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Helping Supply Management to excel in a world of growing complexity
CIPS UAE User group, Dubai June 22nd, 2011
Collaborative Optimization for complex categories
2A.T. Kearney 10/10.2007/27200d
This document is exclusively intended for selected participants of
the CIPS UAE User group, Dubai June 22nd, 2011
. Distribution, quotations and duplications – even in the form of
extracts – for third parties is only permitted upon prior written
consent of A.T. Kearney.
A.T. Kearney used the text and graphs compiled in this report
in a presentation; they do not represent
a complete documentation of the presentation.
3A.T. Kearney 10/10.2007/27200d
Content
Growing complexity in supply management
What is Collaborative Optimization
Example: Applying Collaborative Optimization in Road transportation
5A.T. Kearney 10/10.2007/27200d
External and internal trends have a huge impact on the growing complexity supply management professionals have to cope with
External trends
Internal trends
• Role of procurement shifted to proactive and strategic (away from tactical).
• Socially responsible procurement/sustainable sourcing
• Globalization
• Increased competition and price pressures
• Outsourcing
• Shortened and more complex product life cycles
• Transparency
• Governance
• Focused on the business needs
Impact on the
Sourcing process
• Data driven analytics
• Rationalization of all decisions
• Strongly increased communication with network
• Higher degree of customization
• Closer integration and collaboration with suppliers
• Concentration on value creation
• Metric-driven delivery / Performance optimization.
• Multi-tiered Sourcing
• Competition on supply and capacities
• Clear TCO calculations
• What are the "cost of decisions"?
Growing complexity in supply management
6A.T. Kearney 10/10.2007/27200d
• Rigid structures for proposal collection
– Difficult to align requirements with
supplier capabilities
– Suppliers cannot always place best
possible offer
• Scenario generation: limited analytical
power
– Cumbersome award scenario
development (Excel/Access based)
– Labor and time intensive
• Competition focus: How much are you
paying?
– Savings driven by leverage and
supply base rationalization
Managing the growing complexity requires a new genera-tion of techniques for proposal collection and negotiation
Traditionaltechniques
• Structures enabling „Collaborative‟
proposal collection
– Enables suppliers to align capa-
bilities with requirements
– Encourages supplier innovation and
creativity
• „Collaborative‟ Scenario generation
and optimization
– Iterative, multi-stakeholder business
constraints modeling
– Combinatorial optimization („solver‟)
engines to accelerate analysis
• Collaboration focus: What and how
are you buying?
– Benefits of alternative approaches
are analyzed and quantified
„Next generation‟ techniques
Source: A.T. Kearney analysis
Co
st
Savin
gs
Reali
zati
on
Typically savings
deteriorate over
time
Potential
additional
savings with CO
Max savings
with traditional
techniques
Time
Costs of constraints are fixed / not known
Costs of constraints are explored
Growing complexity in supply management
7A.T. Kearney 10/10.2007/27200d
Optimization & Expressive Bidding are connecting the eco-nomical "possible" of the suppliers with the "realizable" of the client
Collaborative proposal collection
Flexible proposal collection tools allow suppliers
• responding creatively to client requirements by suggesting alternative specifications or services,
• varying order quantities,
• offering conditional/volume discounts, or
• bundling their offerings into packages that highlight their unique differentiators
Optimization
Iterative scenario analyses, supported by combinatorial tools, for evaluating
and negotiating complex, inter-dependent proposals based on
• Defined Variables, conditions and interdependencies
• Flexibly modeled business constraints
• Creation and simultaneous rating of different award scenarios
• Defining of optimized awards per supplier
+
Growing complexity in supply management
A.T. Kearney xx/mm.yyyy/00000 8
Even simple standard situations in procurement imply massive complexity
Standard case in procurement
Collaborative Optimization
Think how this standard situation could be solved using your currently available purchasing methodologies and tools.
