Sourcing Optimization: A Basic Primer From an Expert (Part 3)

Spend Matters would like to welcome back Dr. Jason Brown, a former CTO at CombineNet, who will further share information on how companies can best apply optimization to their overall sourcing practices. See his previous posts here and here.

Negotiation and Contracting Time Savings

A large problem with sourcing applications today is that they have limited or no optimization. This is particularly true in reverse auctions based solely on price.

If there are no business rules, then you are good to go -- but this is rarely the case on the items that actually have any importance within a business. This is where optimization with constraints has a huge advantage, as you are always presented with an award (allocation) that satisfies every single one. Simply keep adding them into the scenario until they are all taken into consideration, and then receive the optimal answer relative to these constraints. By doing so, you can quickly bring the award to contract and hence realize the savings faster. Since optimization engines will take into account all your business rules, you can effectively write a contract off of an award out of one of these systems.

Also, the buyer will do a final negotiation with the suppliers to ensure they can handle the business, and move forward to write and negotiate contracts. Buyers should always do final negotiations, and having the ability to quickly compare last minute negotiation offers with quantitative numbers to back up decisions is essential. Advanced optimization really shines in this area. When a buyer negotiates with a supplier, there is usually an "if-then" conversation that goes on (e.g., if you give me more business on these items, then I will discount these other items). The Buyer needs to quickly evaluate these offers and determine if they are beneficial. With quick optimization engines, it's possible to enter the scenario complete with all the business rules, run the optimization and compare the allocation all while you are still on the phone with the Supplier. This process can iterate until you have completed with a supplier and you can move on to the next.

Dr. Jason Brown

Spend Matters would like to thank Jason Brown for his contribution. Jason can be reached at Jason (dot) brown (at) alumni (dot) unc (dot) edu.

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