BravoSolution: More Applause Deserved (Part 6)

Wrapping up this series after many months in the making, (you can read the initial posts in this series: Part 1, Part 2, Part 3, Part 4, and Part 5) I thought it prudent to round out some of the discussions of optimization and BravoSolution by highlighting a number of sourcing case examples outside of the all-to-familiar transportation area -- which everyone should know by now is, well, an optimal fit for optimization -- to show the flexibility of applying advanced sourcing approaches across a spend portfolio. To begin, consider the case of a CPG company with significant spend (think millions and add an additional zero) of spend for a highly specific commodity/ingredient input. After going through traditional sourcing approaches, this organization found it had largely tapped the exiting market and was unable to identify additional capacity in this key supply market.

The organization was able to leverage an optimization-driven sourcing approach that focused as much on asking the right set of questions as on solving for a possible set of solutions. For example, the company was able to break down the manufacturing process into specific steps as part of an information gathering approach that allowed it to solicit bids in different ways (including both existing and potential next generation processes as potential options). It also encouraged supplier capital investment tied to multi-year contracts (which, in theory, could serve as a type of off-take agreement to enable the financing of new supplier capacity by third-party lenders). In the end, the company evaluated over one million different sourcing options and ended up not only with a solution that created new capacity in the supply chain at the best possible cost, but also avoided many millions of its own capital expenditure.

Or take another case involving the purchasing of a commodity by a large process manufacturing company in the context of a supply duopoly where the organization had long-standing relationships with both suppliers competing in the market (with overall spend across both in the mid-to-high ten figure). Prior to deploying an optimization driven approach that would focus on "cost decomposition, expressive collection of a range of capital structures and scenario generation under various volume and length of contract assumptions" the organization had limited visibility into cost drivers and only set highly specific multi-year contract terms. The result of the sourcing exercise enabled the organization to not only identify significant (10%) cost savings, but helped drive greater overall transparency in duopolistic and supplier partnering context.

In another sourcing case example highlighting the flexibility of optimization-driven sourcing approaches, one organization decided to leverage a data-driven collection and analysis approach across $10 million facility services spend in the US and Europe. The category encompassed a variety of facility services (e.g., security services) that each individual site previously sourced and managed on its own in the past resulting in missed opportunity for cross-site, geography and category leveraging opportunities. In addition, the company also performed many of these services with its own resources in the past. In deploying an optimization-driven approach, the company was able to drive significant savings while entertaining a wide variety of bids from suppliers capable of servicing different facilities and varying facilities services sub-categories.

BravoSolution's experience shows that organizations should not just consider optimization-driven sourcing strategies as an option for complex categories -- they should embrace them. As we turn our attention to what other vendors are doing in enabling such spend categories as commodity inputs, marketing materials (e.g., printed items), direct mail and delivery, contingent labor, medical supplies and retail spend categories, it should become clear to Spend Matters readers that for more sophisticated buying organizations, a combination of optimization and commodity management approaches have replaced reverse auctions, offline buys and approaches for complex categories. BravoSolution has a good mousetrap here, as do others in the market including CombineNet and Trade Extensions (and Emptoris and Iasta, for that matter). I believe the only thing holding all of these providers back in pushing greater adoption of optimization in their user and prospect base is education.

- Jason Busch

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