Category Archives: Technology

RiverLogic: Bringing Optimization to the Enterprise

In our last two posts on Beyond Sourcing Optimization we noted that Strategic Sourcing Decision Optimization (SSDO) is just one area where optimization can be successfully applied in a progressive organization that is a leader in its industry. An average enterprise organization is ripe with opportunities for the application of optimization technology — optimization technology which can easily add up to 5% to the bottom line if properly applied.

RiverLogic, which is advertising prescriptive analytics technology and enterprise optimization, is one such company that is tackling enterprise optimization. Advertising holistic decision support that performs simultaneous optimization of the entire business model, the optimizer is capable of integrating demand, production, and inventory optimization into a single holistic optimization model that, when run, optimizes production and inventory against demand to maximize profit by optimizing revenue against production and inventory (carrying) costs.

As one may have gathered by our previous post, this is no easy feat. Production optimization requires one type of model that understands production line throughput, machine utilization overhead costs per hour or unit, associated workforce requirements, associated costs during regular and over time, raw material inventory costs, and logistics costs at different production levels. Inventory optimization is a different type of model that must take into account the myriad of costs that contribute to the amortized inventory carrying cost and that include, but are not limited to, warehouse overhead costs, labour costs, and depreciation costs and balance these against logistics costs from more or less frequent orders. Finally, demand optimization is its own beast as one has to have a relatively good understanding of the different types of marketing spend and how each will influence market demand, the costs of production at various volume levels and delivery commitments, the associated lifecycle costs including outbound distribution costs, warranty and service costs, and any end-of-life reclamation costs (if one or more locales in which the product is being sold have mandatory reclamation or recycle laws for the product or one or more of its components). Now, one can create a mega-model that encapsulates inventory and production costs into the demand optimization, but it’s not easy, and that’s why few companies have tackled this problem (just like few companies have tackled true SSDO). And most that have tackled this problem do so by building custom models for their clients that require individuals with advanced degrees in Mathematics or Operation Research to run.

However, the RiverLogic platform, like leading SSDO platforms, comes with this model “out-of-the-box” and all a user has to do to build a basic model is get the data. At this point you’re probably thinking this is a show-stopper as

the amount of data required to populate such a model is extremely extensive and
outside of the ERP, no one system has even a fraction of the data required.

RiverLogic understands this perceived dilemma as well and that’s why their platform integrates with over a dozen major ERP and Accounts Payable systems because when you get down to it, that’s where the majority of the cost data required for a holistic demand optimization model, that simultaneously balances inventory and production, resides. Once the proper integrations are done, the model can be run out of the box and the organization can instantly see relative to its demand forecast the optimal production and inventory levels (and, as a bonus, the optimal distribution plan and cost model as logistics are also accounted for in this holistic model). This will allow an average organization that has not simultaneously balanced these models before to shave at least an extra 5% to 15% off of overhead costs and, if one or more of these models haven’t been run before, even more. And these savings will trickle down straight to the bottom line the instant the plans are updated.

But the power of the platform doesn’t stop there, like the best SSDO solutions, it also supports powerful what-if optimization that allows the organization to see how production and inventory plans change if the demand projections were to change, if more money was allocated to marketing, or if the estimated impact of marketing campaigns were more or less successful than initial predictions. This model can be run any time and plans updated dynamically, taking effect with the next (automated) order upon publication to the demand / inventory / order management module of the ERP(s) that the platform integrates with.

Now that leaders like you are using decision optimization in your Sourcing and advanced spend analysis in your planning, you’re ready to apply that knowledge and capability across enterprise operations and, as such, are ready for the enterprise optimization (and prescriptive analytics) that innovators like RiverLogic are offering. RiverLogic is one of the handful of companies you’re going to be hearing a lot more about in the coming year
and one that should definitely be on your radar as you look to take cost control across the enterprise (because what good is saving 10% on a category if poor operations just eliminate that savings after the deal is signed?).

Seventy Years Ago Today …

… we entered the communication space age with the successful completion of Project Diana, an experimental project of the US Army Signal Corps in 1946 to bounce radar signals off of the Moon and receive the reflected signals. The first experiment in radar astronomy, it used a large transmitter, receiver, and antenna array constructed for the purpose in a laboratory at Camp Evans. The transmitter, provided 3 kw at 111.5 MHz in 1/4 second pulses applied to the antenna, a reflective array attend composed of an 8×8 array of half wave dipoles in front of a reflector that provided 24 dB of gain. Reflected signals were received about 2.5 seconds later (which is the time required for the radio waves to make the 768K km / 477 mi journey), proving the technique and successfully completing the experiment.

