After hearing about the recent NIST (National Institute of Standards and Technology) Interagency Report (7622) on 10 Practices to Secure the Supply Chain, it got me wondering as to who should set the standards. Supply Chains are global, so it shouldn't be a single government agency, even if it's a standards agency. While supply chains run on technology -- it's only one of the three corners of the supply chain triangle, with the other two being talent and transition (management).

But, of course, supply chain standards are probably not high on the WTO (World Trade Organization) agenda -- as the primary purpose is to supervise and liberalize international trade -- keeping the flow smooth. Trade agreements take priority over standards. Someone has to bite the bullet and take the challenge. But we need more than high-level practice definitions. These are the 10 perspective practices that the NIST recommends:

1. Uniquely identify supply chain elements, processes and actors
2. Limit access and exposure within the supply chain
3. Create and maintain the provenance of elements, processes, tools and data
4. Share information within strict limits
5. Perform supply chain risk management awareness and training
6. Use defensive design for systems, elements and processes
7. Perform continuous integrator review
8. Strengthen delivery mechanisms
9. Assure sustainment activities and processes
10. Manage disposal and final disposition activities throughout the system or element life cycle

Taken one by one:

1. obvious, no help here
2. also obvious, no help here either
3. you should be doing that already to conform to the plethora of trade and security regulations you're already subject to
4. given the lack of openness in most supply chains between trading partners, this is probably already happening
5. this is good advice -- it's common knowledge, but when it comes to training, no one is listening
6. here's where it gets good -- I don't think defensive design is part of supply chain design today and it's a great approach to keep things in perspective
7. that's just good risk management
8. that's just part of continuous supply chain improvement
9. this is good advice too -- while the sustainability message should also be common knowledge, there's not enough action on this front either
10. this is great advice -- everyone focusses on the acquisition, but often neglects that, at some point, everything created has to be destroyed; everything acquired has to be disposed of

In summary, I give it a 4 out of 10. So, what would be good recommendations? We'll take that up in a later post. But for now, do you have any?

In yesterday's post, we asked how much an enterprise supply management solution really costs because the up-front license cost or annual subscription fee is only one part of the puzzle -- and until the full puzzle is understood, it's hard to figure out what the true cost is and, ultimately, what's the right solution for the organization. The difficulty is the plethora of license models, and add-on fees, that have been invented by on-premise and SaaS/Cloud vendors over the years in an effort to get a leg-up on their competition (and a siphon into your corporate piggy bank). In today's post, we're going to review three proposals from three vendors, Siphon, Skimmer, and Drip. Then, we're going to demonstrate how to compare them on equal footing.

Siphon is proposing an on-site enterprise solution with a perpetual license cost of 50K plus 100 per user, an implementation fee of 20K, an up front customization fee of 15K for reporting, 25% maintenance, and up-front training of 10K for administrators and 20K for users. It also requires a database, application server, and a middleware license -- which have their own maintenance fees. It also requires (3) servers to host the product, space in the data centre, an administrator / developer to maintain the customizations, and a user support person.

Skimmer is proposing a hosted ASP solution with a perpetual license cost of 50K, an additional fee of 50 per user, an additional fee of 1K per integration, and a small transaction fee of $1 per transaction. Maintenance is 10%, but the initial implementation cost is 40K, not counting the 20K for custom reporting or 20K for integration with external systems. User training is 20K up-front.

Drip wants to go pure multi-tenant SaaS for a hosting fee of 40K a year, with 30K up front for implementation, 20K up front for custom reporting, 10K for external systems integration, and 20K up front for training. However, ongoing training, largely self-led, is minimal at 5K / year.

On the surface, Drip sounds expensive if you're looking to make a 5-year commitment because it's 200K in license fees, as opposed to 50K for Siphon and 50K for Skimmer, but Skimmer has over 100K in additional up front costs (bringing your down-payment to 150K) and Siphon has at least 75K of up front implementation costs (bringing the total to 125K) plus whatever it costs for the database, app server, and middleware.

The only way to really understand what the respective costs are is to build a detailed cost model that allows for an apples to oranges to pears comparison that allows for similar elements to be compared on an equal footing when possible, and total cost to be understood.

To this end, you need to build a cost matrix similar to the one below (which is contained in this free cost model spreadsheet [that you can use at your own risk^*]) so that you can determine the true cost of the solution over the time-span you expect to use it. (Be it the 1, 3, 5, 7, and 10 year time-frames pre-calculated, or some other time-frame). Then fill in the gaps.

