Posts filed under 'Optimization'
May 8th, 2008
Sean Delaney - Iasta UK
Well I couldn’t resist this…especially since I was once one of these buyers. What is more interesting for me is that having crossed over to the “other side”, the negotiating styles used by the supermarket buyers (Tesco’s etc) certainly sounded very familiar.
When showing these tactics to Duncan Bullivant, the Chief executive of Henderson Risk Group, a seasoned hostage and kidnap negotiator, the article writes “even he was surprised”. Duncan then goes on to say ”not only do I recognise the phrases, I recognise all these tactics in every aspect of business I have done in the last few years.”
The tactics and behaviours during negotiations have evolved over the years from being more physical, to more psychological. For example, not long ago there was the story of one buyer, who used to attend meetings with a water pistol, and fire water, at the supplier, if the supplier didn’t meet his demands. Is this procurements’ equivalent to water boarding?
One strategy is called the “clock face” which involves 41 sequential steps as the buyer seeks to coax the best price out of the supplier. Tactics include threatening to de-list the supplier (which in reality could lead a supplier going out of business), threatening to go over their head to their bosses, play good guy and bad guy, deliberately misunderstanding something, and just when you think you may have made it, the final stage is the partnership stage. This is where suppliers may be deliberately left to feel the odd one out, before bringing them back into the fold.
Tired? Well, I certainly was after reading it! Quite clearly those more sophisticated suppliers will prevail and there is already evidence of this. Furthermore, as the supply base consolidates, and they become equally sophisticated, an impasse will inevitably be reached. With raw material prices rising so rapidly, I think this may be the final tipping point in relations.
However, back to negotiation techniques used, I can’t help feel that there is a serious case for the automation of the negotiating process. How much more sophisticated can one get? I would argue that in the future, it is imperative to keep it simple. Capacity constraints, and the securing of scarce resources, are going to be the key sourcing variables.
Entry Filed under: Global Supply Issues/Risk, Optimization, Reverse Auctions, Sourcing News, Supply Management Best Practices, e-Sourcing Marketplace
February 19th, 2008
David Bush - Iasta
Industry Week is on a roll as of late. In addition to their recent article on Best Practices in Freight Bidding, that Michael Lamoureux summarized in this post, they just published on article on 10 Strategies to Drive Down Your Transportation Spend that was rather good. In brief, the strategies were:
- Keep your network flexible to take advantage of cheaper and more economical freight lanes.
- Set budgets and measure spend against budget on a regular basis.
- Negotiate constraints for price, capacity, and capability over the long term.
- Implement postponement strategies that allow you to reduce lead time and improve cash flow.
- Monitor and enforce inbound compliance.
- Optimize your transportation planning.
- Consolidate all outbound shipments. If you pay for the truck, use it to its full capacity.
- Improve supply chain visibility. Know where your shipments are when, and why.
- Monitor and audit all invoices and shipments. Only pay what you have agreed to under contract.
- View transportation and trade as one integrated process.
Finally, and I can not stress this enough, use strategic sourcing decision optimization when making your award decision to insure that the award you select will enable you to keep your transportation costs down. Otherwise, you might think you save big on the unit cost only to find out that your transportation costs double.
Entry Filed under: General, Optimization, Supply Management Best Practices
February 18th, 2008
Michael Lamoureux
Industry week recently ran a good article by Chris Ferrell of Tompkins Associates on Best Practices in Freight Bidding that had a number of good suggesstions. The article offered up the following 12 best practices:
- Obtain commitment from executive management.
This is always a good idea, no matter what project you are undertaking.
- Benchmark current freight costs.
Also, separate out fuel surcharges from basic freight spend.
This is critical. After all, how can you do better if you don’t even know how well you’re doing now?
- Include new transportation providers in the bid process and allow carriers to bid on different markets.
This should be obvious, but I’m afraid it isn’t. If you always have the same carriers bidding on the same lanes, they’re going to figure this out eventually and keep their rates in sync to maximize their profit, which is akin to minimizing your savings.
- Standardize bid formats to ensure apples-to-apples comparisons.
This should be a no-brainer.
- Have a minimum of one year’s worth of clean historical data.
Not sure I understand this one. You should have good projections of what your freight requirements are going to be, by market and lane, for the next year and these should be based off of solid demand projections that use at least a year’s worth of good, clean, data and preferably two or three years!
- Look for opportunities to decrease cost by changing transportation modes.
Never assume your current transportation network and strategy is optimal. For instance, just because ocean looks cheaper, doesn’t mean it is. Consider laptops. Their value depreciates weekly. If you can make them light enough, and pack them tight enough, air freight will be more profitable.
- Use a multi-round bid process.
