SIG University Certified Sourcing Professional (CSP) program graduate Tim Johnson details the power of true sourcing optimization within the organization.
It is incredible how many companies are still using a basic RFP platform with minimal scope for optimization. Even the platform Excel has no capacity for optimization or sourcing processes to manage the sourcing of highly complex categories. None of these methods can deliver any substantial savings or ROI.
A simple and easy-to-use sourcing platform is all you would need – even if you are not a sourcing specialist – for a three-bids-and-a-buy sourcing project to source a single item. But if you have hundreds of suppliers and thousands of possible scenarios, a simple platform does not make the grade. As for trying to manage (and more importantly, analyze) complex sourcing events in Excel, that will require a full-time mathematical genius or a team of full-time employees for weeks or months on end trying to figure out the best outcomes.
To manage the sourcing of complex categories and create business value, you absolutely must use a solution that takes full advantage of the power of optimization complemented with artificial intelligence and game theory.
To be “complex” in the sense of the word here, a sourcing category needs to meet some combination of the following criteria:
- It is of high monetary value to an organization
- It is strategic to the organization’s success
- There are many (often hundreds or thousands) of suppliers
- It is difficult to make direct “apples to apples” comparisons between the suppliers because of different qualifying criteria
- There are multiple complex delivery scenarios (such as less than truckload (LTL) in transportation)
- The specifications or requirements can be difficult to compare without advanced analytics
Categories that meet these criteria and typically spring first to mind include transportation, warehousing, packaging, maintenance, repair and operations (MRO), and facilities management. But certain service categories such as management consulting, creative and marketing agencies, and legal services can also be regarded as complex for large organizations. And in some industries, such as food manufacturing, certain direct and indirect materials may be complex.
Simply put, complex categories are not only more difficult and strategic than others; they throw up a vast number of “what-if scenarios” that need to be weighted to get to the optimal solution balancing cost, risk, and other objectives.
An Intelligently Guided Sourcing Process
A robust sourcing platform should intelligently guide supplier behavior in beneficial ways for both the buyer and the suppliers themselves. It is imperative that the tool is easy to use and that a strategic, regionally-centric support center backs this up. Because if bidders cannot construct a proper bid, and buyers cannot construct the right scenario outcomes, all parties could end up losing business, damaging their reputation, and losing millions in the short term and long term.
Most of the major suppliers in the world – and a large number of smaller ones – are very familiar with the few true advanced optimization sourcing tools on the market. They use them because these tools guide users through the onboarding process and intelligently collects the necessary information, telling them what they need to do next.
For example, if a supplier accidentally misses a required onboarding component in a bid, an advanced sourcing tool will automatically prompt the supplier with a reminder message or prevent them from proceeding to the next step without certain information completed. Furthermore, advanced sourcing tools enable buyers to provide suppliers with real-time guidance on bid ranking, creating more competitive and mutually beneficial bid landscape responses.
Suppliers know precisely how they stand during a bid, which helps drive price compression – typically 4-8% with this feature alone. Regardless of platform, the key here is that the advanced sourcing platform assists in the sourcing process and ultimately drives value for both the supplier and buyer.
Financial and Time Savings
Using the right solution is mission-critical to any sourcing team’s success. Optimization combined with advanced game theory and a solution built on features like A.I. and robotic guided buying bots helps buyers drive maximum ROI from optimization tools year over year. Overall, companies that run a majority of their complex event through a sourcing optimization tool will typically deliver price compression of 15-20% year over year. We often continue to see the savings increase when teams with tight processes and disciplines utilize sourcing optimization tools, and savings can grow upwards of 20% in the first year and subsequent years.
It is not unusual to see further savings of 12-15% in a second or third year after tool implementation and change management processes, and in some cases even still after ten years. This is great for the users of the system and their organizations and keeps CPOs and CFOs happy with higher profit margins, while many sourcing team incentives are also tied to category savings.
It’s great when companies continue to see savings numbers year over year. An essential element in savings is the reports that happen behind the scenes. A robust and multi-departmental analytics tool is a crucial feature and necessary for management communication and stakeholder buy-in. It is also essential to understand the need to balance optimization and sourcing benefits to the procurement’s strategy, perceptions, and company culture.
Suppose the sourcing process is excessively burdensome, with over-complex or time-consuming automation or overly controlled platform rules. In that case, many internal stakeholders will work around the process, and genuine savings won’t be easily captured. The process needs to fit the scenario, category, and company.
If sourcing is viewed as only pursuing departmental self-interest with complex processes and overly burdensome controls, bad things within the company happen, and again true ROI is not attained. It is essential that the sourcing process and controls around it demonstrate fluidity, great processes, easy configurability, and is supported by strong stakeholder relationships. Any sourcing team will drive huge year-over-year ROI.
The other saving, of course, is the value of time and overhead. A large organization would need to employ several full-time employees to do less than that, which can be achieved by one person using a sourcing optimizer. Organizationally, it is more strategic to direct those human resources in other activities that will deliver additional value.
The Advanced Intelligent Optimization Behind the Power
The core features and main drivers of value for any advanced sourcing platform are the optimization capabilities themselves, an incredibly advanced application of decision trees, and “what if” scenarios. True optimization works by creating all those “what-ifs?” and “if … then” in the form of configurable scenario rules.
For example, these could be “I want only suppliers who can provide this quantity” and “I want these items bundled with those items” but “At least this quantity must come from this region of origin” and “There must be a minimum X suppliers. Once these rules have been input – and ideally, as many rules as you like – optimization will compute the optimum solution for you from thousands of possible outcomes. This process is done without any human intervention – apart from pressing the proverbial “Optimize” button.
In a truly robust sourcing platform, optimization comes through faster than you think (a matter of minutes at most). Optimization, combined with intelligent scenario features, will crunch its way through thousands or tens of thousands of possible outcomes to reach the optimal solution set. And optimal does not simply mean the lowest cost. For example, you can set capacity limits to minimize risk, e.g., “No single supplier should supply more than 25% of this item”. Collectively, the rules build “rule trees”: “if this … then this” decision trees resulting in the lowest total cost given any set of rules.
More than anything else, the ability to create and apply these rules and rule groups are what sets a truly advanced sourcing optimizer apart from the lower tier tools that are entirely suitable for simple sourcing. Those tools are inappropriate when applied to complex and strategic categories.
Another example is bundled or volume awards, where the buyer wants to see suppliers’ best prices on a bundle of items and all individual items. It is essential that the system intelligently prompts suppliers to provide this information, thereby empowering the buyer. And at the same time, it guides the supplier in such a way as to allow them to put their best foot forward. An intelligent award system that learns from past solution selections uses those past decisions to suggest other possible outcomes and further enables clear win-wins.
At the next level of artificial intelligence, optimization platforms need to learn from past user preferences to identify patterns and understand what is important to the individual user, constantly asking, “Which do you prefer?”. Intelligent analytics, embedded into optimization, transforms what it learns into meaningful statistics that allow users to understand more of the cross-dimensional trends.
Optimization analytics will reveal, for example, situations where there is a high level of supplier overlap. Or, conversely, where a category is being sourced from the same supplier or a small number of suppliers, but a larger population exists to help lower prices. This can happen in complex and strategic categories, but there are perhaps very few suppliers in the world that can meet the buyer’s needs. A good example is specialist machine tooling, such as the huge machines used to create molds for vehicle bodies: when a new mold is needed, it is time to look at the alternatives.
Essentially, optimization advanced intelligence analytics will provide answers to questions about how specific complex categories perform in terms of delivering value to an organization and presenting macro and micro trends in a meaningful way at multiple levels in the organization.
The brilliance behind the advanced optimization is comparing all possible solutions and placing those solutions into buckets that eventually filter down into the optimal solution. Or “best” solution: like an intelligent coin sorter that is constantly comparing and advising on the best scenario to reach the desired outcome.
Event analytics can also dive deeper into a particular event and draw micro-trend conclusions that will help improve the setup or analysis of the next event with rules that better meet the category strategies.
It is common for any sourcing specialist to approach a complex bid with little or no idea what they want the result to be. Optimization helps present that user with possible solution scenarios that mimic prior preferences, thereby allowing them to select outcomes they didn’t envision when starting the bid. Although the user may be unsure of the specific outcome, optimization, and the analytics it produces, works around that by leveraging AI combined with advanced game theory to identify alternative relative preferences within the user’s scenario rules.
Each time optimization moves through the decision tree and possible ‘what-if’ scenarios, it makes a decision that favors one preference over another, configurable ‘what-if’ rules allow that optimization to explore, find, and present new options, learning from the rule trees to narrow the scope of possible outcomes. This represents another huge step forward on the path towards sourcing optimization as a vital part of any sourcing team which aims at maximizing ROI and optimal user experience for increased year-over-year savings and true organizational value driver.
The Certified Sourcing Professional (CSP) program is a 10-week course that focuses on the hard and soft skills of sourcing, including strategic sourcing and outsourcing methodologies, as well as best practices in negotiations.
Tim Johnson is a procurement and sourcing industry expert and a Senior Strategic Account Executive with JAGGAER, specializing in the manufacturing and aerospace & defense verticals. He is tasked to drive insightful solutions with measured results for customers and prospects, targeting bottom-line savings and high return on investment. Originally from San Francisco, California, Tim now lives with his daughter close to JAGGAER Global HQ in Raleigh, North Carolina.