5 Sites 5 Products5 Suppliers
5 different grades of steel
Source: A.T. Kearney
5 suppliers across different
countries
5 sitesacross different
countries
A.T. Kearney xx/mm.yyyy/00000 9
Restriction in allocation of business
When allocating business, complexity can be further driven by restrictions
Collaborative Optimization
1. Which restrictions could apply when allocating the spend ? Who could bring in these restriction?
2. Which allocation scenarios can you think of?
Source: A.T. Kearney
A.T. Kearney xx/mm.yyyy/00000 10
Collaborative Optimization
Source: A.T. Kearney
Unconstrained scenario - lowest cost but high effort to implement
Scenario 1: lowest cost allocation (“cherry picking”)
A.T. Kearney xx/mm.yyyy/00000 11
Collaborative Optimization
Source: A.T. Kearney
Average (weighted)
349.6
359.4
n/a
374.0
354.6
Scenario 2: only one supplier per site (“single sourcing”)
Easy to implement but at a comparably high price
A.T. Kearney xx/mm.yyyy/00000 12
Combinatorial Complexity in Sourcing
This simple scenario implies massive complexity which reveals when looking at the number of possible allocations
Source: A.T. Kearney
Even in this simple example there are 298,023,223,876,953,125 possible allocations!
Collaborative Optimization
A.T. Kearney xx/mm.yyyy/00000 13
Collaborative Optimization
Source: A.T. Kearney
Scenario 3: not more than three suppliers in total and not more than two per location
This may be a realistic and fair compromise, but how do you find the lowest cost for this allocation scenario?
14A.T. Kearney 10/10.2007/27200d
Motivation and creativity of suppliers has no limits … some proven logistics samples
Growing complexity in supply management
15A.T. Kearney 10/10.2007/27200d
Collaborative proposal collection techniques help identify mutually attractive deals that deliver higher, more sustaina-ble savings
Technique Description Supplier Economies Benefits to Client
Bundling Suppliers offer discounts by grouping together items into combinations or bundles
Suppliers can indicate the economies of being awarded an entire set of items that helps to balance their utilization
• Drives towards a supplier allocation strategy that benefits both buyer and supplier
• Provides suppliers incentives to better align capabilities with client requirements
• Achieves greater sustainability and economic efficiency
Step Pricing Suppliers define their own price break grid and use it to provide quotes for items
Suppliers bid in more precise ways that map to their cost drivers e.g. item pricing de-fined through cost driver inputs
• Provides more precise, comprehensive and sustainable pricing
• Increased transparency allows awarding most competitive bids per sub-group
Conditional Bids
Suppliers make a series of alternative conditional offers, e.g. alternate material types, pricing for new capacity
Suppliers can invest in new capacity with multi-year commitment or offer to use alternate equipment
• Include supplier creativity to manage total costs• Understand costs and tradeoffs associated with
operational decisions• Competitive rates leveraged across a higher
proportion of the business• Cost transparency with respect to particular mate-
rial types ensures the correct item is procured
Price Plus Terms
Suppliers offer a dis-count associated with non-price incentives or conditions e.g. lead time variation
Suppliers can offer a variety of pricing if allowed to vary delivery lead time requirements
• Reduces hedging behavior and drives cost transparency
• Provides useful lever for negotiations
Suppliers match tender requirements with their capabilities and/or strategic objectives and, thus, are enabled and motivated to create and share efficiency savings
Growing complexity in supply management
16A.T. Kearney 10/10.2007/27200d
Award constraints modeling is an algorithm based analy-ses approach that allows stakeholders to model business award „conditions‟
Business Constraints
… across entire business
Supplier & Market constraints
Government constraints
Customer constraints
Self-imposed constraints
… across organizational units
… across groups of suppliers
… for groups of items
… for specific suppliers or items
• Business constraints are to reflect real world constraints and, as such, ensure the feasibility of the solution.
• Constraints modeling will allow decision makers and stakeholders to quantify the costs and benefits of various business constraints.