You should definitely use a multi-round RFX, to qualify potential award recipients, but not necessarily a multi-round bid. Depending on the market conditions, the number of potential carriers, your needs, and how clearly you can specify those needs up front, a well-defined auction that takes into account all costs and factors, appropriately weighted, might be your best bet.
- Encourage carriers to take a more holistic look at your freight.
Good carriers will know their networks and how to optimize them much better than you will know yours. It’s their job. They might be able to come up with alternative bundles, modes, or schedules that could save you a significant amount of money.
- Leverage volume through a relatively small group of core carriers.
This is a basic tenet of sourcing, period. Just make sure that you split demand through a small group, and not a single carrier - because this would introduce a significant risk into your supply chain.
- Bid freight on a regular, predetermined basis.
Like any other bid, it shouldn’t be done ad-hoc. It should be by major sourcing project or at regular intervals.
- Put as much effort into implementation plans as you do the bid.
Remember that negotiated savings are just that - negotiated savings. To realize them, you need to be ready to do what it takes.
- Track carrier performance against commitments and utilize feedback loops.
You should not only track performance, but verify invoices using m-way matching and analyze historical performance using spend analysis to find overpayments and secure the credits or refunds before the contract expires.
Although the doctor is an expert in transportation network modeling, and well versed in freight, there are other bloggers out there who are experts in freight bids and freight auctions, a few of whom run projects on a (very) regular basis. He knows at least a few of them check this blog from time to time. Maybe they’ll chime in with a few tips of their own.
Entry Filed under: Optimization, Reverse Auctions, Supply Management Best Practices
February 7th, 2008
David Bush - Iasta
Last month, Global Services Media ran an article titled Sourcing: From Art to Science that noted that not only do today’s approaches to managing global sourcing rely primarily on antiquated methods for project scoping, but that they also fail to put into place real-time metrics to assess productivity. The article also notes that nearly half of sourcing relationships that rely on distributed global teams sour and fall far short of expectations. Those aren’t good odds.
The author states that he believes that we need to build a more sophisticated infrastructure of tools and methods to manage the complexity of working globally. This is because global teams create levels of complexity in management, metrics, and productivity that come with a price. Furthermore, the author states that he believes that the answer lies in real-time dashboards that provide instant metrics on productivity and immediate visibility into a process collaboration, problem situations, and new opportunities.
Now, while I wholeheartedly agree with the need for better visibility, I have to say, especially after discussions with the doctor who has his own views on dashboards (in short, they’re dangerous and dysfunctional), that I do not agree that dashboards alone will solve the problem. Although they might tell you, assuming they’re built properly, where you’re not performing at estimated peak efficiency (and where there’s room for improvement), they won’t tell you why or what you can do about it. Plus, if the metrics say you’re doing well, you can be lulled into a false sense of security. This would be bad if someone came up with a more efficient way to do a process, which you completely ignored because you thought you were doing well enough.
To me, the answer is more science, and more visibility, but it comes in the form of collaborative project management and deep analysis. This requires an e-Sourcing platform that is fully integrated and configurable, to give each team member the access he or she needs, and that tracks project status and outstanding tasks in a simple manner that allows quick access to current projects and tasks. Furthermore, and this is key, the platform needs deep analytics - in the form of spend analysis and optimization - to allow the sourcing team to uncover issues and model the total costs of a potential award so that the best decision can be made going in. In other words, more science is the answer to your sourcing pains, but real-time metrics in a dummy dashboard is not enough.
Entry Filed under: General, Optimization, Project Management, Spend Analysis, Supply Management Best Practices, Technology
February 6th, 2008
Michael Lamoureux
Optimization can not only be used to reduce cost, but it can also be used to reduce risk. In this post I’m going to overview how you can effectively support seven common risk mitigation strategies in a proper strategic sourcing decision optimization solution (including the solution offered by Iasta, if you’re wondering).
Capacity Assurance
You can create exclusion constraints that restrict supply to suppliers with a minimum amount of capacity to insure that the suppliers can handle the award they receive. Furthermore, you can create qualitative constraints that restrict award to suppliers with spare capacity to insure you can cope with unexpected demand surges. Although forecasting significantly more demand than you actually have is bad, especially if you stockpile inventory and don’t dynamically order and pull as needed, forecasting significantly less demand and not being able to meet that demand is much worse - because then your brand takes a big hit in the public market, which is much harder to recover from.
Compliance
These days, there are a dizzying array of regulations that may need to be complied with such as REACH, RoHS, Part 11, ITAR, and SOX (etc., etc., etc.), and failure to comply with any one of these regulations can result in huge fines, delayed or stopped shipments, or confiscation and destruction of inventory. Thus, it’s key that you insure that each product you source meets the regulations that you have to meet. Optimization supports this by allowing you to exclude suppliers that don’t meet any of the requirements, and limit supply to suppliers that only meet the standards of some of the countries you ship product to.
