Applied Savings (Part 1) — Sourcing Optimization/Negotiations in Complex Categories: Packaging

A few weeks back, I provided continuing coverage that explored how companies can apply optimization and advanced sourcing techniques to great effect, even outside of logistics categories, where they're most used today. I also promised to share additional examples of how more leading-edge procurement organizations are using advanced techniques to great effect, realizing results that go far beyond what's possible with basic negotiations or auctions. In the past month, I've caught up with both Trade Extensions and CombineNet, the two leading independent optimization players that do not sell a broader sourcing / supply management suite (as a primary offering), to discuss, among other things, how companies are applying their capabilities to complex categories. In a series of posts exploring what I learned in these discussions and subsequent follow-up research efforts, I hope these case and category examples will provide inspiration for others to consider the use of technology-enabled techniques with their own spend, moving beyond the elementary tactics that no longer provide the level of returns needed.

We'll start the exploration with a case approach from Trade Extensions for packaging in a fast moving consumer goods environment. This organization sources "tens of millions of dollars annually" across a key packaging category. The supply base for the category looked similar to what we often see in corrugated markets in the United States. Yet this was a company that had actively gone to market before in a competitive manner for the category, albeit on a decentralized basis. In Trade Extensions' words, "the context of the supplier base was that it was made up of a number of strong regional players, all of whom had long term relationships with the company's units, which they had been supplying for a number of years. Supplier awards had previously been based upon price and quality of service. Myriad specifications existed and few suppliers had supplied the manufacturer out of their own region."

Through a new sourcing approach, the company prioritized a number of goals, including supplier rationalization, challenging incumbent local relationships, identifying synergies between regions and the price build-up and price decomposition of all key packaging components within the category itself. As part of this process, the organization also wanted to better understand how the supply markets could compete and serve the global needs of the organization, rather than maintaining relationships in regional silos.

Using advanced data gathering and sourcing optimization approaches that allowed for suppliers to offer greater creativity in their responses while simultaneously taking advantage of a competitive market approach, the company was able to evaluate bid responses factoring into account a range of variables. These included: volume discounting, combinatorial bidding (packages), alternative production locations and lead times, supplier impact and dependency and fixed and variable cost elements.

Next, as Trade Extensions told us, "the manufacturer evaluated the current 'as is' position where regional solutions stayed in place, but taking into account all of the other elements detailed above when examining the results. This scenario was compared to a global solution where new suppliers were introduced into regions, where they were experienced, but had not supplied this manufacturer before. In this way the manufacturer was truly able to place the right supplier into the right supply requirement, reducing the overall spend significantly while maintaining or in some cases improving service levels."

The results yielded material savings in a market with volatility in many of the underlying supply market components. But more important than just identified savings, the level of transparency that the process brought with it allowed the organization to create internal stakeholder alignment around a final solution that the organization quickly signed up to implement. Moreover, the suppliers maintained active involvement throughout all stages of the tender, which streamlined the process of change requests and related modifications during the implementation phase.

We'll continue this exploration of leveraging optimization for complex categories in the coming days.

- Jason Busch

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