Today’s guest post is from Ayush Sharma, a Strategic Sourcing Consultant with Trade Extensions in the Americas. His particular speciality is the application of optimization to Retail Sourcing, Dedicated Transportation, 3PL Logistics Sourcing, and Direct and Indirect Materials Sourcing. Ayush has a Masters degree in Supply Chain Management from the University of Texas at Dallas, certifications in Lean Six Sigma and Supply Chain Management, and has served as a Technical Director for a local branch of the Institute for Supply Management (ISM).

We started the series off by discussing the importance of supply and demand chain integration, with respect to the organizational strategic plan, as the key to an efficient, profitable and fluid business and the importance of a good Strategic Sourcing process, built on combinatorial bidding and optimization, in the execution of supply and demand chain integration. Then, in our last post, we discussed the characteristics of a strong and measurable sourcing process which can be utilized to increase Supply Management throughput and turn the organization’s Strategic Spend into a Strategic Value-Add for the corporation as a whole. Today, we are going to present our first of two examples, inspired by real-world events, that demonstrate the impact of including combinatorial bidding and optimization in a sourcing project that follows a process similar to the one outlined in our last post.

We start with a logistics sourcing project run by ‘Transport Corp.’, a 3PL (third-party logistics) company that wants to source three routes — Route A, Route B and Route C. Each route has a certain volume (number of truckloads) that needs to be fulfilled. Transport Corp. wants to utilize the combinatorial bidding and optimization process and invites three freight carriers to bid in this project — ‘Carrier A’, ‘Carrier B’ and ‘Carrier C’.

Transport Corp. has the following volume information.

Transport Corp. wants the carriers to provide the following inputs:

1. A ‘Rate per Mile’ for each lane
2. An estimated ‘Transit Period’ (number of days from the origin to the destination)
3. A ‘Capacity Commitment’ (number of loads each carrier can fulfill)
4. Any ‘Lane Bundles’ that would entail a lower rate across the bundle

The freight carriers each quote the following:

Carrier A doesn’t have any additional bundle discounts to provide.

In addition, Carrier B says that if given all the volume in Route A and Route B, they’ll provide an additional discount of 5%.

Carrier C doesn’t have any additional bundle discounts to provide.

Initial Results (Low Cost without Capacities or Discounts)

With the carrier Lane Rates (cost for shipping all the loads on each lane), it’s possible to get a ‘Total Cost’ comparison. Looking at the numbers simplistically (i.e. without considering any capacities or discounts), we can infer the lowest cost carrier easily. In this case, looking at the table below, it’s easy to identify the winner overall would be Carrier A if one was just looking at the carrier prices

Low Cost Considering Discounts

However, we know that Carrier B has offered a 5% discount on Route A and Route B if awarded both these lanes. Let’s consider this possibility in the table below. It’s apparent that after applying the discounts, Carrier B becomes more favourable not only on Route A and Route B but also overall (see the last row showing the total cost for awarding all routes to a single carrier).

Optimal Payment Considering Discounts, Capacities and Business Constraints

In the same problem, we now analyze the possibility of honouring carriers’ ‘Capacity Commitment’ numbers. In addition, Transport Corp wants to mitigate risk and therefore wants to award each route to at least two carriers. We now see that a simple problem with three lanes and three carriers quickly becomes hard to solve. This is where the power of optimization comes into play, allowing us to quickly compute the best solution. Here’s a look at the solution if we want 2 winners per route and also want to honour capacity commitments. Carrier B’s discount doesn’t materialize in this scenario as no carrier gets a full lane award.

Taking this one step further, it’s possible to visualize cases where Transport Corp wants to incorporate some penalties for carriers with higher ‘Transit Periods’ to arrive at another solution that has a better overall lead time. In this manner, several what-if scenarios can be run in a short span of time. These types of creative analyses can be performed while simultaneously allowing carriers to submit all the information they have. However, a process also needs to be instituted where the awarded scenario is closely evaluated against previously implemented rates. It is also useful to do some sensitivity analyses to understand how the award alignment changes if the payment is relaxed by a certain percentage. Monitoring these in addition to carrier performance and quality metrics allows Transport Corp to arrive at an optimal decision that considers all factors and is right for their business.

Thanks, Ayush.

Today’s guest post is from Ayush Sharma, a Strategic Sourcing Consultant with Trade Extensions in the Americas. His particular speciality is the application of optimization to Retail Sourcing, Dedicated Transportation, 3PL Logistics Sourcing, and Direct and Indirect Materials Sourcing. Ayush has a Masters degree in Supply Chain Management from the University of Texas at Dallas, certifications in Lean Six Sigma and Supply Chain Management, and has served as a Technical Director for a local branch of the Institute for Supply Management (ISM).

Yesterday’s post discussed the importance of supply and demand chain integration as the key to an efficient, profitable, and fluid business. These processes, which should be integrated with the strategic plan, should utilize Strategic Sourcing and it’s ability to drive ‘savings’ year after year. And the best Strategic Sourcing processes are those that combine combinatorial bidding and optimization, which allows an analyst to run several what-if scenarios in minutes and generate reports that show exactly how the overall spend distribution changes as newer business processes are taken into account. In today’s post, we will discuss the requirements for a strong and measurable sourcing process.

A strong and measurable sourcing process normally exhibits the following characteristics:

1. Integrated Processes
   Using a rolling window of a few years (usually two to three years), strategic sourcing projects should be strictly monitored to understand expected vs. implemented costs and ensure implemented costs are in line with the strategic plan. The suggested time window works best as it allows room to respond to market dynamics while maintaining a medium to fairly long-term focus.
2. Creative Analyses
   Technologies like combinatorial bidding and optimization can be used creatively. Today’s tools offer extreme flexibility in terms of the types of data that need to be captured and the limitless possibilities for analysis. Businesses must look at ways of incorporating qualitative information and ongoing metrics (e.g., favouring suppliers who have been able to maintain the price for the duration of the contract) in the analysis process.
3. Collaboration
   Supplier collaboration is key to insure the success of any Strategic Sourcing process. In this era of real-time communication, it’s vital to collaborate with suppliers on an ongoing basis while providing them dynamic feedback to improve the overall quality of the sourcing process.
4. Economies of Scale
   Businesses must look to increase the scale of projects. Several bidding tools allow ridiculously large numbers of bids to be captured and analyzed at an extremely granular level. Increasing the size of projects not only means increased productivity and cycle time (and thereby cost) efficiencies for the organization. It also allows you to take advantage of economies of scale in the bidding process while maintaining the appropriate level of detail during analysis.
5. Benchmarking
   Sourcing projects should be used to create financial benchmarks allowing organizations to understand industry trends and the impact of specific changes in methodology. When the market fluctuates, effective benchmarking techniques help understand the immediate and long-term effects and allow organizations to mitigate risk.

The easiest way is to just get started using the guidelines above and then steadily build and refine the process. No one solution will work for all organizations, but taking the lather-rinse-condition-repeat approach with special focus on ‘conditioning’ will ensure maximum optimality. Supplier collaboration should take center-stage, especially when the focus is on long-term profitability. Utilizing the latest technology to capture all of their requirements ensures a wholesome process and a meaningful relationship with suppliers. As the process gets more streamlined, productivity benefits (along with specific measurable savings) will mean increased throughput in the entire sourcing process without losing track of strategic goals. This is how your Supply Management organization turns the organization’s Strategic Spend into a Strategic Value-Add for the corporation as a whole.

In the posts that follow, we will illustrate this with a couple of examples, inspired by real-world events, that demonstrate the impact of including combinatorial bidding and optimization in a sourcing project that follows a process similar to the one outlined above.

Thanks, Ayush.

Today’s guest post is from Ayush Sharma, a Strategic Sourcing Consultant with Trade Extensions in the Americas. His particular speciality is the application of optimization to Retail Sourcing, Dedicated Transportation, 3PL Logistics Sourcing, and Direct and Indirect Materials Sourcing. Ayush has a Masters degree in Supply Chain Management from the University of Texas at Dallas, certifications in Lean Six Sigma and Supply Chain Management, and has served as a Technical Director for a local branch of the Institute for Supply Management (ISM).

Supply and Demand Chain integration has been viewed as key to an efficient, profitable and fluid business. This is especially true today with several organizations looking for deeper synergies between their supply and demand planning processes as they look to drive costs out of the value chain. But soon enough, all the “costs” will be cut and companies will be looking to increase the efficiency and long-term profitability of their supply chain. ‘Long-Term Profitability’ is an interesting term given the context.

In today’s volatile business environment it’s even more imperative to insure your supply chain is primed to mitigate risk and deliver real-dollar savings year after year. If the last two years have taught us something, it’s the extent to which regional disturbances can affect supply chains worldwide. The high-level solution is to integrate supply and demand planning processes with each other. But even more important is that they be integrated with the strategic business plan. Specifically, on the supply-side, Strategic Sourcing is an important cog in the supply chain wheel simply because of the level of spend at most large organizations and the pressure to drive ‘savings’ year after year.

While trying to add value to the Strategic Sourcing process, combinatorial bidding as a methodology has seen some success in recent years. In the Sourcing space, the term ‘Combinatorial Auctions’ is widely used to denote a process that allows you to elegantly capture suppliers’ pricing in an auction-type event while taking into account several considerations like bundled pricing and supplier capacities. However, one must also realize that combinatorial bidding (in non-auction RFx type events) has been used with tremendous success by several companies spanning a wide variety of industries. The effects of combinatorial bidding are great because of the nature of the process — suppliers place bids based on what they think their competitive advantage might be and buyers can efficiently take these into account while consistently honouring their own business requirements.

Pair this with optimization and you can drive even more value (not just “savings”) out of the process. Optimization allows buyers to run several what-if scenarios in minutes and generate reports that show exactly how the overall spend distribution changes as newer business requirements are taken into account. The reason this is important is because a low-cost solution, even with combinatorial bidding, is never really tailored for any business. Given the wide-ranging scope of business requirements, optimization allows you to make an informed decision as it can quickly give you the information you need to identify the best ‘Overall Value’ rather than just the lowest cost — not to mention being better prepared for supplier negotiations.

The truth is that even today, with a variety of tools available to support these processes, too many businesses fail to see hard-dollar results. The reasons for this obviously depend on the specific nature of projects conducted and are generally complex and varied. But a common theme that ties them together is the thought that a few sourcing events with the methodology above would help realize immediate savings. This might be true in some cases, but even then, the savings realized are probably low-hanging fruit that should’ve been captured through either traditional spend analysis, cost modelling, or an appropriately designed auction. Furthermore, especially in cases where suppliers’ costs have been ‘driven down’, these ‘savings’ can quickly fade away as suppliers try to recover business in creative ways once the contract has been signed. This aspect should be given special consideration because of the macro- and micro-economic factors that come into play.

In order to drive down costs and at the same time maintain long-term viability, the sourcing process must be tightly integrated with the strategic plan. Further, bidding and optimization tools must be part of the sourcing process as these tools allow for increased collaboration with suppliers while maintaining control over the sourcing process. In Part II, we will discuss the requirements for a strong and measurable sourcing process.

Thanks, Ayush!