How Sourcing Optimizer Simplifies the Complex
- Sourcing Optimizer
Even today it is amazing how many companies are still using a very basic RFP platform, with very little scope for optimization, or even Excel, which has no scope for optimization or sourcing processes at all, to manage the sourcing of complex categories. These tools can get the job done (you can collect bids and make an award decision), but it’s a round peg/square hole situation. They just can’t deliver any real strategic impact to your business.
Of course, 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 handful of common items. But if you want to evaluate the value delivered by dozens or hundreds of suppliers across many different factors, a simple platform just does not make the grade. As for trying to manage (and more importantly analyze) complex sourcing events on Excel, it can be done, but typically requires leaving value and savings on the table in the interest of making a decision in a limited amount of time.
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Efficiently managing the sourcing of complex categories and capturing the most value possible requires specialized algorithms that were not built simply to automate quick bids, but rather designed to collect and evaluate a range of item, supplier, pricing and related data. JAGGAER has been developing and refining these algorithms for many years, and in parallel, it has been our mission to make this powerful technology a more user-friendly tool that is easily adopted for broad use when sourcing complex categories.
To be “complex” in our sense of the word, a sourcing category needs to meet at least one (and usually more than one) of the following criteria: there are many (often hundreds or thousands) of items and suppliers; it is not a ‘one size fits all’ comparison between the suppliers because of the different values assigned to their bids and business characteristics; and the specifications or requirements change and 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.
In fact, McCormick Inc. saved 11% year-on-year by taking ingredients sourcing out of a basic sourcing tool and using JAGGAER Sourcing Optimizer. To put it simply, 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 in order to get to the optimal solution, balancing cost against other decision factors including supplier capacity constraints, bundled discounts, and business rules such as maintaining relationships with incumbent suppliers.
A True Powerhouse, but Configurable and Easy to Use
While it is a true powerhouse of a tool, Sourcing Optimizer is also very well known for its configurability and ease of use for sourcing teams. An event wizard intelligently guides users step by step through the entire process of setting up a sourcing event and if there are any doubts or further help needed, setup is further accelerated with the use of RFxpress templates – the customer simply plugs in their data and the system guides them through what is needed for their specific category.
JAGGAER also provides a uniquely focused support center for Sourcing Optimizer users. The Best Practices Center is an important resource for many customers and provides training, consulting workshops, sourcing templates and strategic insights into sourcing complex categories.
Sourcing Optimizer intelligently drives supplier behavior in ways that are beneficial for both the buyer and the suppliers themselves. It is extremely important that the tool is easy to use because if suppliers cannot construct the proper bid with the right information, they could end up losing business and damaging their reputation. Most of the major suppliers in the world – and a large number of smaller ones – are very familiar with JAGGAER’s Sourcing Optimizer and use it because it guides them through the onboarding process and intelligently collects the necessary information, telling them what they need to do next. In addition, Expressive Feedback is a patented feature that enables buyers to provide suppliers with real-time guidance on bid ranking, creating a more competitive and mutually beneficial bidding experience. Suppliers know precisely how they stand during a bid and this helps drive price compression between bidders – typically 4-8% with this feature alone.
The Business Benefits
Algorithms and award strategies based on advanced game theory help buyers to drive maximum ROI. Overall, Sourcing Optimizer will typically deliver price compression of 15-20% year-on-year, and for companies running most of their complex events through JAGGAER, this can rise upwards of 20% not just in the first year, but in subsequent years. It is not unusual to see further savings of 12-15% in a second or third year after implementation, and in some cases after ten years. This is great for the users of the system as well as their organizations. Sourcing professionals’ bonuses are largely tied to the savings they achieve for each strategically managed category. Over the past ten years, the sourcing teams at three of America’s best-known restaurant brands have not missed a single bonus. Not least because another strong feature of Sourcing Optimizer is that it generates clear reports and analytics to substantiate the savings.
The other saving of course is on staff time. A large organization would need to employ several full-time employees to do less than can be achieved by one person using Sourcing Optimizer. Much better to direct those human resources in other value-driven activities.
The Advanced Intelligence Behind the Sourcing Optimizer
The core feature of Sourcing Optimizer and the biggest driver of value is, it goes without saying, the optimizer itself, an incredibly advanced application of algorithms, decision trees, and powerful solvers. It works by creating all those “what-ifs?” and “if … thens” in the form of configurable scenario rules. For example, these could be “I only want 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 by the user– and you can have as many such rules as you like – Sourcing Optimizer will find the optimum solution for you, from thousands of possible outcomes, without any human intervention (apart from pressing the big green “Optimize” button!) You can then walk away and do something else, although having said that, the results will come through faster than you think. The algorithms will crunch their way through thousands or tens of thousands of possible outcomes (usually in under a minute) 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”.
More than anything else, the ability to create and apply these rules, and rule groups, is what sets Sourcing Optimizer apart from the lower tier tools that are entirely suitable for simple sourcing, but totally 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 three items and all three individually. The system intelligently prompts suppliers to provide this information, thereby empowering the buyer. And at the same time, guiding the supplier in such a way as to allow them to put their best foot forward.
JAGGAER has recently enhanced the Sourcing Optimizer further with the Intelligent Award Navigator. I will tell you more about this in the next article.