Category Archives: Decision Optimization

the doctor’s Guest Posts: The Year in Review

Over the past year, I’ve blogged a number of guest posts over on eSourcing Forum, including forty posts last summer as part of the weekend series. For new(er) readers to the blog, here is a list of all guest posts over on eSourcing Forum with direct links.

Weekend Series Posts on e-Sourcing Forum [WayBackMachine]

Purchasing Innovation I: An Introduction
Purchasing Innovation II: TRIZ
Purchasing Innovation III: The Verifier Approach
Purchasing Innovation IV: Innovation Continued
Purchasing Innovation V: Sourcing the New Organization
Purchasing Innovation VI: CrowdSourcing
Purchasing Innovation VII: The Road Ahead
Purchasing Innovation VIII: Transforming New Product Development
Purchasing Innovation IX: The Purchasing Evolution!

On Demand I: The Good
On Demand II: The Not-So-Bad
On Demand III: And the Coming Pretty …

Cost Reduction and Avoidance I: An Introduction
Cost Reduction and Avoidance II: Metrics
Cost Reduction and Avoidance III: Incentivize for Success!

Supply Risk Management I: An Introduction
Supply Risk Management II: Risks and the Need for Resilience
Supply Risk Management III: Managing Risk

Supplier Performance Management I: An Introduction
Supplier Performance Management II: The Road to Success
Supplier Performance Management III: Best Practices

Demand Driven Supply I: An Introduction
Demand Driven Supply II: Stages and Implications
Demand Driven Supply III: Challenges and Implementation

Center Led Procurement I: An Introduction
Center Led Procurement II: A Center of Excellence
Center Led Procurement III: Best Practices

Procurement Outsourcing I: Is it right for you?
Procurement Outsourcing II: Selecting a PSP
Procurement Outsourcing III: Getting the most out of your PSP

Optimization I: A Powerful Tool
Optimization II: Why it was Relegated to the Shadows
Optimization III: Why it’s time is finally here
Optimization IV: POE or BoB?

Six Sigma I: An Introduction
Six Sigma II: Innovative Quality
Six Sigma III: Value Based Strategic Sourcing

Weekend Series Wrap Up I: Process and Technology
Weekend Series Wrap Up II: Supply Chain Management
Weekend Series Wrap Up III: The Innovation Revolution

Miscellaneous Posts on e-Sourcing Forum [WayBackMachine]

* Lead Time Optimization: Groundbreaking New Technology or just Applied Total Value Management-based Decision Optimization in Disguise?
* Sustained Sourcing Success
* Are there any limits to procurement’s role?
* Outsourcing Gets Tough
* Design for Supply
* The Benefits of an End-to-End e-Sourcing Suite
* Accelerating Value with On-Demand: An Aberdeen Perspective
* Supplier Enablement Enables Savings

And just in case you missed it, here’s a link to the chaos-causing post on Emptoris’ optimization over on Spend Matters:
The Doc’s Perspective on Emptoris’ Optimization*

* All posts prior to 2012 were removed in the Spend Matters site refresh in June, 2023.

Even Heroin Smugglers Need Freight Optimization

According to a recent article on Yahoo! News, Tajik police have arrested a woman for trying to smuggle heroin in a refrigerator through express delivery firm DHL. Apparently, the DHL office in the Tajik capital Dushanbe grew suspicious after noticing that its transportation cost to Moscow exceeded the actual cost of the fridge by several times. Upon a search, they found 17.4kg of heroin hidden in the innver cover plate.

What was she thinking? Or more importantly, what was she not thinking? “Let’s see … $200 fridge … $500 shipping … makes sense to me!” What isn’t wrong with this picture. First of all, as a consumer, you should never pay more to ship a commodity than you pay to buy it. Secondly, you should never import something you can buy locally. (Who wants to deal with customs and import duties when someone else can do it for you?) Furthermore, if you have approximately 2.2M* worth of heroin, certainly you could afford to buy and ship a small car, which would cost roughly 1% to 2% of the total value and have a shipping fee only one tenth of its value – which would surely not be as suspicious since shipping would be much less than the value and people import cars significantly more often than they import fridges.

So, I guess there are two lessons here:

  • If you’re going to smuggle drugs, make sure you smuggle them in an item where the shipping cost doesn’t (significantly) exceed the item value.
  • If you’re going to buy and ship internationally, make sure you’re not paying too much for freight, or risk getting your shipments stopped and search by ambitious agents looking for the next bust.

* Based on an estimated street value of roughly $125/gram, which appears to be the median value returned from various sources in a Google search on June 1, 2007.

CombineNet IX: Interlude – We Can Optimize Anything

CombineNet is on a quest to conquer the Optimization World! Hopefully I’ll be able to post more details soon, but for now, let’s just say that it sounds like their new slogan is “We Can Optimize Anything“. To that end, I hereby proffer* the following for their new theme song (assuming, of course, that they can get the musical rights from the Tragically Hip for Blow at High Dough).

