Continuing on with the BravoSolution example I discussed in my last post on the topic, one of the most important points to take under consideration when using decision optimization capabilities is that skillful data gathering is every bit as important as the strength of a solver or the creativity one applies from a constraint perspective in the ultimate outcome of a sourcing exercise. For example, when weighing different options within a supply chain (e.g., buying finished goods, buying an outcome -- e.g., power by the hour in A&D -- buying capacity, buying raw materials and paying for machine time, etc.) it's essential to consider all of the potential options upfront while then letting the supply market communicate to you how it can best meet your needs. Consider how a manufacturer may wish to apply formula-based pricing for a particular tender.
In looking at the total cost of a particular scenario for an award decision, this company may wish to build a model that factors into account dozens of variables and options underlying a per-unit cost such as overall capacity (at the facility or vendor level), raw material costs (based either on supplier pricing, pricing from demand aggregation exercises, etc.), transition costs, acceptance of alternative specifications/materials, the ability to consider new suppliers (or not) and the willingness to consider LCCS suppliers (either direct or at lower tiers in the supply chain). When it comes time to add additional business rules and requirements (e.g., requiring a certain percentage of spend, in the aggregate based on multiple tiers, be awarded to minority suppliers, factoring into account environmental track records, etc.) sourcing practitioners should be able to continue to manage a scenario without a significant amount of specialized training. Perhaps more important than knowing how to use the tool is to understand the implications of scenarios and final award decisions for other stakeholders.
As Bravo put it to me, in these complex scenarios "sourcing must also be able to negotiate internally." Bingo. This is perhaps the most important overlooked factor in getting the most from any advanced sourcing toolset. Even with the ability to consider numerous constraints and dozens of business rules, if you can't influence other stakeholders (e.g., "do you really need that short lead time?" or "how much to you value daily deliveries versus weekly?") about the impact of decisions on pricing, procurement organizations will greatly devalue the use of both the tool and the process. Still, for companies that can do this convincing and internal selling, perhaps the greatest benefit of an optimization-driven process, replete with a greater emphasis on data gathering and set-up than anything else, is that procurement leaders can significantly compress cycle times for complex decisions. In fact, speed is perhaps the most critical factor in letting optimization drive new types of discussions and negotiations among internal stakeholders.
Factoring this into account, it's critical to remember that optimization should not be the only driver of award decisions. It should give us a priority list to work from to arrive at a set of possible decisions. Remember that negotiation is artful and is not just a science (and those which approach it only as a science are a danger to both themselves and the organization). Moreover, regardless of how smart our formulas or scenarios get, by "adding a constraint" we're often "increasing the likelihood that we're awarding business" to someone who is not, technically, the "low-cost" supplier based on how a traditional negotiation would work. Food for solver thought.
Tomorrow, we'll turn to how optimization-driven processes can work in practice by highlighting a few case examples with specific categories and company names blinded to protect the innocent.
- Jason Busch