Distribution Alternatives
A strategic sourcing decision optimization solution that supports freight lanes can support multiple carriers, allowing you to select the lowest carrier, and lowest cost shipping lane per carrier, between a supplier warehouse and a buyer distribution center. (If the product doesn’t support multiple shipping lanes per carrier for each warehouse-distribution_center pair, you can always create a second instance of the carrier and associate that with alternate routes. You can then account for total volume discounts offered by the carrier by defining the discounts on all instances of the carrier.)
Dual Sourcing
From a risk mitigation perspective, sole sourcing is a bad idea. A really, really bad idea. With decision optimization, you can use allocation constraints to force an award to at least two carriers, and even specify an approximate award breakdown, such as a 20-30-50% split between the three lowest cost carriers.
Incentives / Performance Based Contracts
Let’s face it, some suppliers will perform much better if they get a bonus for good performance. By using negative discounts, you can determine how much a given award would cost you if the supplier performed exemplary under an incentive structure, and by using penalties, you can determine how much an award would cost if the supplier performed poorly (providing you also factored in an adjustment for the higher cost of processing more returns).
Lead Time Reduction
You can use a qualitative constraint to capture the average amount of delivery time for each carrier on each lane and limit awards to a given distribution center, set of distribution centers, or all distribution centers to product from supplier warehouses that can reach the destination(s) in a maximum (average) timeframe. Thus, if you’re selling a product for which demand can fluctuate significantly, you can make sure you can always restock within a given timeframe as soon as the sales data starts to spike unexpectedly.
Price Hedging
Strategic sourcing decision optimization can help you figure out what contract length might be optimal for a given commodity. For example, if your predictions are that oil is going to keep rising for the next year, with a peak price that’s $20 per barrel above what you’re paying now, and your main supplier thinks that it’s going to top out at a peak price that’s only $10 per barrel more than what you’re paying now, and is willing to give you all the oil you need at only $5 more per barrel than the current market price, you can run scenarios for a 6 month demand window and a 1 year demand window at different price points. Then, you can see that if cost keeps increasing at a rate that is only two thirds of your prediction, it’s probably better to hedge for a full year.
And, of course, proper strategic sourcing decision optimization also gives you:
Total Value Management
Since it allows you to capture all your costs - unit, freight, utilization, and impact costs (by way of adjustments) - as well as any discounts available to you from a supplier for the purchase of certain products in sufficient quantities. This means that you’ll always get the lowest total cost of ownership with respect to your business constraints.
Entry Filed under: Global Supply Issues/Risk, Optimization, Supply Management Best Practices, Technology
January 31st, 2008
Sean Delaney - Iasta UK
In a previous entry I talked about how the utilisation of Spend Analysis software makes the rational of a vendor reduction programme less relevant. When reading the latest report from The World Economic Forum on the risks for 2008 I am convinced this logic will now start to gain more momentum.
According to the WEF there are 4 major risks to be aware of over the forthcoming decade. What is most disturbing is that all 4 will have an immediate effect on sourcing decisions.
In summary these are:
• Systematic Financial risk – this has already been well documented in recent weeks. The lack of liquidity in markets will have a negative effect on business investment and therefore increase capacity constraints in the global supply chain.
• Food Security – Global food prices are at record highs whilst stocks are at 25 year lows….”population growth, lifestyle changes, use of crops to manufacture bio fuels and climate change – are likely to sharpen over the coming decade”. There is already evidence of this in the UK. During the last 10 years land used for Agricultural purposes has fallen by 8%. In addition land still in use is increasingly being used for the production of Bio fuels. The price of wheat is at all time high. Furthermore during the same period the population has grown by 2m to 60m – this is predicted to grow to 69m by 2027!
As anicdotal evidence of the scale of the shift the other day I was at my son’s children party. When I was talking to one of the Dads he mentioned that an old colleague was, until recently trading currencies and he is now trading livestock in Australia…buying millions and millions of dollars of cattle one day and selling the next. What’s more is he is achieving higher returns than he was when he was trading currencies.
• Supply Chain Vulnerability – “Improvements in technology and global logistics, along with reduced trade barriers, have led to a historic expansion of international and intra-regional trade over the past 20 years”. Although this has widely been seen as a benefit the WEF are saying now our risks are too concentrated in core areas. For example the concentration of raw material ownership in the hands of say State controlled funds or the impact on wage price increases in China.
• Energy – the increasing demand for energy coupled with the requirement to reduce CO2 emissions is going to cause difficulties. I am already seeing the growth in the demand for specialist energy buyers to mitigate organisational risk. However when we see 17% increase in fuel bills universally applied by all suppliers, clear evidence of collusion in the market and what is worse more political influence on the supply it seems that such a move is now punitive.