For starters, with respect to Siphon's proposal, we have to cost out the database, application server, and middleware. When we do that, we find that the db license is 15K plus 30% annual maintenance, the application server is 10K plus 25% maintenance, and the middleware server is 20K plus 20% maintenance. Plus, we need to buy 3 servers to support it -- one for the application and middleware, one for the database, and one for the web application server. Digging deeper, we find out that it needs five custom module integrations, and each will cost 2K, tacking another 10K onto the proposal in addition to the 10K required to integrate with external systems. Digging into the support requirements, it's going to require 50% of an admin's time, and that person costs 90K a year, and 100% of a support rep's time, and that person costs 60K a year. The servers will consume about 6K of power, an additional 3K of backup services will be required, and the annual maintenance on the database, middleware, and app server will cost 5K, in addition to 5K of annual training to keep the admin up to date.

Skimmer, being a hosted ASP solution, also requires an annual hosting fee of 20K for data centre costs in addition to the 50K perpetual license cost, and an additional fee of 10K in each subsequent year for training.

Drip, being a pure multi-tenant SaaS, has no other costs.

When we put it all together, we end up with the table below:

And then when we summarize the costs, breaking them down into first year and subsequent year, we get the following summaries:

And then we quickly see that, in the first year, SaaS is the cheapest and On-Premise the most expensive and, more importantly, that going forward, On-Premise is considerably more expensive due to high data centre costs. We also see that, overall, SaaS will be the cheapest solution but this doesn't mean it is the right solution as the cost of Hosted ASP and SaaS in subsequent years is almost the same, and if the Hosted ASP provider can offer substantially greater security and reliability with the single instance they are offering (as opposed to the multi-tenant SaaS solution), it might be worth the additional 70K up-front cost for the Hosted ASP solution -- especially if the company is looking to commit for a longer term (like 5 years). Plus, With the costs so similar, a negotiation might be able to reduce the base implementation and integration costs, putting the Hosted ASP solution on par with the SaaS solution. However, none of this would be clear without this total cost calculation. So do your homework, and your detailed year-over-year costing, before selecting a solution. It will pay off.

^* All warranties or representations, express or implied, are disclaimed and you take complete responsibility for the use, or misuse, of the template.

Pardon my language, but GFQ: Good Fracking Question! With the way that most providers price these days, it's really hard to tell and bravo! to Chain Link Research (CLR) for taking up the issue in a recent 2-part piece on SaaS Pricing: Insanity or Good Deal for Users (Part One and Part Two). When I first broached the subject back in 2009 in my series on An Enterprise Software Buying Guide (Part I: Overview, Part II: Cross Functional Team Formation, Part III: Need Identification, Part IV: Potential Solution Identification, Part V: Cost Model Definition, Part VI: Cost Model Calculations, Part VII: Negotiations and Part VII: Contract Definition & Management), I thought I was the lone crazy voice talking to the cat in the corner that wouldn't listen because, at the time, everyone thought SaaS was always cheaper and the wave of the future. (Sometimes it is, sometimes it isn't.) The reality is that up-front license cost or annual subscription fee is only one part of the puzzle, and until the full puzzle is understood, it's hard to figure out what the true cost is and, ultimately, what's the right solution for the organization.

As the CLR articles point out, the first thing you have to figure out is what you're buying. Is it on-premise, hosted ASP, or SaaS/Cloud, and then, more importantly with respect to today's cost models, is it enterprise or community? I.E. Is it 100% internal to your organization or does it allow you to connect with different organizations within the extended enterprise as well as supply chain partners? Is the price fixed, per usage metric, or based on Spend Under Management (SUM)? If your organization only has 20% SUM today but is buying the solution to get to 80% spend under management, then the cost of the solution is going to quadruple overtime. What sort of user connectivity is supported? Is it in-house only? Remote? Multi-location? And, today, multi-device? (Executives want everything, whether it makes sense or not, to work on their iPad and/or iPhone.) How secure is it? And how much hardware and/or how many data centre resources are going to be required to support it?

If it's on-premise/hosted ASP, is the license perpetual or for a limited term? If it's SaaS, is it single-tenant or multi-tenant? What sort of availability or security assurances are there? Is anything being outsourced?

And then, once you get a grip on the basic delivery model, you need to start coming to terms on how the solution is being priced. For SaaS, what is the frequency of subscription payments? What is the payment based on -- site license, number of seats, number of transactions, CPU utilization, bandwidth utilization, storage requirements, and/or dollar volume processed? And what are the up-front costs? Is there a one time integration or implementation fee? Any customization fees? Any training fees? The list goes on.

Similarly for enterprise. Is the license fee fixed-term or perpetual? Site license, by user, by server, or by CPU? Does it require any middleware that must be licensed separately? What is included in the way of implementation and integration? In terms of user training and, more importantly, site administrator / developer training? How much customization is required? The list goes on.

For an average business user trying to select the best solution for the business, it's like trying to compare apples to oranges (which can be compared, by the way -- see this post) to processed fuel (which is of an entirely different composition and has an entirely different production cost model, unless, of course, it's corn-based ethanol). But there is hope! Stay tuned for Part II!

And download the new BravoSolution sponsored Sourcing Innovation WhitePaper on Taking the First Step on Your Next Supply Management Journey [registration required] today if you haven't already.

The acronyms and acclamations are still flying fast and furious in the Supply Management space and phrases like VFS, Hi-Def Sourcing, Next Level Supply Management, and Next Practices aren't going anywhere -- and neither is your organization unless it's on the road to improving it's Supply Management practices (unless it's in the Hackett Group 8% and has a solid plan to stay there).

Chances are that, right now, your organization is somewhere in the standardization and complexity reduction phase of maturity, and if you're reading SI, approaching the phase of operational excellence. A few of you are in the operational excellence phase, and maybe even approaching the final phase of strategic business enablement, but given that excellence is a moving target, even if you're lucky enough to be there, it's going to take work to stay there now that you need to be an expert in QFD, CMM, TVM, KM, SRM, SIM, WM, GSM, NPD, IRR, ROI, ROIC, EBITDA, EV, EVA, NPV, TTM, and TTV! (Don't know what these are? Read the white-paper!)

In order to advance, a Supply Management organization needs to master the nine axes of excellence, which are:

• Sourcing Process
• Organization
• Finance
• IT
• Product Management & Marketing
• Risk Management
• Asset Management
• Relationships
• Metrics

These axes, along with some key achievements necessary to progress the next level ladder, are defined in SI's new white-paper, sponsored by BravoSolution, on Taking the First Step on Your Next Supply Management Journey. Download it for FREE now [registration required].

Today's guest post is from Ayush Sharma, a Strategic Sourcing Consultant with Trade Extensions in the Americas. His particular speciality is the application of optimization to Retail Sourcing, Dedicated Transportation, 3PL Logistics Sourcing, and Direct and Indirect Materials Sourcing. Ayush has a Masters degree in Supply Chain Management from the University of Texas at Dallas, certifications in Lean Six Sigma and Supply Chain Management, and has served as a Technical Director for a local branch of the Institute for Supply Management (ISM).

We started the series off by discussing the importance of supply and demand chain integration, with respect to the organizational strategic plan, as the key to an efficient, profitable and fluid business and the importance of a good Strategic Sourcing process, built on combinatorial bidding and optimization, in the execution of supply and demand chain integration. Then we discussed the characteristics of a strong and measurable sourcing process which can be utilized to increase Supply Management throughput and turn the organization's Strategic Spend into a Strategic Value-Add for the corporation as a whole. In our last post we presented the first of two examples, inspired by real-world events, that demonstrate the impact of including combinatorial bidding and optimization in a sourcing project that follows a process similar to the one outlined in our last post. Today, we present our second example.

Let's consider the case of Retailer X that wants to source several cases of fresh fruit juice. Three varieties are being sourced in this project -- Apple, Blueberry and Cranberry Juice. The retailer has three DCs in Austin, Baton Rouge and Columbus and wants to determine if it's more cost effective for the supplier to transport items to the DCs versus the retailer's trucks picking them up. Finally, let's consider the three suppliers placing bids on these items are Company A, Company B and Company C.

Retailer X has the following forecast for FY 2012:

The team wants to perform some creative analyses. To this end, suppliers are allowed to provide the following information:

• Delivered Duty Paid (DDP) 'Cost per Case'
  (this includes the cost of transportation from the supplier location to a DC)
• Collect 'Cost per Case' excluding transportation
  (in this case, the retailer handles transportation)
• Item and location-specific capacities
  (e.g., the supplier can only provide 30,000 cases of Apple Juice from their Florida location)
• Discounts on dynamic bundles of items
  (e.g., If awarded the entire forecast of Apple Juice and Blueberry Juice, the supplier offers to provide a discount of 5%)
• Information about the locations that suppliers will be shipping from

The retailer has been strictly monitoring data from the last two years and is using the implemented costs from FY 2011 as a baseline for this project. Based on the data collected over the last two years, the retailer was also able to find a direct correlation between the suppliers' qualitative metrics (let's call this an Index Score) and their ability to match the expected price without unexpected cost increases over the financial year. Based on this information, the retailer wants to penalize suppliers with a low Index Score to ensure they're able to maintain supply quality.

It's possible to get a sense of analysis possibilities just from looking at the supplier data collected. The retailer obtains a 'Transportation Cost' (Cost per Case) from their internal transportation team using the suppliers' location information. This Transportation Cost is used to calculate a 'Landed Cost per Case' if the retailer handled transportation. The Landed Cost thus obtained is then compared against the 'DDP Cost per Case' and the best cost is chosen. The retailer also takes into account supplier capacities to calculate how much of the demand volume gets fulfilled from each location. Also, each supplier has offered certain discounts if they're awarded certain volumes. This is weighed against the capacity information to determine the best overall fit.

The optimization and analysis process typically spans several steps:

1. Low Cost Scenario: This scenario simply calculates an award to each Item-DC combination using the lowest cost per case (among the Landed Cost and the DDP Cost) without considering capacities or discounts
2. Low Cost with Capacities: This scenario again uses the lowest cost per case but now considers supplier capacities and discounts while calculating individual awards
   
   
3. Limiting Winners: Typically, there are some supplier specific constraints that need to be applied (e.g., only 1 supplier gets the Austin DC); We build upon the solution in #2 by applying these constraints
4. Supplier Mix: This set of constraints ensures product availability while maintaining the desired supplier mix (e.g., award at least 10% of each DC to a new supplier)
5. Applying Penalties: In this case, we build the solution further by incorporating some penalties using the suppliers' Index Scores
6. Additional Constraints: Each category has its own unique set of requirements which determines the constraints that are applied; An example of this would be penalizing suppliers that are located far away from a DC if the product is time-sensitive

The process for this project spans across multiple rounds. The retailer participates in face-to-face negotiations between the two rounds to discuss the suppliers' quote with each supplier and to explore any additional ways they could add value. The retailer also decides to share some feedback with suppliers in the second round based on their analyses. In most cases, increased transparency encourages suppliers to provide better quotes.

The example above was very simple with just three items being sourced. But you're immediately able to get a sense of the possibilities where an increased number of Item-DC combinations can be sourced in the same project. Potentially, the retailer could also look for multiple commodities that could be fulfilled by the same set of suppliers and group these into a single project. Having this level of scalability ensures the advantage of better supplier quotes while maintaining the desired supplier-product mix in the analysis stage.

The retailer identifies relevant KPIs that allow them to effectively monitor the category over time. Examples of such metrics include the ratio of product to shipping costs (per DC and overall), suppliers' on-time delivery performance (this must be applied to the overall index score), Expected vs. Implemented Costs (costing changes due to supply shortages, natural disasters, etc.), the cost of maintaining the supplier mix (aligned with sourcing strategy), etc.

Over a multi-year supply cycle, this process effectively drives savings while maintaining a strict hold on metrics that are important to the category and aligned with the retailer's overall strategy.

When you combine this example with the example in the last post, it's easy to see how optimization, when used in conjunction with combinatorial bidding, can add tremendous value to any strategic sourcing initiative. The advantage of being able to compare different possibilities within a short duration of time while following stringent sourcing methodology means your organization has a repeatable and result-oriented process on the right track to sourcing success.

Thanks, Ayush!

Long time readers will know that the doctor has been telling you to set up operations in Halifax (if you haven't already) if you're doing business in North America and Europe or if you're shipping between North America and Europe, India, and/or southeast Asia (including most of southern China) due to its strategic location (on a time-zone halfway between Los Angeles and London) and ready, quick access to many global ports from the Port of Halifax. (the doctor still stands by his 2006 post that said Halifax is The Best Place to Do International Business in Canada!)

The Port of Halifax has made considerable investments in infrastructure over the last five years -- as pointed out in this post from 2010 pointing out that Halifax Can Handle Your Ocean Freight as a result of it's $35 Million Berth Project to insure that it is the deepest North American port on the Eastern seaboard -- and is now ready to handle the vast majority of your shipping needs (including heavy lift, special project, roll-on/roll-off, steel coils, forest products, dry bulk, and liquid bulk). At 16.2 m of depth, it can handle 8,800 TEU vessels with a 15.00 m Draft. Plus, it has transload capabilities direct to rail and cross-docking capabilities for efficient consolidation of shipments from 40 ft containers into 53 ft trailers and a full-service grain elevator.

The port's ocean terminals have 13 berths with over 400,000 square foot of covered storage with direct loading to ship, rail, or truck; a 65,000 square foot cover shed with 20-25 foot vertical stacking capability with six rail loading/discharging bays and 5,000 linear foot of on-dock trackage; four truck loading docks equipped with levellers; and three dedicated cold storage warehouses with HACCP and CFIA approved programs.

As noted in a prior post, Halifax, via the Suez Canal, is a day and a half closer to southeast Asia than any other North American east-coast port and is two days closer to Europe. For example, it's only 6 days to Rotterdam or Hamburg, 20 days to Singapore, and 21 days to Ho Chi Minh City. And rail to Montreal, Chicago, and Memphis is quite competitive. It's only 1.5 days to Montreal, 3 days to Chicago, and 4 days to Memphis. And if you want to know how long it will take, the Port's new HalifaxGetsItThere.com site has a spiffy new Transit Time Calculator in addition to Route Maps, a Schedule-at-a-Glance, and a Daily Status Report.

Just remember that HalifaxGetsItThere.com and come to Halifax. Your business will thank you for it.

Today's guest post is from Ayush Sharma, a Strategic Sourcing Consultant with Trade Extensions in the Americas. His particular speciality is the application of optimization to Retail Sourcing, Dedicated Transportation, 3PL Logistics Sourcing, and Direct and Indirect Materials Sourcing. Ayush has a Masters degree in Supply Chain Management from the University of Texas at Dallas, certifications in Lean Six Sigma and Supply Chain Management, and has served as a Technical Director for a local branch of the Institute for Supply Management (ISM).

We started the series off by discussing the importance of supply and demand chain integration, with respect to the organizational strategic plan, as the key to an efficient, profitable and fluid business and the importance of a good Strategic Sourcing process, built on combinatorial bidding and optimization, in the execution of supply and demand chain integration. Then, in our last post, we discussed the characteristics of a strong and measurable sourcing process which can be utilized to increase Supply Management throughput and turn the organization's Strategic Spend into a Strategic Value-Add for the corporation as a whole. Today, we are going to present our first of two examples, inspired by real-world events, that demonstrate the impact of including combinatorial bidding and optimization in a sourcing project that follows a process similar to the one outlined in our last post.

We start with a logistics sourcing project run by 'Transport Corp.', a 3PL (third-party logistics) company that wants to source three routes -- Route A, Route B and Route C. Each route has a certain volume (number of truckloads) that needs to be fulfilled. Transport Corp. wants to utilize the combinatorial bidding and optimization process and invites three freight carriers to bid in this project -- 'Carrier A', 'Carrier B' and 'Carrier C'.

Transport Corp. has the following volume information.

Transport Corp. wants the carriers to provide the following inputs:

1. A 'Rate per Mile' for each lane
2. An estimated 'Transit Period' (number of days from the origin to the destination)
3. A 'Capacity Commitment' (number of loads each carrier can fulfill)
4. Any 'Lane Bundles' that would entail a lower rate across the bundle

The freight carriers each quote the following:

Carrier A doesn't have any additional bundle discounts to provide.

In addition, Carrier B says that if given all the volume in Route A and Route B, they'll provide an additional discount of 5%.

Carrier C doesn't have any additional bundle discounts to provide.

