Making a Simple Case for Optimization

Over on E-Sourcing Forum, David Bush took the time to highlight a number of optimization case studies from Aberdeen's recent report on advanced sourcing. Aberdeen -- and David -- do a good job at distilling the value of optimization for an audience who might not be overly familiar with how it can help from a sourcing decision support vantage point. Rather than re-invent the wheel with my own examples here, I'll quote one that speaks for itself in an energy market.

"Facing dramatic increases in diesel fuel prices, [a] sourcing team took an advanced sourcing approach to managing costs while balancing the needs of 5 separate business divisions. They conducted a series of reverse auctions by geography that focused on supplier margins and transportation costs (cost components of delivery vs. actual fuel costs) to capture supplier bids. The reverse auction results flowed directly into a bid optimization engine which was used to determine optimal supplier awards given specific business constraints per business unit and location … [as a result] the company captured competitive pricing and optimized total cost awards within 3 days. In an escalating fuel market, they achieved savings on more than half of locations while ensuring all business constraints were met. The team also gained a much better understanding of the supply market and the cost structures in this category."

It is basic examples like this which highlight how logically optimization can fit into a strategic sourcing process -- as part of a competitive negotiation environment or instead of it, depending on the situation. Now, I could easily go off in a tangent here about how optimization can also be used to help companies make the best possible make versus buy decisions involving plant closing, relocations, and supplier selection, but rather than go in this direction today, I'll keep it simple. As optimization -- for all those getting started with it -- should be.

Jason Busch

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