expressed …
Growing complexity in supply management
17A.T. Kearney X/mm.yyyy/00000
135
130
125
120
115
110
105
0
Scenario modeling allows to find the optimal balance between business constraints and the cost that they imply
Scenario modeling
Optimal
Award
Allocations
Supplier (collaborative) proposals and capacity
• Detailed cost breakdown• Technical alternatives• Conditional bids
• Price plus terms• Bundling• Step pricing
Business award constraints
Baseline db
… across entire business
Supplier & Market constraints
Government constraints
Customer constraints
Self-imposed constraints
… across organizational units
… across groups of suppliers
… for groups of items
… for specific suppliers or items
expressed …
Iterative
constraints
modeling
process
Optimi-
zation
Engine
Source: A.T. Kearney
Baseline
…
„Unconstrained‟: max savings, min implementability
Incumbents Only max implementability, min savings
Scenario A
Scenario B
“Most Desired Outcome”optimal balance between savings and
implementability
Spend (m GBP)
Client Example
18A.T. Kearney 10/10.2007/27200d
Summary
Collaborative Optimization ( CO) helps to:
Make the opportunity cost of your decisions / constraints transparent
Lever dormant supplier capabilities and efficiencies and gain additional savings / cost benefits
Take fact based decisions for the best combination of offer
Growing complexity in supply management
Example 1
Applying Collaborative Optimization in Road Transportation
20A.T. Kearney 10/10.2007/27200d
Growing customer requirements and reduced flexibility on the supply markets increase the challenge to find the right strategic fit
Transportation cost in Europe increases by 3 – 6% per year due to:
• Increasing fuel cost
• Increasing labor cost
• Rising toll cost
• Increasing traffic density
• Shortage of available capacities
• Tighten European labor directives
Low profit margins (1-3%) do not allow pure price negotiations, but require a collaboration with the carriers to use
their capabilities efficiently
Transportation Sourcing is characterized by:
• Data mining & Baseline definition– Collect complete and accurate
transportation data– Allocate line haul cost and
surcharges– Define of lanes/ transportation flows– Definition of operational
requirements and constraints
• Tendering– Align lot structure with supplier
capabilities and objectives (asset utilization and/ or network leverage)
– Factor in carrier capacities and strategies
• Award analytics– Perform "what if" analysis– Factor supplier capacity constraints
into award decision
Complexity
Current Market Situation Transportation Sourcing
Complexity in transportation
21A.T. Kearney 10/10.2007/27200d
Prerequisite for the use of CO & Expressive Bidding is a clear and solid understanding of the carriers„ cost-benefit-model
Carriers„ Cost-
Benefit Drivers
• Fleet utilization
• Network efficiency
• Buying power
• Cost management
• Regional or service segment specialization
Expressive
Bidding
• Define service regions (matching their network)
• Define part-load break defaults
• Indicate capacity constraints at country, regional or lane level
• Indicate investment capabilities and willingness
• Expose accessorial charges (i.e. weekend driving)
• Offer price discounts for bundles of lanes or regions
• Offer volume discounts
• Indicate price discounts for adjusted/ revised requirements, i.e. longer lead times
Carriers are enabled and motivated to create and share efficiency savings
based on their capabilities
Example: Road Transportation
Optimisation & Expressive Bidding
22A.T. Kearney 10/10.2007/27200d
Optimisation & Expressive Bidding
Optimization
• Sourcing Teams can define a wide array of constraints, i.e.:
– Forced usage or elimination of specific carriers
– Minimum and/or maximum number of carriers
– Minimum and/or maximum number of existing carriers
– Minimum and/or maximum volume of business awarded
• Constraints can be expressed for i.e.:
– The entire company
– Specific lanes or regions
– Organizational units (divisions, plants, brands)
– Groups of carriers (i.e. pre-approved for specific customers)
– Specific carriers on selected lanes or regions
Example: Road Transportation
Award Constraints Modeling in transportation is an algo-rithm based analyses approach that allows stakeholders to define/model business award „conditions‟
23A.T. Kearney 10/10.2007/27200d
€ 62,5
€ 63,5
€ 64,5
€ 65,5
€ 66,5
€ 67,5
27 32 36 37 38 39 41 45 49 51 52 53 54 57 62 67 72 74
Millio
ns
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
award_spend Lane Incumbent Origin Incumbent Incumbent
Award Logistic cost and Incumbent share by max # of suppliers(FTL & FCL Network)
Cherry Pick-
with capacity
Optimisation & Expressive Bidding
Example: Finding the efficient supplier mix is key for implementable and sustainable savings in transportation
24A.T. Kearney 10/10.2007/27200d
_________________________________________________________________________________
Federico MariscottiDirector A.T. Kearney FZ LLC
Level 26, Media One TowerDubai Media CityPO Box 126299, DubaiUnited Arab Emirates Tel: +971 4 457 5055Mobile: +971 50 5529 335
Procurement Solutions [email protected]_______________________________________________________________________________
_________________________________________________________________________________
Frank ThewihsenVice President A.T. Kearney FZ LLC
Level 26, Media One TowerDubai Media CityPO Box 126299, DubaiUnited Arab Emirates Tel: +49-211-1377-2376 Mobile: +49 175 2659 376 (Germany)
+971 505577971 (UAE)Procurement Solutions [email protected]_______________________________________________________________________________
Contact details: