Sourcing Optimization: A Basic Primer From an Expert (Part 4)

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, here and here.

Money Savings

In previous posts, I brought up the fact that if analysts are running analytics without using optimization, their results may come up with AN answer that satisfies all of their business criteria, but not necessarily the BEST answer. Depending on the category of the criterion, this could impact anywhere from 1-20% of the total spend.

Additionally, if using pre-bundles, there is a tremendous amount of hedging of the supplier's upward bids in case they are awarded a bundle in which they have no direct supply -- meaning they would need to purchase some of the items at a higher price and then re-sell them. This pre-bundling also does not allow the suppliers to package items together in a way that enables efficiency within their operations. If the suppliers are able bundle the items a way that makes the most operational sense for them, then they can produce them at a lower cost, and thus pass those savings on to the buyers. In effect, the suppliers make more money and the buyers save more money.

Unfortunately, unbundling and bidding on the individual items makes for many, many more individual items that are out to bid. The optimization engines need to be scalable in order to handle tens of thousands of items instead of just a few.

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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