The Importance of Respecting Complexity in Procurement

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In the white paper, What defines complex sourcing – and why does it matter?, my colleague Peter Smith makes a number of convincing arguments about why procurement professionals and consultants should take a hard look at complexity as an overall driver of sourcing and supply management strategy, opportunity and engagement.

But to understand and ultimately embrace complexity, we must first understand it. Here, Peter argues:

There is a myth around the procurement world, promulgated not just by practitioners, but by some consultants and solution providers, that sees complex sourcing as merely standard sourcing “but bigger.” If we can run a reverse auction with 10 providers, surely one with 100 is just a bigger version? Now in the case of a simple auction, the answer may well be yes. But when we get into complex sourcing processes, and some of the factors that follow, we move into a whole different field.

The sort of tasks we talk about under the “complex sourcing” banner, such as huge logistics tenders or multi-tier supply allocation or supply chain structuring tasks are not at all like a basic tender or auction. They take us into an area of complex decision theory and in particular introduce the concept of an NP-complete problem.

Without getting too deeply into the formal mathematics of this, what it means is that there is no single algorithm that solves the problem. So while you can solve some problems by applying a rule or algorithm – for example the way we were taught long division at school – there is no equivalent in this case, no single mechanism for solving the sort of complex sourcing problems we are discussing here.

Another way of looking at these problems is that the solution may be easy to check – but it is hard to find. It is easy to check that 565,442 x 5,345,637 equals 3,022,647,676,554. But if you are given 3,022,647,676,554, and told to find the 2 factors of that number, it is a much harder problem.

That means that methods that computer scientists might call “iterative” and we might call “trial and error” have to be used, along with complex mathematical techniques involving estimation and optimization.

The message here is not to fear complex sourcing problems. We need to understand that complex sourcing problems require clever solutions to arrive at the best sourcing decisions.

Some of the largest single programs we have seen procurement organizations and consultants to companies drive and implement center on embracing complexity. These sourcing programs cross into all aspects of the business, spanning demand, inventory, commodity, multi-tier supplier and many other supply chain – and non-supply chain – considerations.

Far too many procurement organizations do not realize this is possible today. But with the right process and technology approach to solving for complexity, it is. To learn more about the topic, stay tuned for additional posts in this series. Or download Peter’s full analysis today: What defines complex sourcing – and why does it matter?

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