Managing the "What-ifs"
Fortunately for today's sourcing professional, there are techniques and tools that expedite the decision-making process by addressing the "what-if" factors in a direct, quantifiable manner. This technique is decision optimization.
Decision optimization applies rigorous analytical techniques to bid results to arrive at the best possible decision out of a multitude of possible alternative scenarios. It empowers companies to select the best combination of suppliers, products and services on a simplified, repeatable and provable basis. By using a decision optimization tool, companies can layer different business factors/risks (for example, quality, capacity, rebate structures) to derive real-world award scenarios.
For example, one scenario might analyze bid results by excluding a supplier from one of five locations, build in rebate structures from other suppliers, award at least 10 percent of the business to a diversity supplier, while also ensuring there are at least three suppliers awarded the business. The results (the costs of the recommended supplier mix) are presented in a matter of minutes. This scenario can then be compared with other custom scenarios. Through these custom scenarios, companies minimize "what-if" risks by analyzing the impact of those risks for the company.
An additional benefit is that decision optimization is an inclusive, transparent process. The joint sourcing and stakeholder team can work together, (at the same time, in the same room), creating and comparing scenarios in a time-effective manner. Collaborating through the tool drives an expedited decision and reduces process time from six to eight weeks to 10 days. For example, by using decision optimization technology, a Fortune 50 company successfully reduced decision making time from 45 days to 11 days (75 percent) for a $110 million project. The results led the customer to state, "Data drove the strategy," and issue the award notification the following day.
In a report, technology research firm Aberdeen Group states, "Early adopters of advanced sourcing [decision optimization] and negotiations reported incremental savings of 12 percent on average, beyond what was obtained with basic e-RFx and auction tools alone." We recommend following the "Rule of Threes" when deciding to use decision optimization: for three key criteria – if there are multiple suppliers, multiple locations and multiple line items – use decision optimization to develop award scenarios. You will save time and money.
About the Authors: David Bush is the CEO and co-founder of Iasta, a provider of supply management technology and associated services. Melissa Beuc is senior director of product marketing with Iasta. For more information on Iasta, please go to www.iasta.com.