While moonbounce communication was not that practical (outside of its use in radar astronomy to map Venus and other nearby planets), as it was abandoned by the military with the advent of communications satellites a mere two decades later, and is now only used by amateur radio operators, it did usher in the communication space age and should not be forgotten.

Technological Damnation 88: Algorithm / Computing Leap

This damnation is like damnation 76 Cybersecurity / Cyberattack. Unlike Social Media, Big Data, and The Cloud, it’s not even on the radar until it happens. And it will happen, it’s just a question of when. While rarer than Cyberattack, which although a daily event in the news, for a given company, unless you’re a public Global 3000, is probably only a potential issue a few times a year (and if IT is doing its job, the Firewalls are going to keep most hackers, and all of the wannabes, out). But every now and again, those walls get breached and if consumer, or credit, data gets stolen, then it’s damnation #1 (at least until resolved).

Similarly, new innovations hit the market every day, and every few years, some of them are big. Really big. So big they disrupt entire business models and those companies not ready don’t survive. But it’s not just IT companies that have to fear computing leaps, it’s Procurement too. Computing leaps and new algorithms will eventually seep their way into enterprise platforms, and while Procurement platforms may not be the first platform to see improvements, they are coming, and any organization that isn’t ready to be an innovator is going to be a laggard, and while innovators save, laggards lose. Innovators that adopted leading e-Invoicing platforms early, and got 85%+ of invoices electronically submitted using a standard protocol that allowed 85%+ of those to be automatically processed and approved without manual intervention, were able to reduce manual invoice processing requirements by 70%, reduce invoice overpayments by a similar amount, and, most importantly, free up that time to get more spend under management. If this increased sourcing events by 50%, and increased spend under management by 30%, that’s significant. Very significant!

So why is this a damnation, since every leap is good? Because you don’t know when it’s coming. You don’t know where it’s coming. And you don’t know what the fallout will be. And because you’re so overworked and so understaffed, you don’t even have time to think about this. Unless you are one of the handful of companies that is lucky enough to be in the right place at the right time and find out about the right product that you can be one of the few beta testers for, you’re not going to know about it until your competitor suddenly takes 5% off the bottom line, increases profit 3-fold, and gets the Procurement budget to advance leaps and bounds ahead of you, grow their supplier management teams, and have the resources to work 24/7 to be the customer of choice while the best suppliers relegate you to be an afterthought.

Uncertainty, while often forgotten and out of mind, is a damnation all the same.

The Island of IT, Part II

Today’s guest post is from Torey Guingrich, a Project Manager at Source One Management Services, LLC who focuses on helping global companies drive greater value from their indirect expenditures, such as IT and Telecommunications investments.

In our last post we noted that even some of the most mature Strategic Sourcing departments tend to struggle with IT because IT spend is off limits or out of reach for traditional sourcing and procurement efforts. We then examined the three most common excuses, or hurdles, and provided some guidance on how to overcome them. Once you convince IT to give Procurement a chance, the next step is to …

DELIVER THE VALUE

Once you have overcome these hurdles with IT stakeholders, it is critical to follow through with the value that Procurement has promised in the sourcing and contracting process. Looking at a need identified by IT through a sourcing lens will likely lead to better defined requirements and a better relationship between the IT department and the supplier with whom they ultimately work.

