoco Phillips – who also walked away with over 20M in savings. I say “over” because the 75.6% cycle time reduction they achieved also allowed them to capture an additional 1.6M in savings because they were able to complete the project in 2 weeks, instead of the usual 6+ weeks.

Thus, I must ask you again – why aren’t 75% of you even considering optimization? Can you really afford to leave millions … if not tens of millions … on the table when prices are skyrocketing across the board, revenue is falling, and your job is on the line? Especially when a savings of even 5% on a 2M-3M category can be the difference between the company being able to afford your salary over the next year? (And, to be honest, the chances of you not racking up a cost avoidance of at least 5% with optimization on any category of even moderate complexity are quite low.)

Is it because you think it’s hard? Although I would have conceded this point to you even three years ago, and would still concede this point to you if you are using the wrong vendor who still believes that everyone can use a mathematical programming language interface, the fact of the matter is that some vendors, like Iasta who has put a lot of R&D into making optimization usable by the average buyer over the last few years, now offer solutions that you can be up and running on with only a day or two of training. Now, it’s true that you won’t master some of the more advanced features that quickly, but when even the basics will shave 5% to 10% off the total cost of the award, that’s one heck of a good start and your mastery will improve with each project you do. Furthermore, now that most vendors with UI-based optimization products, like Iasta, now offer you a multitude of options to get started, which include full service and guided support in addition to self-serve, you are free to start at your level of comfort. And when buyers with only a few months under their belts are creating scenarios beyond what people like myself could envision as model designers, and suggesting enhancements that experts like myself (who have been designing these types of solutions for eight years now) never even thought of, you begin to understand that it’s really pretty easy compared to the state of affairs of a few years back.

Of course, you do have to know what you are doing – and as I pointed out above, you do need a little bit of training. But it’s often a lot less training than you think, especially if you’re a self-starter (which you should be if you’re in sourcing these days) and willing to take steps to self-educate. In addition to readily available buyer-training (most vendors will give free demos, free support, and schedule training on short notice for their customers – and do it on your site if that’s what you want), there are also a number of resources out there that you can use to begin to understand what optimization is, what it can do, and how you can begin to use it. There’s the optimization archives on this blog, the optimization archives on e-Sourcing Forum [WayBackMachine], the optimization wiki-paper on the e-Sourcing wiki [WayBackMachine] (which also forms the basis for the chapter on strategic sourcing decision optimization in the e-Sourcing Handbook [e-Book available on request]), the Next Level Purchasing (now the Certitrek NLPA) podcasts (Parts I and II), and the extended transcript with commentary (as well as the introductory “purchasing tips” article). And your vendor, with extensive experience, will be able to help you identify relevant issues for any project you wish to undertake.

It might take a little bit of effort initially, but when your analysis time is reduced by 50%, 66%, and even 75%, it will be more than worth it … especially since successive projects will be faster still as you’ll already have the data templates ready for future projects as well as the basic scenarios you need to build and compare defined. Plus, you’ll have to do less projects to meet your savings / cost avoidance targets … which means that you’ll hit your bonus faster. And, if nothing else, isn’t that reason enough for you to take the leap?

As I have already fully disclosed, Iasta is a client and I am responsible for much of the model that their product (and Smart Optimization in particular) is based on, but the UI innovations are entirely Iasta’s, as are the results reported.

The e-Sourcing Handbook (Free e-Book)

The e-book edition of the e-Sourcing Handbook, co-authored and edited by yours truly, and sponsored by Iasta [acquired by Selectica, merged with b-Pack, rebranded Determine, acquired by Corcentric] (an e-Sourcing solution provider), is now available on request (through e-mail).

The e-Sourcing Handbook is your modern guide to Supply and Spend Management Success which utilizes and enhances strategic sourcing technology and best practices. Covering the full spectrum of the e-Sourcing cycle, the handbook helps you understand not only what spend analysis, e-RFx, e-Auction, decision optimization, and contract management are, but where and when to apply these technologies for maximum benefit.

Building on the resounding success of the e-Sourcing Wiki [WayBackMachine] and the e-Sourcing Forum [WayBackMachine] and Sourcing Innovation blogs, the handbook takes the concept of open access to knowledge and best practices one step further by compiling the best information on e-Sourcing to appear on all three public information sources into one definitive source. Furthermore, by mixing content from factual and informative wiki articles with blog postings that are both controversial and opinionated in an innovative manner, the juxtaposition of the two in the handbook allows the reader to see where the boundary lies between information and advocacy. It is the goal of the authors that, through this ground-breaking effort, the reader will gain a better understanding of e-Sourcing and how to take their supply and spend management efforts to the next level.

