Most organizations have a diverse spend portfolio that includes many simple, several moderately simple and a few complex spends.
To address each spend appropriately, we need to understand the dynamics that make each event complex. For starters, let’s look to another ‘multi-faceted’ puzzle; the Rubik’s Cube.
Invented in 1974 by Erno Rubik, Rubik’s Cube has puzzled generations around the world with its utter devilishness. The multi-faceted nature of the Rubik’s Cube makes for a good analogy to spend management and sourcing.
According to Wikipedia, a 3×3 Rubik’s Cube has over 43 quintillion starting positions. With the right combinatorial magic, any cube can be solved in 29 or fewer moves. Like spend management, the Rubik’s cube has an extraordinary number of possible starting positions but a logical, algorithm-based solving process can elegantly solve the problem with only minimal effort.
Complex Spend Management is another multi-faceted puzzle with even more complexity and ‘faces’ (internal and external to the buying organization) than Rubik’s famous cube. There are many factors which influence decision-making and like a Rubik’s Cube each factor of Complex Spend Management is related to others. For example, let’s look at the supplier ‘facing’ decision factors inherent in sourcing decisions; price, incumbency, risk and timing:
If incumbency, supplier risk factors and timing are not important, the spend management puzzle is relatively straightforward to solve. We could use a reverse auction or simple RFI/RFP template and get the cheapest possible price, all other things being equal, pretty easily. This is akin to solving one face of a Rubik’s cube, something most of us have the skills to do:
But, if we focus on the multi-faceted nature of our negotiations, explore new, potentially more efficient ways of dealing with suppliers while balancing the satisfaction of our internal stakeholders (in operations, finance, marketing, etc) we must recognize how our efforts to solve one ‘face’ or dimension of the puzzle impact the other faces and work to find a solution that satisfies each dimension. We’ve all observed that the price visibility we see in a reverse auction inspires pricing creativity by suppliers. In the same way, if we can offer more visibility into other, non-price stakeholder requirements, we will stimulate suppliers to respond creatively in those areas as well.
Successful sourcing managers find creative ways to drive financial results for their company. Effectively reducing costs means challenging internal stakeholders’ assumptions, preferences, and processes with scenario analysis that quantifies trade-off costs.
Buyers need to expand simple price analysis to quantify the total costs (landed, total cost of ownership) absorbed by the operational stakeholders. Complex Spend Management requires that buyers include the inventory and logistics impact in their financial analysis. Buyers are often challenged to explore a wider variety of options to redesign their supply plan while evaluating strategic considerations like ‘make versus buy’.
To address this explosion of complexity, many buying organizations have developed and maintain ‘big ass spreadsheets’ (BASS). These spreadsheets were often designed for a single project and then reused on subsequent complex spend events. This approach is suboptimal as it does not take into account the dynamic nature of Complex Spend Management. The BASS approach is akin to knowing the moves to solve one specific starting position of a Rubik’s cube and applying it to other starting positions – it simply does not solve the ‘new’ puzzle. In short, buyers need a more dynamic and flexible solution.
Fortunately, today’s optimization algorithms, like that of BravoSolution’s Collaborative Sourcing, provide buyers with a technology that identifies the optimal sourcing solution for each combination of supplier pricing, buyer preferences, business rules and risk factors. This allows buyers to define a problem (starting position) and work with the suppliers in a collaborative manner to propose solutions. The buyers then use optimization to determine which combination of supplier proposals is best.
In essence, optimization technology provides the buyer with the ability to increase collaboration with suppliers and solve any starting position of a Rubik’s Cube buy simply pressing the “Solve Now” button.
For those of you interested in typing in a configuration of a real Rubik’s cube and getting step by step instructions for solving it, click here.
By Paul Martyn, Vice President of Marketing, BravoSolution
Paul Martyn is vice president of marketing at BravoSolution, a supply chain solutions company. BravoSolution supports procurement professionals with tools and services to identify sourcing opportunities, prioritize initiatives, execute projects with tailored solutions, and realize the benefits of their initiatives. Learn more at www.BravoSolution.com.