Making Sourcing Optimization Sexy: Part 1

As promised, this will be the first in a series of blogs that I post on how companies are applying optimization to Spend Management decisions. While I'm not sure if I will succeed at my goal of making optimization sexy, at least I'll try and demystify it a bit, and hopefully provide a useful starting point for those investigating the subject.

But first, a little bit of background. While I do not claim any deep optimization expertise, I'm not exactly new to it either. I was first exposed to the potential for sourcing optimization when Avner Schneur trekked down to Pittsburgh in the early days of Emptoris and showed me their early prototypes. At the time, I thought it was fascinating, but I failed to fully appreciate the power that this type of negotiation approach could bring. Later, when FreeMarkets developed its own optimization capabilities back in the 2002-2003 timeframe, I played a key role helping to position the firm's solutions.

Since then, I've casually advised vendors and others interested in building and deploying optimization as part of their negotiation capabilities, but not in an overly formal way. So a few weeks ago when I decided to look at the state of optimization in today's Spend Management market, I was coming from a decent, but somewhat dated optimization foundation. To come up to speed on the latest in the market, I decided to interview a handful of optimization leaders, including Emptoris, Combinenet, and Verticalnet, as well as some other industry observers and practitioners. What I learned might surprise you, especially if you're not using optimization as part of your negotiation arsenal today.

What I found is that optimization is a way to elevate the role of Spend Management by removing organizational barriers, helping procurement move beyond its traditional role. By helping Spend Management leaders to focus on the drivers that impact a decision -- rather than the decision itself -- it elevates the traditional procurement role. For instance, optimization technology can allow procurement organizations to significantly impact supply chain design. In one case, I heard of a leading Spend Management organization which has used optimization to analyze whether it is most advantageous to internally manufacturer a series of parts (and source the inputs), purchase the parts from a supplier, or purchase capacity or machine time from a supplier.

In my research, I also found that leading Spend Management organizations are applying optimization approaches to a broad range of categories and opportunities. No longer is the optimization opportunity limited to transportation (which was the focus of many early sourcing optimization efforts). In addition to ocean freight, air freight, LTL, and truckload transportation -- all of which remain great categories for optimization -- companies have deployed optimization with great results in such categories as MRO, packaging, temporary labor, plastics, labels, and printing. In addition, I heard numerous examples where organizations have used optimization in direct materials make vs. buy analyses (more on this below).

Another high level observation I have is that companies should not look at optimization just as a feature/function checklist item when evaluating Spend Management vendors. In today's market, it seems like virtually every Spend Management vendor with a sourcing module has -- or is coming out with -- some type of optimization capability. Forrester's recent eSourcing wave suggests that there's a significant variance in sourcing decision support levels between vendors. In their research, which you can download for free on Ariba's learning center by clicking the above link, Emptoris slightly edged out Ariba for the top spot in sourcing decision support, but Verticalnet and Frictionless were not far off the two leaders. Clearly, not all software approaches to optimization approaches are the same. Even those providers that license the same ILOG solver often come up with a different capabilities and interfaces within their products. In short, if you're serious about optimization, read Forrester's analysis, speak to the analyst community, demo the products, and speak to reference clients.

And if you're in the early stages of your optimization journey, don't consider just self-service, software-driven approaches. There's a small group of providers such as CombineNet and Verticalnet who offer services-based capabilities with greater flexibility and depth than many of the self-service approaches (though some vendors dispute this). These optimization capabilities allow companies to collect and evaluate a much more extensive set of data, allowing, for example, companies to make complicated make vs. buy decision analyses with hundreds or even thousands of inputs. I've heard that strategy and operations consultancies are quietly working with these service providers as part of their commodity studies for clients, especially when it comes to make vs. buy decisions.

Look at this first post on optimization as just a start. In my research, I found a tremendous amount of great material. Later this week, I’ll continue to share my findings, including some case examples of how companies are applying optimization to elevate the role of Spend Management in their organization.

Jason Busch

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