I would like to add a fifth risk that since none of these risks were mentioned in the same report for 2007 volatility caused by globalisation should be added too!
From this it is quite clear that there is need for global supply chains to be more diverse and as mentioned before this can be achieved with decent (real time as possible) spend analysis. Furthermore this technology should be used to monitor production, commitments and deliveries. Reports should also include commitment further down the supply chain.
The use of sourcing optimisation technology is now essential and especially the use of “what if” scenarios is a must. In fact the speed of change could require optimisation scenarios to be computed more frequently and not just at the point of “award”. This would allow for the inclusion of such things like the effect of climate changes to raw material stocks or the increase in the average wage in China.
It is now obvious that it should be a priority to use both of these technologies. However what has struck me is that combining these technologies together would achieve far more powerful results. I don’t know the exact probabilities by my guess is that the benefits would be exponential and thus reduce the probability of major a catastrophe in a global supply chain.
Entry Filed under: Analysts/Research, General, Global Supply Issues/Risk, Optimization, Spend Analysis, Technology
January 16th, 2008
David Bush - Iasta
SCDigest ran a commentary recently which spelled out five recommendations for improving your results for eSourcing.
- Prioritize The Trinity Of Reliability, Quality And Price
Very true, eSourcing does not change what you would normally do when going through a sourcing exercise, it just enhances it. If you sense the loss of a critical milestones, recalibrate and get it right.
- Use e-Sourcing Strategically
SCD claims here that not all projects are suited for eSourcing. This is a classic trap and not true. It is true that not all things should be reverse auctioned, but teams should get used to using other tools like RFx and optimization for specialized opportunities. Additionally, the sourcing team should be capturing the spend information to maintain quality reporting in the management dashboards.
- Provide Clearly Defined And Relevant Specifications
Again, to point one, have good specs whether you are on or offline line and issuing a bid. Otherwise, you should just “re-order” and not “source”.
- Focus On The Quality, Not The Quantity Of The Supplier Pool
Here is a good point and where your sourcing organization needs to get serious about using RFx technology to the fullest of its capabilities.
- Encourage Suppliers To Participate In Shaping Negotiating Terms
Using collaborative bidding tools like multi-round RFx or optimization allow a much more interactive bidding experience and where suppliers stay engaged and productive for the entirety of the project.
Don’t forget the most important one!
Utilize your eSourcing vendor for high quality support and guidance in eSourcing best practices. In all likelihood, they have already been there and done that, with regards to the problems that you are staring down.
Entry Filed under: General, Optimization, Reverse Auctions, Supply Management Best Practices, Technology, e-RFx
December 5th, 2007
David Bush - Iasta
Recently, Supply & Demand Chain Executive reported on the annual 3PL CEO survey by Penske Logistics and Northeastern University. The survey, which found that many CEOs are optimistic about global expansion opportunities and the overall growth prospect for the industry, also had some good news for Sourcing:
- 87% of survey respondents indicated that procurement is more involved in the logistics provider selection process than ever before
- 87% of companies have taken steps to address the pressures of more service for less and pricing pressures - an area where procurement can play a key role
The fact of the matter is that procurement should not only be involved in logistics provider selection, but should be involved before the award is made since logistics costs can often more than offset the expected savings from switching to a new supplier if not taken into account during the award process. That’s where modern strategic sourcing decision optimization technology comes into play. It allows you to make sure that the award will have the lowest total cost - and that you don’t make an award that actually costs more than the award you made last time because you failed to factor in more expensive transportation costs and import / export duties.
Furthermore, only procurement is in the right position to address the severe price pressures being placed on an industry where more is constantly being demanded for less. The only ways you can increase service without decreasing profits are to increase efficiency or decrease costs - and this is what procurement excels at. As more and more companies begin to realize this, we should see a brighter dawn for procurement.
Entry Filed under: General, Optimization, Supply Management Best Practices
October 8th, 2007
Michael Lamoureux
Even before Aberdeen came out with its “Success Strategies in Advanced Sourcing and Negotiations: Optimizing Total Costs and Total Value for the Next Wave of E-sourcing Savings” in June of 2005 where they determined that “the application of optimization tools to analyze total costs, and of flexible bidding functionality to uncover creative supplier solutions has enabled early adopters to identify average incremental savings of 12% above those that basic, price-focused auctions alone have generated“, some of us already knew that decision optimization was the future of strategic sourcing.
