| As defined in the Strategic Sourcing Decision Optimization* wiki-paper, decision optimization is the application of rigorous analytical techniques to a well-defined scenario to arrive at the absolute best decision out of a multitude of possible alternatives in a rigorous, repeatable, and provable fashion. Furthermore, the analytical technique must be capable of analyzing every possible solution to the scenario (complete) and be capable of performing such analysis accurately (sound).
Strategic sourcing decision optimization is an important part of your technology toolkit because it can significantly reduce cycle times, enable significant realizable cost savings, and guide a buyer to the best overall total value management sourcing decision. Analyses that take weeks or months in spreadsheets like Excel can often be done in a few hours, and sometimes even a few minutes, and the savings can be substantial. Aberdeen, in two back-to-back studies in 2005 and 2007, found that the application of optimization tools in the analysis of total cost and the usage of flexible bidding functionality enabled early adopters of the technology to identify an average incremental savings of 12% beyond the savings that could be realized with basic price-focussed auction and e-RFX technology. There are a number of requirements that need to be met before a solution can be identified as a true strategic sourcing decision optimization solution. In addition to solid mathematical foundations (such as Mixed Integer Linear Programming, or MILP), it must support true cost modeling, sophisticated constraint definition in multiple core categories, and “what if” analysis capabilities. The system must be able to accurately model the complex cost of goods sold calculations that are common in today’s global sourcing environment. It must be able to account for all of the fixed costs (such as production line set up, support fees, etc.) and variable costs (such as cost per unit, duty, etc.) that are associated with each product level, regardless if the cost is a raw material usage cost, energy cost, labor cost, trade cost, distribution cost, or trade cost. In addition, it must also support the definition of discounts and rebates that suppliers will offer for volume purchases or multiple product purchases. Since the lowest bid is not always the best solution (as there are quality issues, supply reliability risks, and associated costs to take into account in the total cost and total value equations), it is imperative that the system be able to support the plethora of regulatory, business, and strategic quantitative and qualitative constraints that a buyer needs to truly arrive at an optimal, implementable, solution. At a minimum, the system needs to support capacity and limit constraints, basic allocation constraints, risk mitigation (meta) allocation constraints, and qualitative constraints. Capacity Constraints allow for the specification of real world limits on the amount of product a supplier can supply and on the amount of product that a warehouse can receive. They also allow a buyer to restrict the supply base according to business rules, regulatory constraints, and strategic decisions. Basic Allocation Constraints allow a user to specify that a certain supplier, or group of suppliers, must receive a minimum award of one or more products, and may also be used to specify a maximum award that a supplier, or set of suppliers, may receive. They can be used to capture pre-existing agreements, define preferred suppliers, and implement global sourcing strategy constraints. Risk Mitigation Allocation Constraints allow a user to specify that at least one supplier in a group must receive a minimum, or maximum allocation, and are generally used to mitigate supply risk or ensure compliance with regulations. Qualitative Constraints allow for the definition, and imposition, of an absolute or average minimum, or maximum, qualitative score on each product, or product bundle, sourced. They allow for engineering requirements, marketing and customer satisfaction goals, and other non-quantitive business constraints to be included in the model. For a more complete definition of decision optimization, see the Strategic Sourcing Decision Optimization wiki-paper. For a detailed discussion, see the Next Level Purchasing podcasts on “What is Supply Optimization” and the associated transcripts, indexed below. For savings benchmarks, see the Aberdeen white-papers, also indexed below. Finally, the following posts offer some good starting points as well:
* The e-Sourcing Wiki was created and maintained by Iasta, which was acquired by Selectica in 2014 (which renamed itself Determine in 2015). It was retired by Determine (which did not actively maintain it) before Determine was acquired by Corcentric in 2019 |
Category Archives: Glossary
Crowdsourcing
| Crowdsourcing can be defined is the act of taking a task traditionally performed within your organization and outsourcing it to an undefined, often large, group of people or community in the form of an open call for participation. (Wikipedia) It’s a distributed problem solving model that allows an organization to delegate various tasks for which it does not have the manpower or expertise to external entities or affiliations of networked persons with the expertise, access, or raw capabilities that the organization requires to complete the task.
In addition to being an option for solving problems and completing tasks your organization does not have the manpower for, it can be a great mechanism for knowledge transfer as it can connect people who have ideas and knowledge about certain ways to solve a problem with those people who need a problem solved but don’t have the right knowledge or ideas. It allows an organization to take advantage of a team that is larger than the number of people that can be supported on the organization’s payroll and it can save an organization a lot of money if external experts can get it done more efficiently and cost effectively. For more information crowdsourcing, check out the following posts: |
Cost Reduction and Cost Avoidance
| Cost reduction can be generally defined as the act of cutting costs to improve profitability. Cost reduction is often confused with cost avoidance, which is more properly defined as the act of eliminating costs or preventing their occurrence in the first place. Both types of cost control, which are two sides of the cost containment coin, are important and necessary for a company that wants to achieve and maintain profitability, especially in a weak economy.
A cost reduction, which is a “hard” cost saving, usually takes the form of a tangible year-over-year bottom-line cost reduction such as:
A cost avoidance, which is a “soft” cost saving, usually takes the form of a more intangible cost avoidance, which does not show up on, but materially impacts, the bottom-line cost such as:
If you haven’t conducted a supply chain efficiency audit recently, chances are that your supply chain is ripe with cost reduction and cost avoidance opportunities. Start by looking at the six fundamental sources of cost:
And ask the following questions to help you identify where you are most likely to be hemorrhaging cash:
Once you’ve identify those areas that are hemorrhaging cash, you reduce the costs by identifying cost reduction strategies and change management plans to implement those strategies. The following strategies are often good starting points:
In addition, you should consider bringing in some external expertise to help you with this effort, as consultancies that live and breathe cost reduction are often able to quickly identify significant cost savings opportunities and help you realize them faster, and at higher rates of return, than internal efforts. For more information, check out the following blog posts: |
Contract Management
| The Wikipedia definition is the management of contracts made with customers, vendors, partners or employees and the process of systematically and efficiently managing contract creation, execution, and analysis for the purpose of maximizing financial and operational performance and minimizing risk. In a wiki-paper on the e-Sourcing Wiki*, I differentiated between basic and enterprise contract management, which I defined as the holistic view that is formed when one looks at the management of contracts from the enterprise perspective. This includes the legal perspective, which ensures that the corporation is using standard, the risk management perspective, which ensures that the procurement contract is addressing foreseeable risks, the financial perspective, which makes sure the payment terms are clearly and unambiguously defined, and the procurement perspective, which needs to ensure a continuity of supply.
Contract management is important to procurement and purchasing for a number of reasons. Not only does it insure that a business lives up to its obligations, which protects it from legal risks, but it brings with it a slew of operational and financial benefits that can drastically improve company productivity and profitability. The Benefits
For more information, we recommend starting with many of the contract management articles here on Sourcing Innovation, and the following classic posts:
* The e-Sourcing Wiki was created and maintained by Iasta, which was acquired by Selectica in 2014 (which renamed itself Determine in 2015). It was retired by Determine (which did not actively maintain it) before Determine was acquired by Corcentric in 2019 |
Compliance Management
| Compliance can be defined as either a state of being in accordance with established guidelines, specifications, or legislation or the process of becoming so, but what does this mean in the context of the supply chain? In the supply chain, compliance is a universally nebulous concept that every provider has a solution for, even when they don’t have a definition.
In the supply chain, compliance management only has meaning with respect to a given function. The primary functions where compliance is a major concern, and where you can find software-based solutions, are the following:
For more insights into Compliance, please see the following posts: |