They had a problem once … in my home town
Everybody affected … from miles around
Energy crisis … not enough silver bling
Well we ain’t no day traders, but we can optimize anything

Get it out .. get it all out
We’ll stretch that bling
Make it last, we make it last
To well beyond the market bell rings
Well the stock-car driver likes his rhythm,
never likes the stops
Throes of passion, Throes of passion
When something just throws him off

Sometimes .. the faster it gets
The less you need to know
But you gotta remember
The smarter it gets, the further it’s going to go
When you optimize so
When you optimize so

Whoa baby you’ll feel fine
You can trust that it’s genuine
Dollars and Cents, Saves Dollars and Cents
Yeah, Every time you optimize
Nobody solves it as good as we do
It is one kick-ass tool
‘Cause we solve so fast, solve so fast
Makes everybody drool

Sometimes .. the faster it gets
The less you need to know
But you gotta remember
The smarter it gets, the further it’s going to go
When you optimize so
When you optimize so

Out in the market, same Elvis thing
But they can’t catch us, ’cause we can optimize anything
‘Cause we can optimize anything

Sometimes .. the faster it gets
The less you need to know
But you gotta remember
The smarter it gets, the further it’s going to go
When you optimize so
When you optimize so

Out in the market, same Elvis thing

* Copyright 2007. All rights reserved.

No Advanced Sourcing at Oracle

I was recently asked what I thought about Oracle’s Advanced Procurement Solution, and its optimization offering (new in version 12.0) in particular. The short answer is that it doesn’t make the cut in my book. The core sourcing cycle consists of spend analysis, RFx, auction / bid collection, decision optimization, and contracting. In order to be considered an advanced sourcing application, in my book, the underlying spend analysis technology, decision optimization technology, and contract management technology must support advanced capabilities. Although Oracle Procurement Contracts might be considered a fair contract management tool, it is certainly not advanced and it is by far the most developed of the offerings.

Oracle’s sourcing optimization product is pretty basic. It only supports three constraints: header, which can be used to constrain the maximum award amount or exclude one or more suppliers by scores, line constraints, which determine which, and how many, suppliers can split a line item award, and to what extent, and supplier which can be used to globally limit the number of suppliers and the award to certain suppliers. Basically, they support basic exclusion, capacity, allocation, and qualitative constraints. Not bad compared to most of the “optimization solutions on the market, but not really advanced sourcing.

Regular readers will note that I have four basic requirements for a true strategic sourcing decision optimization product:

  1. solid mathematical foundations
  2. true cost modeling
  3. four key categories of sophisticated constraints:

      capacity, basic allocation, risk mitigation, and qualitative

  4. sophisticated what-if capability

Since it uses ILog CPlex, it meets the solid mathematical foundations (provided that the underlying model is a true representation, and not a heuristic simplification), it has basic what-if capability, it mostly meets the minimum constraint requirements, but definitely falls short on true cost modeling. In order to allow for true cost modeling, a decision support must support tiered bids (or discounts that can model the tiered bids), flexible discounts, separate cost components (or at least flexible adjustments), and fixed costs. To the best of my knowledge, although Oracle’s tool does offer some volume discounts, it does not support multi-level tiered bids, flexible discounts, separate cost components (and at least freight should be supported), or fixed costs. In the constraint department, they do support basic capacity, allocation, risk mitigation, and qualitative constraints, but they are all tied to an item or an entire order. Qualitative constraints should be definable at the supplier, item, or location level, a concept the tool doesn’t yet support to the best of my knowledge, risk mitigation should be definable across item, group, or order, and only item and order appear to be supported, and capacity, allocation, and exclusion should be equally as flexible. Plus, the Oracle tool doesn’t have any constraints beyond these absolute basic constraints.

CombineNet Comunique VIII: CombineNet Energy

Recently, CombineNet (acquired by Jaggaer), one of the few companies lucky enough to have inspired a whole series of posts (I, II, III, IV, V, VI, VII) on this blog, launched CombineNet Energy which, although it sounds like a new sports drink, is actually a re-launch of their advanced sourcing application platform with built-in decision guidance systems for the energy sector.

As you may know, back in 2003 CombineNet, in a leading initiative, formed an Energy Division, which, considering the recent energy crisis, doesn’t look nearly so crazy or risky in hindsight. According to their

solution overview, in a competitive energy market place, shareholders insist on strong financial performance, customers expect reliable and affordable service, and regulators require detailed reporting and compliance. In this pressured environment, CombineNet Energy offers proprietary, optimization-enabled decision guidance technologies that enable energy executives, policy makers and business managers to address the most complex strategic, financial and operational issues confronting the energy industry. CombineNet Energy’s advanced technologies help energy companies increase operational efficiencies and maximize profits.

In addition to their advanced sourcing platform, based on their Expressive Bidding and Scenario Builder offering, they are now offering a Gas System Guidance System, GS2, that they are promoting as an entirely new breed of operational and financial planning tool for the natural gas industry that simultaneously analyzes all elements of the vertically-integrated natural gas operation, including supply, transmission/compression, storage, operational solutions and contractual constraints, to guide weekly, monthly, and annual operational decisions that maximize profits and efficiency. It sounds very interesting – pipeline optimization is a tricky problem. At any one time, you can only pump one-way, and it’s hard to predict exact demands in advance. They even have a Video Demo, which is kind of neat.

The also have an on-line flash-based value-assessment Calculator that an energy company can use to estimate it’s potential cost reductions using the CombineNet tool (which is quite important because this type of technology comes with a hefty price tag, and not every one understands that the rewards can be many times greater than the investment). For example, given the number of Local Distribution Companies, the annual operating revenue, annual gas purchase expense, annual volume of gas withdrawn, the weighted average cost of gas, the annual transportation expense, and the property, plant and equipment balance, it is able to calculate an estimated range of savings that would be obtained using CombineNet’s solution. Check it out.

I’ll eventually get to my promised “Powers of POE” piece …