Initial Results (Low Cost without Capacities or Discounts)

With the carrier Lane Rates (cost for shipping all the loads on each lane), it's possible to get a 'Total Cost' comparison. Looking at the numbers simplistically (i.e. without considering any capacities or discounts), we can infer the lowest cost carrier easily. In this case, looking at the table below, it's easy to identify the winner overall would be Carrier A if one was just looking at the carrier prices

Low Cost Considering Discounts

However, we know that Carrier B has offered a 5% discount on Route A and Route B if awarded both these lanes. Let's consider this possibility in the table below. It's apparent that after applying the discounts, Carrier B becomes more favourable not only on Route A and Route B but also overall (see the last row showing the total cost for awarding all routes to a single carrier).

Optimal Payment Considering Discounts, Capacities and Business Constraints

In the same problem, we now analyze the possibility of honouring carriers' 'Capacity Commitment' numbers. In addition, Transport Corp wants to mitigate risk and therefore wants to award each route to at least two carriers. We now see that a simple problem with three lanes and three carriers quickly becomes hard to solve. This is where the power of optimization comes into play, allowing us to quickly compute the best solution. Here's a look at the solution if we want 2 winners per route and also want to honour capacity commitments. Carrier B's discount doesn't materialize in this scenario as no carrier gets a full lane award.

Taking this one step further, it's possible to visualize cases where Transport Corp wants to incorporate some penalties for carriers with higher 'Transit Periods' to arrive at another solution that has a better overall lead time. In this manner, several what-if scenarios can be run in a short span of time. These types of creative analyses can be performed while simultaneously allowing carriers to submit all the information they have. However, a process also needs to be instituted where the awarded scenario is closely evaluated against previously implemented rates. It is also useful to do some sensitivity analyses to understand how the award alignment changes if the payment is relaxed by a certain percentage. Monitoring these in addition to carrier performance and quality metrics allows Transport Corp to arrive at an optimal decision that considers all factors and is right for their business.

Thanks, Ayush.

Today's guest post is from Ayush Sharma, a Strategic Sourcing Consultant with Trade Extensions in the Americas. His particular speciality is the application of optimization to Retail Sourcing, Dedicated Transportation, 3PL Logistics Sourcing, and Direct and Indirect Materials Sourcing. Ayush has a Masters degree in Supply Chain Management from the University of Texas at Dallas, certifications in Lean Six Sigma and Supply Chain Management, and has served as a Technical Director for a local branch of the Institute for Supply Management (ISM).

Yesterday's post discussed the importance of supply and demand chain integration as the key to an efficient, profitable, and fluid business. These processes, which should be integrated with the strategic plan, should utilize Strategic Sourcing and it's ability to drive 'savings' year after year. And the best Strategic Sourcing processes are those that combine combinatorial bidding and optimization, which allows an analyst to run several what-if scenarios in minutes and generate reports that show exactly how the overall spend distribution changes as newer business processes are taken into account. In today's post, we will discuss the requirements for a strong and measurable sourcing process.

A strong and measurable sourcing process normally exhibits the following characteristics:

1. Integrated Processes
   Using a rolling window of a few years (usually two to three years), strategic sourcing projects should be strictly monitored to understand expected vs. implemented costs and ensure implemented costs are in line with the strategic plan. The suggested time window works best as it allows room to respond to market dynamics while maintaining a medium to fairly long-term focus.
2. Creative Analyses
   Technologies like combinatorial bidding and optimization can be used creatively. Today's tools offer extreme flexibility in terms of the types of data that need to be captured and the limitless possibilities for analysis. Businesses must look at ways of incorporating qualitative information and ongoing metrics (e.g., favouring suppliers who have been able to maintain the price for the duration of the contract) in the analysis process.
3. Collaboration
   Supplier collaboration is key to insure the success of any Strategic Sourcing process. In this era of real-time communication, it's vital to collaborate with suppliers on an ongoing basis while providing them dynamic feedback to improve the overall quality of the sourcing process.
4. Economies of Scale
   Businesses must look to increase the scale of projects. Several bidding tools allow ridiculously large numbers of bids to be captured and analyzed at an extremely granular level. Increasing the size of projects not only means increased productivity and cycle time (and thereby cost) efficiencies for the organization. It also allows you to take advantage of economies of scale in the bidding process while maintaining the appropriate level of detail during analysis.
5. Benchmarking
   Sourcing projects should be used to create financial benchmarks allowing organizations to understand industry trends and the impact of specific changes in methodology. When the market fluctuates, effective benchmarking techniques help understand the immediate and long-term effects and allow organizations to mitigate risk.

