Sourcing Optimization: A Basic Primer From an Expert (Part 5)

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, here and here.

Investigating Future Opportunities

This investigation usually takes place by forward-thinking buyers who are willing to listen to their suppliers and re-think their own supply chain by effectively collaborating with the suppliers, having them be the innovators. Some have termed this type of sourcing "transformational" in that it could transform the supply chain, usually taking the form of alternative offers for an item. For example, a different type of material for packing boxes, a different printing and labeling mechanism, a different shipping method and delivery time or a different warehouse location.

Also, when you allow bidders to offer alternatives or variations on the items traditionally brought out to bid upon, you must allow them to protect themselves from exposure. This usually takes the form of capacity limitations or restrictions on the bids that can be taken together. This allows the supplier to bid aggressively on all bids, but protect themselves from getting so much business that they cannot provide the items if they are awarded to them.

Now that the buyer has received bids on the item, alternate items, supplier-defined bundles, conditional offers, and capacity limitations, they can investigate whether if they were able to change their supply chain, what the potential savings could be. For example, which new distribution center should they build? Which new material should they consider for subsequent years? Which transportation lanes can they take longer transit times on? Etc. In many cases, buyers are not able to take full advantage of these alternatives because they would need to make capital changes or more likely process changes that take some time. But what it does allow is for them to set longer term transitional supply chain roadmaps that will quantitatively change the cost of goods sold in future years.

Final Summary

It is important to realize that these reasons for using optimization do not just apply to large sourcing initiatives. They can (and should) be applied to all sourcing initiatives. Granted a 20% savings on a $10,000 spend or the savings of one week of a person's time is not a lot of money, but if this is done hundreds or thousands of times per year, it certainly adds up. The additional benefit of being able to evaluate other suppliers by taking into account corporate business rules and existing contracts applies to almost every company, regardless of size of spend or number of items. Finally, from a human capital standpoint, the analysts become more strategic and forward-thinking in evaluating many different options and possible futures, as opposed to relegating them to data crunching or other menial, rote activities.

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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