However, even though Aberdeen confirmed this result in their January 2007 follow-up entitled “The Advanced Sourcing and Negotiation Benchmark Report: The Art and Science of the Deal” which found that “enterprises that are employing advanced sourcing techniques are still identifying an average savings of 11.9% per sourcing event” and that “best-in-class enterprises are identifying an average savings of 13.7% per event“, I still need to ask the question Why Aren’t You Optimizing Your Sourcing Decisions?. Despite the hundreds of success stories that can be culled from previous customers of some of the leading vendors, only 21% of companies plan to consider such technologies in the next two years. I can not help but ask why?
Many innovative service and solution companies in the e-sourcing marketplace have been betting for the last five to ten years that optimization is the wave of the future. It’s true that many have met with limited success to date, and that many more are out of business, but this is simply what happens in an emerging industry, especially when it’s on the tail end of a boom. The reality is that, in their haste to get something to market, many of these companies did not understand what optimization really was, did not have the expertise or skills in house to pull it off, did not focus on usability, did not enable their customers in the collection and cleansing of the large amounts of data required, did not integrate well with the other sourcing products that encapsulate the processes that come before and come after decision optimization, or failed in all these regards. Furthermore, many customers were not ready as you need a good process in place, need the tools to collect the data, and need the right training in strategic sourcing to maximize benefit from such a tool.
But we’re not in the late nineties anymore - this is the late naughts - and many things have changed. Many leading organizations not only make use of leading e-Sourcing technologies in their end-to-end sourcing process, but have good e-Procurement and data management technologies as well. They have highly capable people, have squeezed a lot of the fat out of supplier margins through e-Auctions, and have sufficient data to do meaningful spend analysis to spot opportunities. But even though they are prime for it, they not only are not using, but are not even considering decision optimization technology. And I’m puzzled!
Is it because they think it’s not appropriate to their situation? Is it because they think you need a Ph.D. to utilize such technologies? Is it because they think the products are just not where they need to be? As I’ve argued before, optimization is always appropriate - even if just a sanity check on the intended award. There are a few situations where it will not save you money, but these are very few and far between and neither I, nor any company I’ve worked with, have ever encountered a situation where it didn’t eek out at least a couple of additional percentage points of potential savings on any moderately complex scenario. Although you often need a PhD to design and build these tools, there’s no reason the user interface needs to be any more complicated than your run-of-the-mill business intelligence tool that you use every day - and the good providers realize that and have spent a lot of time, effort, and money, making the tools easy to use. Although many of the tools even five years ago were just not where they needed to be in at least one respect, that’s not the case today. Many are where they need to be, or close enough, for many common scenarios that their application will realize the savings that Aberdeen has found.
With rising raw material and energy prices, rising transportation costs, lengthening lead times due to labor force shortages and increased regulation, and constant consumer demand for shorter product cycles and lower costs, the time for decision optimization is now. If you have it as part of your e-Sourcing, e-Procurement, or e-Logistics suite, use it. If not, get it. There are good solutions out there now, and no reason not to use them.
For more information on decision optimization, and strategic sourcing decision optimization, check out the Strategic Sourcing Decision Optimization: The Inefficiency Eliminator wiki-paper over on the e-Sourcing Wiki, the two-part What is Supply Chain Optimization? podcast over on Next Level Purchasing (Part I Transcript and Part II Transcript), or my Decision Optimization posts over on Sourcing Innovation.
Entry Filed under: General, Optimization, Supply Management Best Practices, Technology
October 1st, 2007
David Bush - Iasta
For any one that subscribes to this blog and understands our position on eSourcing, my contribution to the 2007 Sourcing Innovation Series should come as no surprise. However, I forge these opinions, not by being locked up in a think tank with no access to sunlight, but with direct contact with practitioners, both client and prospective.
**eSourcing and advanced optimization have merged into one entity**
There is no question over the last few years that eSourcing has gradually increased in sophistication and the user community has also embraced this increase beyond simply running reverse auctions. Strategic sourcing teams now regularly combine project management milestones and multi-stage eRFx documents into projects and do it without hesitation. However, we at Iasta have been professing for over two years to add advanced sourcing optimization to that arsenal of tools. I have witnessed this grow in acceptance and seen people that are new to eSourcing come to the table with a fundamentally higher level of understanding. Taking a complex bid, and automating more of the lifecycle, is critical to compressing the amount of time needed, and thus, allowing more bids to be strategically sourced by the same number of people.