The easiest way is to just get started using the guidelines above and then steadily build and refine the process. No one solution will work for all organizations, but taking the lather-rinse-condition-repeat approach with special focus on 'conditioning' will ensure maximum optimality. Supplier collaboration should take center-stage, especially when the focus is on long-term profitability. Utilizing the latest technology to capture all of their requirements ensures a wholesome process and a meaningful relationship with suppliers. As the process gets more streamlined, productivity benefits (along with specific measurable savings) will mean increased throughput in the entire sourcing process without losing track of strategic goals. This is how your Supply Management organization turns the organization's Strategic Spend into a Strategic Value-Add for the corporation as a whole.

In the posts that follow, we will illustrate this with a couple of examples, inspired by real-world events, that demonstrate the impact of including combinatorial bidding and optimization in a sourcing project that follows a process similar to the one outlined above.

Thanks, Ayush.

Today's guest post is from Ayush Sharma, a Strategic Sourcing Consultant with Trade Extensions in the Americas. His particular speciality is the application of optimization to Retail Sourcing, Dedicated Transportation, 3PL Logistics Sourcing, and Direct and Indirect Materials Sourcing. Ayush has a Masters degree in Supply Chain Management from the University of Texas at Dallas, certifications in Lean Six Sigma and Supply Chain Management, and has served as a Technical Director for a local branch of the Institute for Supply Management (ISM).

Supply and Demand Chain integration has been viewed as key to an efficient, profitable and fluid business. This is especially true today with several organizations looking for deeper synergies between their supply and demand planning processes as they look to drive costs out of the value chain. But soon enough, all the "costs" will be cut and companies will be looking to increase the efficiency and long-term profitability of their supply chain. 'Long-Term Profitability' is an interesting term given the context.

In today's volatile business environment it's even more imperative to insure your supply chain is primed to mitigate risk and deliver real-dollar savings year after year. If the last two years have taught us something, it's the extent to which regional disturbances can affect supply chains worldwide. The high-level solution is to integrate supply and demand planning processes with each other. But even more important is that they be integrated with the strategic business plan. Specifically, on the supply-side, Strategic Sourcing is an important cog in the supply chain wheel simply because of the level of spend at most large organizations and the pressure to drive 'savings' year after year.

While trying to add value to the Strategic Sourcing process, combinatorial bidding as a methodology has seen some success in recent years. In the Sourcing space, the term 'Combinatorial Auctions' is widely used to denote a process that allows you to elegantly capture suppliers' pricing in an auction-type event while taking into account several considerations like bundled pricing and supplier capacities. However, one must also realize that combinatorial bidding (in non-auction RFx type events) has been used with tremendous success by several companies spanning a wide variety of industries. The effects of combinatorial bidding are great because of the nature of the process -- suppliers place bids based on what they think their competitive advantage might be and buyers can efficiently take these into account while consistently honouring their own business requirements.

Pair this with optimization and you can drive even more value (not just "savings") out of the process. Optimization allows buyers to run several what-if scenarios in minutes and generate reports that show exactly how the overall spend distribution changes as newer business requirements are taken into account. The reason this is important is because a low-cost solution, even with combinatorial bidding, is never really tailored for any business. Given the wide-ranging scope of business requirements, optimization allows you to make an informed decision as it can quickly give you the information you need to identify the best 'Overall Value' rather than just the lowest cost -- not to mention being better prepared for supplier negotiations.

The truth is that even today, with a variety of tools available to support these processes, too many businesses fail to see hard-dollar results. The reasons for this obviously depend on the specific nature of projects conducted and are generally complex and varied. But a common theme that ties them together is the thought that a few sourcing events with the methodology above would help realize immediate savings. This might be true in some cases, but even then, the savings realized are probably low-hanging fruit that should've been captured through either traditional spend analysis, cost modelling, or an appropriately designed auction. Furthermore, especially in cases where suppliers' costs have been 'driven down', these 'savings' can quickly fade away as suppliers try to recover business in creative ways once the contract has been signed. This aspect should be given special consideration because of the macro- and micro-economic factors that come into play.

In order to drive down costs and at the same time maintain long-term viability, the sourcing process must be tightly integrated with the strategic plan. Further, bidding and optimization tools must be part of the sourcing process as these tools allow for increased collaboration with suppliers while maintaining control over the sourcing process. In Part II, we will discuss the requirements for a strong and measurable sourcing process.

Thanks, Ayush!