PurchTips edition #131

Some sourcing situations involve constraints and complexities. Constraints are limits on your decision, for example:

• A requirement that you must select two suppliers (as opposed to one, three, or any other number)
• No supplier has the capacity to handle 100% of your business
• A requirement that a certain percentage of your award must be placed with diversity suppliers

Examples of complexities may be:

• A large number of line items being bid
• Suppliers offering discounts at different volume levels and/or combinations of line items
• Various delivery locations with differences in the suitability of certain bidders to supply some of them
• A choice of freight lanes at differing costs

When you encounter situations with lots of constraints and complexities, it becomes quite challenging to figure out the best supplier selection. For these types of situations, some purchasing departments utilize supply chain optimization technology to support their decisions.

Simplified, supply chain optimization is a technology that applies “rigorous mathematical techniques to a well-defined sourcing scenario to produce an optimal award allocation,” according to Michael Lamoureux, president of ToP KaTS Consulting and editor of the Sourcing Innovation Blog. Supply chain optimization helps purchasing departments “arrive at the best decision out of all the possible alternatives.”

When there are multiple bidders, multiple constraints, and lots of complexities, there can be a massive number of alternatives and combinations! And the more options there are, the higher the probability that you will make a suboptimal decision.

While it is possible to work out some slightly complex bid analyses by hand, there is a significant chance that using supply chain optimization technology can save money, save time, and reduce errors. But supply chain optimization may not be appropriate for every organization or spend category.

According to Lamoureux, “You would use [supply chain optimization] to source high-value core commodities, parts, and materials for which there are capacity constraints, associated risks, and multiple potential suppliers.” And because supply chain optimization technology requires a significant investment – Lamoureux estimates a premium of “anywhere from $100,000 per year to a few million” dollars above the cost of a standard eSourcing application – it is typically adopted by larger organizations who are able to achieve a larger return on investment due to their spend volume.

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