Specifically, I see advanced sourcing optimization being the catalyst which merges the function of the general business analyst with the sourcing team. Traditionally, a complex bid would go through the sourcing process and immense amounts of data would be collected. This, in turn, would be shuttled over to the business analysts assigned to support procurement. In many companies, this process could take 6 weeks, and that is optimistic and assumes the Director gave a due date! The power that advanced sourcing optimization provides, allows the sourcing team to manage the analysis themselves. They can derive very detailed scenarios in a matter of hours, instead of weeks. It also frees the business analysts to concentrate on many of the requests that they are getting from other departments, such as finance. In one example we were involved with, the business analyst still was not done with the scenarios after 8 weeks on a $25 million dollar bid which had captured approximately 10% savings. This was not due to him not trying, but he had too many other requests to get done which competed with his time. This delay was costing the company $208,000 per month in lost savings by not completing the analysis and awarding the contract. Meanwhile, our team had developed the correct scenarios for the award decision two days after the sealed bid closed. Needless to say, the benchmark we provided made its point!
Essentially, an eSourcing tool that provides procurement more independence and autonomy from other departments makes them more nimble and responsive. They also know what is needed right away and do not have to go through painful translation exercises to get to a final conclusion that probably needs to be adjusted once it is reviewed any way. Doesn’t this all sound like a spend analysis vs BI/DW discussion, too?
From my point of view, I see the next year, or more, being a continued transformation of procurement to self sufficiency, which removes layers of inefficiency. This is a practical and attainable goal that best in class companies already experience.
Entry Filed under: Optimization, Supply Management Best Practices, Technology, e-Sourcing Marketplace
September 19th, 2007
David Bush - Iasta
Some guy named Mike Lamoureux wrote guest commentary in the latest newsletter from Eyeforprocurement, on the in’s and out’s of sourcing optimization. Of course, its worth a read because optimization is technology that has a bark much worse than its bite. Meaning…its not as bad or complicated, as you think it is. Specifically, the end of the article mentions:
Whereas reverse auctions are often only good for squeezing the fat out of supplier margins, optimization solutions uncover true efficiencies. So, when your reverse auction fails to deliver any additional savings the third time you run it on the same commodity, decision optimization can still be used to find potential savings through improved inventory management, distribution, or dual-sourcing strategies. Strategic Sourcing Decision Optimization will transform your sourcing process for the better.
This is a classic evolution into the next phases of eSourcing for companies that have already experienced great results with the first few waves. Additionally, we see many companies coming to the table with a more advanced outlook on deploying and utilizing eSourcing concepts. More information on advanced sourcing and negotiations are available, at no charge from our sponsorship of an Aberdeen report on the subject earlier in the year.
Entry Filed under: General, Optimization, Supply Management Best Practices, Technology, e-Sourcing Marketplace
June 6th, 2007
David Bush - Iasta
I just got around to reviewing an Aberdeen study Winning Strategies for Transportation Procurement & Payment which was published in February. In it, there are many concepts regarding transportation sourcing which are interesting. Based on this study’s findings, companies seeking to improve their transportation procurement and payment processes should:
- Centralize their freight procurement operations and evolve beyond manual processes and spreadsheets.
- Implement a formal spend management process and encourage more innovation in their carriers’ bid responses.
- Mine spend management data to improve cross-functional business decisions.
Additionally, respondents were 1.5X as likely to manage procurement centrally and 1.4X as likely to use a procurement application for their carrier selection process rather than spreadsheets or manual processes.
In 2007, with freight rates starting to soften for some transportation modes, companies believe this is a great time to review procurement and freight audit & payment practices. Companies believe they can save an average of 8.8% on their overall freight budget with a more sophisticated procurement or payment/audit system.
Regarding procurement technology, Aberdeen adds:
Procurement technology helps companies improve staff productivity, negotiate more effectively with a larger carrier pool, and make better business decisions on which bids to accept.
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A pharmaceutical manufacturer needed to control $25 million in air and ocean freight spend. The company shipped across 900 lanes via three freight forwarders. It asked the three incumbents to give their best price to avoid an open RFP, and the forwarders came back with a total of $600,000 savings. The company decided to offer a wider bid and invite 10 firms to participate. The company let providers bundle and unbundle lanes and suggest alternate routings. After using the bid optimization tool to analyze the results, the company ended up selecting two of the incumbents but this time saved $6 million.
Bid optimization tools are also being prioritized by companies, especially those with large freight spends. These tools can manage the complexity that comes with multiple lanes and letting carriers bundle and unbundle lanes in their bid responses. Companies are realizing the benefits of competitive bidding cycles that encourage bid innovation.
The previous example is further defined in a case study from the Aberdeen Advanced Negotiation Benchmark which highlighted an Iasta client that performed a complex ocean freight bid, available here.
From this February report, one can easily conclude that procurement applications come in various forms, such as logistics specific or eSourcing applications which support bid optimization. We have found optimization to be widely applicable for all sorts of categories. Although a transportation specific tool is very valuable, most companies can benefit across more categories than freight which makes a uber-optimization tool much more useful. Not only can analysis be run to allocate awards and save significant amounts of time but sourcing professionals can also use optimization as a “sanity check” to verify that the pending decisions do not have gaping logical holes in them. Any organization that has delivery zones, items and suppliers should be thinking about how to implement sourcing optimization.
