Collaborative Optimization for complex categories

Transcription

1 Collaborative Optimization for complex categories Helping Supply Management to excel in a world of growing complexity CIPS UAE User group, Dubai June 22 nd, 2011

2 This document is exclusively intended for selected participants of the CIPS UAE User group, Dubai June 22 nd, 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. 2

3 Content Growing complexity in supply management What is Collaborative Optimization Example: Applying Collaborative Optimization in Road transportation 3

4 Growing complexity in supply management External and internal trends have a huge impact on the growing complexity supply management professionals have to cope with External 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 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 Internal trends Transparency Governance Focused on the business needs Clear TCO calculations What are the "cost of decisions"? Impact on the Sourcing process Data driven analytics Rationalization of all decisions Strongly increased communication with network 5

5 Cost Savings Realization Growing complexity in supply management Managing the growing complexity requires a new generation of techniques for proposal collection and negotiation Traditional techniques Next generation techniques 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 Potential additional savings with CO Max savings with traditional techniques Typically savings deteriorate over time Time Structures enabling Collaborative proposal collection Enables suppliers to align capabilities 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 Costs of constraints are fixed / not known Costs of constraints are explored Source: A.T. Kearney analysis 6

6 Growing complexity in supply management Optimization & Expressive Bidding are connecting the economical "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, interdependent 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 7

7 Even simple standard situations in procurement imply massive complexity Standard case in procurement Collaborative Optimization 5 Sites 5 Suppliers 5 Products 5 sites across different countries 5 suppliers across different countries 5 different grades of steel Think how this standard situation could be solved using your currently available purchasing methodologies and tools. Source: A.T. Kearney A.T. Kearney xx/mm.yyyy/

8 Restriction in allocation of business Collaborative Optimization When allocating business, complexity can be further driven by restrictions 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/

9 Scenario 1: lowest cost allocation ( cherry picking ) Collaborative Optimization Unconstrained scenario - lowest cost but high effort to implement Source: A.T. Kearney A.T. Kearney xx/mm.yyyy/

10 Collaborative Optimization Scenario 2: only one supplier per site ( single sourcing ) Average (weighted) n/a Easy to implement but at a comparably high price Source: A.T. Kearney A.T. Kearney xx/mm.yyyy/

11 Combinatorial Complexity in Sourcing Collaborative Optimization This simple scenario implies massive complexity which reveals when looking at the number of possible allocations Even in this simple example there are 298,023,223,876,953,125 possible allocations! Source: A.T. Kearney A.T. Kearney xx/mm.yyyy/

12 Collaborative Optimization 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? Source: A.T. Kearney A.T. Kearney xx/mm.yyyy/

13 Growing complexity in supply management Motivation and creativity of suppliers has no limits some proven logistics samples 14

14 Growing complexity in supply management Collaborative proposal collection techniques help identify mutually attractive deals that deliver higher, more sustainable savings Technique Description Supplier Economies Benefits to Client Bundling Suppliers offer discounts by grouping together items into combinations or bundles Step Pricing Suppliers define their own price break grid and use it to provide quotes for items Conditional Bids Price Plus Terms Suppliers make a series of alternative conditional offers, e.g. alternate material types, pricing for new capacity Suppliers offer a discount associated with non-price incentives or conditions e.g. lead time variation Suppliers can indicate the economies of being awarded an entire set of items that helps to balance their utilization Suppliers bid in more precise ways that map to their cost drivers e.g. item pricing defined through cost driver inputs Suppliers can invest in new capacity with multi-year commitment or offer to use alternate equipment Suppliers can offer a variety of pricing if allowed to vary delivery lead time requirements 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 Provides more precise, comprehensive and sustainable pricing Increased transparency allows awarding most competitive bids per sub-group 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 material types ensures the correct item is procured 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 15

15 Award constraints modeling is an algorithm based analyses approach that allows stakeholders to model business award conditions Business Constraints Growing complexity in supply management expressed Self-imposed constraints Customer constraints Government constraints Supplier & Market constraints across entire business 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. 16

16 Scenario modeling allows to find the optimal balance between business constraints and the cost that they imply Scenario modeling Supplier (collaborative) proposals and capacity Detailed cost breakdown Technical alternatives Conditional bids Price plus terms Bundling Step pricing 135 Spend (m GBP) 130 Baseline Client Example 125 Baseline db Optimization Engine Optimal Award Allocations 120 Incumbents Only max implementability, min savings Business award constraints expressed across entire business across organizational units across groups of suppliers for groups of items for specific suppliers or items Self-imposed constraints Customer constraints Government constraints Supplier & Market constraints Iterative constraints modeling process Most Desired Outcome optimal balance between savings and implementability Scenario B Scenario A Unconstrained : max savings, min implementability Source: A.T. Kearney A.T. Kearney X/mm.yyyy/

17 Growing complexity in supply management 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 18

18 Example 1 Applying Collaborative Optimization in Road Transportation

19 Complexity in transportation Growing customer requirements and reduced flexibility on the supply markets increase the challenge to find the right strategic fit Current Market Situation 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 Complexity Transportation Sourcing 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 20

20 Optimisation & Expressive Bidding Prerequisite for the use of CO & Expressive Bidding is a clear and solid understanding of the carriers cost-benefitmodel Example: Road Transportation Carriers Cost- Benefit Drivers Fleet utilization Network efficiency Buying power Cost management Regional or service segment specialization Carriers are enabled and motivated to create and share efficiency savings based on their capabilities 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 21

21 Optimisation & Expressive Bidding Award Constraints Modeling in transportation is an algorithm based analyses approach that allows stakeholders to define/model business award conditions Example: Road Transportation 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 Optimization 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 22

22 Millions Award Logistic cost and Incumbent share by max # of suppliers (FTL & FCL Network) Optimisation & Expressive Bidding Example: Finding the efficient supplier mix is key for implementable and sustainable savings in transportation 100% 67,5 90% 80% 66,5 70% 65,5 64,5 Cherry Pickwith capacity 60% 50% 40% 30% 63,5 20% 10% 62, % award_spend Lane Incumbent Origin Incumbent Incumbent 23

23 Contact details: Federico Mariscotti Director A.T. Kearney FZ LLC Level 26, Media One Tower Dubai Media City PO Box , Dubai United Arab Emirates Tel: Mobile: Procurement Solutions federico.mariscotti@atkearney.com Frank Thewihsen Vice President A.T. Kearney FZ LLC Level 26, Media One Tower Dubai Media City PO Box , Dubai United Arab Emirates Tel: Mobile: (Germany) (UAE) frank.thewihsen@atkearney.com Procurement Solutions 24