Probably Not. And if you haven’t yet downloaded Sourcing Innovation’s latest Illumination on Optimization, What Comes Next, then you’re definitely not.

As indicated in Sourcing Innovation’s recent post, So You Think You’ve Mastered Strategic Sourcing Decision Optimization, you haven’t even mastered the extent of strategic sourcing decision optimization available to you today. If you’re in the Hackett Group 8%, applying (at least baseline) optimization to the majority of your high-dollar and/or strategic categories, and are even building Billion Dollar sourcing models, then you might have mastered the basics of optimization 2.0. Barely. But optimization 3.0 is on the way.

And because you’re still struggling with the basics of model building, data collection, constraint definition, scenario comparison, and, most importantly, when you should use optimization (always, but not necessarily to make the award decision), you haven’t even had to time to realize that there might be more coming. And there is. Lots more. Just like there was a substantial increase in capability that hit the market starting between 2005 and 2007, about 5 to 7 years after most of the optimization vendors hit the scene circa 2000, we are reaching the point where the next set of rapid advancements in capability are about to hit the market, and those companies that latch on to these advancements first will be in a prime position to quickly advance down the path of supply mastery. They will be years ahead of the average company and decades ahead of the laggards. Decades.

These organizations will not only be the first to take optimization to the next level — and go from T-CAP (Cost of Acquisition and Production/Utilization/Distribution) to true TCO (Total Coat of Ooptimization) on their journey to TVM (Total Value Management) — but the first to merge big data, analysis, and optimization in new and innovative ways that will identify previously undetectable cost avoidance and value generation activities.

So, if you want to be one of this decade’s Supply Management leaders, download Sourcing Innovation’s new white-paper on Optimization, What Comes Next (registration required), sponsored by Trade Extensions, and start preparing for the future of optimization today. It will be worth your while and when you start applying these techniques, you won’t be disappointed.

Well, the doctor has news for you. You haven’t. In fact, you’re not even close.

You might be applying at least baseline optimization to the majority of your high-dollar and/or strategic categories. You might be in the Hackett Group Top 8%. You might be building Billion Dollar sourcing models. You might be years ahead of your peers. But the reality is that when it comes to true strategic sourcing decision optimization (SSDO) mastery, you’re not even close.

With the exception of the two e-CHAOS vendors, the doctor interacts and/or works with all of the remaining vendors who offer true strategic sourcing decision optimization (which isn’t a hard thing to do as there are only seven^*1 [7] vendors in total with a solution that meets the minimum requirements as set forth in the wikipaper), knows the depth of the projects these vendors have supported, and can say with confidence that the best of the best have barely mastered the basics of optimization 2.0. Barely. And optimization 3.0 is on the way.

[  As a history lesson, optimization 1.0 was circa 2000 when the first solutions that minimally met the four basic requirements of solid mathematical foundations (MILP), true cost modelling, constraint analysis, and what if? capability hit the market. Most of these were basic, supporting only supplier – product – customer DC mappings; unit and transportation costs and then one level of discounts or rebates; capacity, allocation, and min/max supplier selection constraints for very basic risk mitigation; and manually created what-if scenarios. In addition, maximum model size was limited, large models took hours to days to solve, and setting up and importing all of the data from multiple bid sheets across multiple spreadsheets often took days.

Then, circa 2005 to 2007, as a result of a considerable increase in computing power, algorithmic improvements, and domain knowledge, a few solutions started to improve rapidly and we hit the beginnings of optimization 2.0. The platforms evolved to make full use of the theory of logical variables in the MILP solvers; they also supported multiple supplier locations, product substitutions, and differential costs by lane^*2; a buyer could define costs by way of a cost model with as few or as many factors as desired, at multiple tiers and with volume or spend-based discounts; a full plethora of allocation, capacity, and risk mitigation constraints that could define required and desired splits, address risk mitigation or mandate awards to a set of products, suppliers, and or regions, etc.; and could automatically generate what-if scenarios based on automatically adding or dropping previously defined or newly defined constraints, historical versus current pricing models, and other factors. In addition, import and export was streamlined from RFX, Auction, spreadsheet templates, and ERP systems (where standard transportation and overhead pricing was kept). State of the art report generators and OLAP capability was integrated so that not only could you generate scenario reports and comparative reports across scenarios, but you could also dive in to see what was driving the savings against the current sourcing strategy and, more importantly, what was driving the costs compared to the unconstrained baseline scenario (and zero-in on what business rules might be too costly).  ]

The reality is that the average best-in-class organization is only doing T-CAP strategic sourcing decision optimization, and is still far from achieving TCO. Basically, when the average organizations build their cost models, they are focussed on the costs of acquisition and production (and distribution) of the goods they are buying. They’re not incorporating downstream maintenance, service and return costs and not considering end-of-life reclamation, recycling, and disposal. Nor are they breaking the acquisition cost models down to determine the upstream impact costs associated with the supplier or production method. For example, if the supplier runs their factory on dirty coal and the company has pledged carbon neutrality and has to buy carbon credits to achieve their goal or the working conditions in the factory are unhealthy (and the factory would be closed down if it was in America) and this adds more fuel to the fire of the CSR activists and is costing your organization brand value, these costs also need to be considered. As a result, the organization is capping its potential return from optimization. Not only is the organization not achieving TCO, but it’s no where close to achieving TVM (total value management), which is what it has to achieve if it wants to realize true optimization 2.0 mastery and move on to optimization 3.0.

And the average organization is not even thinking about the more advanced opportunities that the next generation 3.0 capabilities will enable. Right now, the leading strategic sourcing decision optimization vendors are integrating new capabilities in the new versions of their products that are currently in development, with some basic 3.0 capabilities already released! The convergence of big data, advanced analytics, and decision optimization into a single platform is enabling a host of new capabilities that the average organization has not yet envisioned, including the 6 next-generation advanced sourcing optimization capabilities outlined in Sourcing Innovation’s new white paper on Optimization, What Comes Next (registration required), sponsored by Trade Extensions (which is one of the vendors working hard to give you tomorrow’s optimization solution today).

Companies that master the 6 next-generation advanced sourcing optimization capabilities described in Optimization, What Comes Next (registration required), will not only be the first to master optimization 2.0, but will be the first to enter the world of optimization 3.0 and find savings and cost avoidance opportunities that they never even knew existed.

Are you ready to crank the amp and take it to 11? If so, download Optimization, What Comes Next (registration required) today!

^*1 search the SI archives if you don’t know who the seven are

^*2 the MindFlow Model, which was recognized as the first SSDO model to support multi-line item optimization back in 2000, actually supported this level of modelling back in 2000, an average of five-plus years before the majority of SSDO solution providers did

Admit it. You don’t. You have no clue. You’re still struggling with the basics of model building, data collection, constraint definition, scenario comparison, and, most importantly, when you should use optimization (always, but not necessarily to make the award decision). It’s math, it’s hard, you weren’t trained, and you’re already struggling to keep up with the increasing demands placed upon your Supply Management organization by the C-Suite, stakeholders, and suppliers.

But you should. Costs, including labour and energy, are rising across the board. Inflation is about to make its way back with a vengeance. Markets are uncertain and in some places unstable. It’s getting to the point where all optimization on a category optimized in the last three years is going to do is limit cost increases to inflation. Unless the model is expanded, the category is redefined, or an innovative approach is taken — there will be no more savings to be found.

As a result, you have to take your optimization to the next level. You have to go from T-CAP (Cost of Acquisition and Production/Utilization/Distribution) to true TCO (Total Cost of Ownership) as you work your way to TVM (Total Value Management). You have to learn how to take your modelling and analysis skills to the next level. And you have to be innovative in your application of optimization.

And what does that innovation look like? To find out, download Sourcing Innovation’s new Illumination white-paper on Optimization, What Comes Next (registration required). Sponsored by Trade Extensions, this white paper presents six ways you can merge big data, analysis, and optimization to take strategic sourcing decision optimization (SSDO) to the next level and find savings and cost avoidance opportunities you would never have imagined even a year ago.

The reality is that even if you’re Hackett Group top 8%, regularly applying SSDO to high-dollar and/or strategic categories, and building nine, and even ten, figure sourcing events on optimization, you’ve barely mastered the basics of optimization 2.0. Since the doctor regularly interacts (and sometimes works) with five of the seven providers of SSDO technology (and the two e-CHAOS hold-outs have not upgraded their platforms substantially in years), including the true market leaders, he knows the extent of the projects they have supported and knows that even the most advanced organizations are just scratching the surface of optimization 2.0. But these providers are now taking their products to the next level and have started releasing the foundations of 3.0 capability, with lots more to come over the next few years. The organizations that adopt, and master, these 3.0 capabilities first will be decades ahead of their peers in supply mastery. Decades.

So, if you want to be one of this decade’s Supply Management leaders, download Sourcing Innovation’s new white-paper on Optimization, What Comes Next (registration required) and start preparing for the future of optimization today. It will be worth your while and when you start applying these techniques, you won’t be disappointed.