Entry Filed under: Analysts/Research, General, Optimization, Supply Management Best Practices, Technology
May 10th, 2007
David Bush - Iasta
I broke away from the many conference duties long enough to catch one workshop, e-Optimizing Your Strategic Sourcing Process. This was put on by Dr. Phil Carter and Dr Larry Giunipero and I had particular interest as I was one of the interview pool that they used while developing their findings on advanced sourcing optimization. They both made the trip to Indianapolis to meet with me and our leading optimization developers to discuss the industry, usage patterns and embedding new technology within the traditional strategic sourcing process.
Of course, they did a very nice job presenting the subject and did a particularly good job translating it down into manageable parts for easy comprehension. This can be a very complex topic and their discussion was useful for both a novice and moderately experienced users.
After going through some common strategic sourcing situations with assessments and strategy development, they captured the essence of where optimization should be applied. I commonly refer to this as my “Optimization Rule of 3s” for fundamental simplicity and they included two extra which are all based on large numbers of:
- Potential Suppliers (Rule 1)
- Items/services to be Purchased (Rule 2)
- Geographic Needs (Rule 3)
- Specifications
- Constraints/Business Rules
The last one, I believe is an implied application, since business rules and constraints are necessary by default to have any need for analytical assessment. According to their research, some commonly used constraints include: limiting spend with a supplier (or group), assigning a spend amount with a MWBE supplier, allocating business for specific traffic lanes or locations, and avoidance of single sourcing.
Also, the research pinpointed some of the distinct advantages of bid optimization:
- Finding the lowest cost that covers all items
- Test impact of alternate business rules
- Analyze all bids
- Reduction of bid analysis cycle time
- Effective multi-round strategy
- Verifiable process
- Transparency of process to suppliers
- Alternative to reverse auctions
I found one example very interesting where a supplier offered an alternative to the buyer which would save an additional $4,000,000 but require an additional 18 FTEs. The company chose not to pursue that option but had all the information necessary to make the right decisions (the CEO actually made this decision).
Most importantly, the covered what they felt was the future of advanced sourcing optimization technology which was summed up by saying that they expect much higher adoption and usage of bid optimization in the future and added that most companies should be strongly considering the usage of these tools. Iasta even got a nice plug at the end and was listed as one of the leading 5 vendors providing this type of tool for complex award decisions.
Entry Filed under: General, Optimization, Supply Management Best Practices, Technology, e-Sourcing Marketplace
March 19th, 2007
Sean Delaney - Iasta UK
32% of organisations worldwide have sustainable travel policy and 20% said their transport policy gave priority to vendors with lower carbon emissions.
These figures seem quite high but I can’t help but feel that with companies like Tesco and Wal-Mart giving a greater priority to this issue these percentages are likely to change dramatically over the next few years.
Carlson Wagonlit Travel (CWT) seems to be tackling this head on and have developed a calculator that incorporates carbon emissions data when calculating the cost of your travel.
Tesco and Wal-Mart are currently concentrating on their direct operations like transport, packaging and store operations. However I suspect that they are likely to impose more prescribed terms of environmental trading with suppliers. In addition as Carbon trading matures this should make calculating the market price on the cost of emitting CO2 far easier.
I can only see this issue growing but I also believe eSourcing is well placed to support the impact on procurement. The use of optimisation software will be critical when evaluating and comparing the different sourcing scenarios.
Take for example the decision to award an office supply contract. Factors like location of distribution centre to end users, average order size (larger the better), the type of fuel used by the delivery vehicle and percentage of product which is recycled. To further complicate the decision matrix, these parameters may differ by region and country.
Imagine the different scenarios and you will soon realise optimisation will be the only plausible method of analysing how to award the contract.
Entry Filed under: General, Global Supply Issues/Risk, Optimization, Technology
February 26th, 2007
David Bush - Iasta
This is the second installment of our interview with Andrew Bartolini from Aberdeen. He takes some time to answer detailed questions about the supply management marketplace, adoption/traction and future. Thanks to Andrew for spending time to participate.
1. The Benchmark report indicates that many companies still do not use e-Sourcing strategies. From our anecdotal experience, many are averse to auctions and don’t want to use them for fear of encouraging their own customers to use them. How do you respond to these companies?
In spite of a clear and proven value proposition, certain enterprises have resisted utilizing eSourcing as a standard business process. I think part of this is due to the hangover from the early “reverse auction” days where a lack of acceptable business practices and technologies with severe limitations enabled buyers to use these tools as a battering ram to beat down their suppliers. When I was at Commerce One, we spent a great deal of time and energy educating procurement organizations on best practices (level playing field, apples-to-apples bidding, etc.) sometimes to no avail. While most played fairly, abuses occurred and left a bad taste in the mouth of many a supplier. It is why for many years “auction” was a four-letter word in this industry.
But we’ve come a long way, acceptable (read: clear and fair) eSourcing business practices are widely understood and employed and best of all, today’s eSourcing technology is really robust. The functionality has really progressed in the past 6-7 years.
For those companies that have resisted eSourcing, the sad fact is that they are at a competitive disadvantage to their competitors. Don’t want to conduct an auction? Fine, but you can use eSourcing for “sealed bid” events and leverage technology to streamline processes and perform superior bid analysis.
From a supplier perspective there are many benefits to participation including .
• Shorter sales cycle with an automated the RFQ process
• Access to new markets & new customers
• Lower barriers to entry
• Greater competitive information
• Clearer insight into market pricing (New and timely information on state of the market)
• Ability to leverage excess/idle capacity
As I write that last section, I feel like I’ve gone back in time to circa 2000…..
2. The Benchmark report indicated that there is a trend of lower identified savings via standard e-Sourcing strategies. Does this mean that companies just starting to initiate e-Sourcing should worry about reduced savings?
I believe that the trend towards lower savings is indicative of a case of diminishing returns found in the second and third eSourcing cycles of certain commodities. Let’s be clear, used properly eSourcing can enable superior price discovery and enhanced savings (compared to legacy offline processes) by offering a more competitive bid process, it does not change true market pricing. Suppliers participating in eSourcing events may sharpen their pencils, but they rarely check their cost structures at the door.
3. Many sourcing teams primarily run simple, e-Sourcing projects. Can bid optimization (decision analysis) technology help them?
Because it is an under-utilized strategy, I think it first makes sense to offer a definition - Bid optimization uses advanced analytical tools to simultaneously negotiate and evaluate complex bid structures against a wide range of interdependent sourcing objectives, variables, constraints, and scenarios. In plain English (and as it relates to eSourcing) – bid optimization enables buying organizations to evaluate often complex bid information against a set of criteria to make the best award decision. At some level you can employ bid optimization with less complex eSourcing events with few data points, however, the real benefit to enterprises is the ability to conduct complex eSourcing events with multiple bid inputs to make your decision. For those readers with a financial background, the modeling capabilities of bid optimization engines today match and in some cases, exceed what can be done in Excel. The ability to incorporate a much broader set of evaluative criteria means that you can use eSourcing for a much greater number of categories
4. Of all the e-sourcing techniques you covered in your report (a) which techniques seemed to be the most common and (b) which technique(s) are not and (c) which seem to deliver the most significant improvement after introduction.
a. We are certainly seeing greater usage of non-price factors in utilized in award decisions and a higher number of events focused on total landed cost. Scoring (Team or Automatic) which may be used in events that I described in the previous sentence is widely used. I personally do not consider it an advanced strategy but the use of multi-stage events is becoming more commonplace.
b. Commodity hedging and NPV or other financial modeling are rarely used; supplier alternative bidding also has limited traction.
c. Our research shows that bid optimization, matrix or tiered pricing, and scoring deliver significant improvement. Our research also shows that most enterprises use these strategies rarely, if at all.
5. Bid optimization technology seems too complex for the average Sourcing Professional to use. Is this true? Does one need a PhD to effectively use bid optimization technology? Do you think advanced sourcing optimization is being used well yet? Is it still ahead of the curve for most companies?
Our latest report shows that bid optimization is successful when employed but very under-utilized.
As my predecessor once noted, ‘these are not your father’s eSourcing applications.’ The capabilities within many eSourcing applications are quite astounding. This means however that there are many moving parts that may appear complex to an occasional user. For a power user or someone who is well-trained, the applications are generally intuitive and very buyer-friendly.
Best in class enterprises have passed the adoption challenge and can now focus on optimizing their processes and on using advanced strategies.
However, most enterprises are still smack-dab in the middle of the adoption cycle (and it has been a long one) and lack the internal expertise to utilize bid optimization.
It is my view the time is now to start using bid optimization and other advanced sourcing strategies more aggressively. Best in class enterprises have the capabilities to do so and are doing so….. For the average enterprise, leveraging external expertise is a great way to start, I also highly recommend centralizing your eSourcing capabilities to work your way up the learning curve as quickly as possible.
David – Thanks for another opportunity to discuss The Advanced Sourcing & Negotiation Benchmark.
Happy blogging,
Andrew
Entry Filed under: Analysts/Research, General, Interviews, Optimization, Reverse Auctions, Supply Management Best Practices
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