And, most importantly, unlike some of the recent e-books to pop-up, this is a real book – not a glorified marketing white paper doubled (or tripled) in size with a fancy (spaced-out) layout that contains dozens of colorful, yet useless, images. An exact mirror of the forthcoming print-book, it’s 220 pages of solid content backed up by a 4 page resource section, 8 page glossary, and 22 page bibliography for those who thirst for knowledge. The full table of contents and index are also included to help the reader quickly find what she is looking for.

But perhaps the foreward by co-author Eric Strovink of BIQ (acquired by Opera Solutions, rebranded ElectrifAI) says it best.

The e-Sourcing space has undergone a major transformation since 2000. Vendors who were once dominant or cutting-edge have failed. Many have undergone asset fire sales, become part of the walking-dead, or been absorbed into larger companies; and still others have been forced by their investors into mergers that make little sense to the outside observer.

 

These consolidations have brought about a dangerous commoditization of ideas, along with a slowdown of innovation. Even worse has been the obscuring – by over-enthusiastic and under-educated vendor marketing departments – of deeply important issues that sourcing practitioners must consider and understand in order to be successful.

In response to this, my co-author, Dr. Michael Lamoureux, launched the Sourcing Innovation blog with the specific purpose of educating practitioners and cutting through the marketing babble that had begun to dominate the discussion. Another co-author, David Bush, started the e-Sourcing Wiki (from which the bulk of this Handbook is taken) in a similar attempt to put fundamental e-Sourcing ideas and concepts into a publicly accessible forum. Over the years, David has also built Iasta’s e-Sourcing Forum blog into a credible and useful resource.

These efforts are laudable, but blogs and wikis are sometimes hard to navigate, and effort is often required to extract related information in a useful way. This Handbook is an effort to draw together the knowledge base of the Wiki, along with relevant blog postings, into a coherent and readable framework. Of course, one might argue that none of the authors are readable or coherent – and that may be a fair criticism – but we’ve made a best effort.

Because Michael is a strong and independent voice in the space, it’s appropriate that he is the editor of this Handbook. He has taken an interesting and unorthodox approach, choosing to mix factual and informative wiki articles with blog postings that are both controversial and opinionated. The juxtaposition of the two allows the reader to see where the boundary lies between information and advocacy. This is perhaps the first effort of its kind where two very different resources are interlinked in a constructive, and hopefully interesting, way.

 

I trust that this edition of the Handbook will be the first of many similar efforts, and that together we can collectively energize our space with accurate information and useful insights. Remember, the e-Sourcing Wiki is a public resource – anyone can contribute – so everyone should consider “sharing the wealth” and do so.

Transportunity Identification Requires Decision Optimization

I recently discovered an archived “expert insight” on SupplyChainDigest from last summer on “Transportunities: What Kind of Results Can You Expect from Carrier Bid Optimization Projects” that was pretty good, but lacked advice on the right way to go about the more technical aspects of the project.

The article, which noted that savings in the 5% to 15% range are usually achievable, noted that there are factors that will affect the achievable savings range, namely:

  • How good have you been?
    It will be hard to generate savings if you have already captured them in a prior sourcing project. Remember, fuel costs keep rising, and with labor shortages and inflation, so do savings. You’re only going to capture savings if there are (significant) inefficiencies to be eliminated.
  • How good will you be?
    If you have been unable to capture transportation savings in the past, why will this time be any different? You need to be sure you have the knowledge, tools, and support you need before you begin the project, or you will just be wasting your time.
  • What is your freight profile?
    If you are a low-volume shipper moving light bulky freight from Hong Kong to LA … or need a “reefer” out of Florida after the citrus ripens, you can only expect to do so well or rather not so well. You need regular, high-volume shipments on the same lanes that have not been (properly) sourced in a couple of years if you want to find real opportunities.
  • What is the state of the market?
    In the midst of a capacity crunch, like we were a few years ago, you’re not going to get good rates. However, in the midst of an economic slowdown, like the one we are currently in, conditions are prime to negotiate better rates.

In other words, if you have not been stellar, have the resources at your disposal, and have an appropriate freight profile in a receptive market, then chances are you have a good shot of saving a sizeable chunk of change if you, as the article suggests, broaden the scope of the sourcing project and, most importantly, use the right tool for the job.

It’s critical to use the right tool for two reasons. The right tool enables the right process and, most importantly, the right tool makes sure you aren’t sacrificing other savings opportunities simply to get better freight rates. For example, if you over-allocate to a certain carrier, then you could lose the required volumes needed to achieve the TL rates you need for low freight costs on lanes only served by other carriers. Also, if you lock in freight lanes, then you restrict your supplier pool – and if freight is less than a quarter of your overall sourcing costs, this can be bad.

That’s why you should always source categories at a time in a sourcing project, so you can balance unit cost vs. freight cost, and do freight projects at least once, if not twice, a year where you amalgamate across needs based on expected lane-volume combinations using current contracts and most likely award scenarios.

For more information on the right way to handle freight projects, see my post on Missing the Point … or … The Right Way to Handle Freight.