Sourcing: Competitive bids and the RFx process can, and should, be used for IT and telecommunications initiatives. Because IT departments tend to partner more closely with their supply base as compared to other indirect categories, it can be easy to accept a proposal or pricing from a supplier who knows the company’s systems and basic requirements quite well. While this may be a faster route, Procurement needs to help IT ensure that the supplier’s proposal is the best fit for the organization’s needs and is competitive in the market. Work with IT to develop an RFP that allows suppliers who may not be as intimately connected with the department to propose innovative solutions and competitive pricing.
Scope and Deliverables: Once Procurement and IT have worked together to award an initiative to a supplier, Procurement’s value will be further demonstrated while going through the contracting process. Press your IT stakeholders to clearly define their expectations, the scope of the project, and the deliverables that the supplier will provide. Many business owners tend to think in “end state” deliverables, but be sure to inquire whether there are processes or defined stages that the supplier is expected to go through to get that end state, e.g., system, integration, and/or user acceptance testing. While there may be assumed expectations, work with IT to ensure those assumptions and expectations are defined.
Timelines and Acceptance: While working with IT to define the agreement deliverables, tie in timelines and dates for the company’s acceptance of mid-stream deliverables. Ensure there are key checkpoints prior to the final acceptance testing window to minimize rework or changes that need to be made. Also, be sure to use a critical eye when defining acceptance procedure and timing; often suppliers will insert language that assumes acceptance if no formal communication is received by a certain number of days. While this is intended to keep projects moving forward, you can change this language to require an affirmative acceptance by the company or at the very least, ensure the timing for default acceptance is ample enough to allow for any internal reviews that may take place.

While IT systems, products, and services may not be second nature, treat your business owners in a way that lets them know you are there to help ensure their requirements are met and their budget is maximized. IT — more than any other area — seems to consistently have budget on the chopping block, have projects pushed out year after year, and be asked to do “more with less”; by becoming a solid partner and delivering value to this group, you can not only help them make better buying decisions, but actually achieve their departmental goals.

Thanks, Torey.

The Island of IT, Part I

Even some of the most mature Strategic Sourcing departments tend to struggle with IT. IT spend is off limits or out of reach for traditional sourcing and procurement efforts. Let’s look at a few excuses that tend to pop over why IT can, and needs, to act independently, how to bridge that gap, and what value can ultimately be delivered by Procurement.

HURDLE #1: IT IS TOO COMPLEX

Often Procurement professionals can feel intimidated by the technical aspects of IT initiatives which results in IT departments tending to make decisions in a silo. Consider other “highly complex” categories that sourcing takes on (e.g., chemicals, raw materials, assemblies). While these may seem complex to those who have not worked with them in the past, with experience, training, and research these categories fit very well into the core competency of Procurement departments.

Overcome the “complexity” hurdle: It is vital to partner with stakeholders for sourcing and spend management within all categories. Devoting time and energy to gain a basic understanding of the IT software and services being purchased comes with the territory of working in Procurement. Begin reviewing past contracts, SOWs, and the structure of IT-related initiatives to become familiar with different components of these projects. By simply reviewing what has been done in the past, you can begin to see the patterns in the way these services are provisioned and priced. Also, utilize the knowledge of IT counterparts; more than likely they will be very open to explaining the purpose and goals of the services needed and impart critical knowledge to help you get up to speed within the category.

HURDLE #2: IT SPEND IS ALWAYS SOW AND/OR LICENSE DRIVEN.

While this may seem the case more often than not, SOWs and licensing agreements can be improved when reviewed from a sourcing perspective and should still be under Procurement’s scope.

Overcome the “SOW and license” hurdle: First, for those projects that are truly unique, by defining deliverables and tracking the details of an SOW within spend management tools, Procurement and IT will gain real visibility into the spend figures within the organization. Secondly, there are plenty of components of IT that tend to be more standard or follow a relatively simple pricing structure (equipment, telecommunications, etc.). You can use these inherently simpler areas as a starting point for review of categories within IT. Look at an IT need and try to breakdown the components for a better understanding. For example, software contracts typically have the same components (license fee, maintenance, support, and fees for any customization/unique support) and these can be looked at as separate components to gain a full understanding of the software and services being provided.

HURDLE #3: IT CAN’T BE STANDARDIZED.

While IT services and products are less likely to be standard, there are portions of spend and pricing methodologies that can be standardized within an agreement. It is Procurement’s role to seek out these standard components and get past the sales-speak that suppliers may present to end users.

Overcome the “non-standard” hurdle: Similar to the “SOW and license” hurdle, it is important to seek out the portions of project that are, or can be made, standard. Armed with the market intelligence and past contracting experience that Procurement brings to the table, suppliers are more likely to work on defining rates for specific roles, the number of trouble tickets/service calls included, license discount bands, and other components where Procurement can push for standardization. As we discussed above, you can work with IT suppliers to unravel the bundled components of spend to first understand the components and then determine what is actually standard. You will find that while a supplier may claim that an entire solution is custom, there are large portions of that solution that are very standard and should be treated as such.

Once Procurement has overcome the hurdles, the next step is to deliver the value. We’ll discuss this in Part II.