Collaborative optimization uses flexible, expressive bids from suppliers—built on internal suppliers’ strengths but still compatible with other internal requirements. CO can also provide a cost for each brick—the decision options that challenge internal requirements and can help create the blueprint for the best way to choose bricks and build the house—resulting in an award decision with maximum value to the business.

The principle behind CO is simple: Expand the number of ways to build the house. In other words, multiply the solutions from two sides. From the demand side, get internal stakeholders to consider other bricks or be open to alternative suppliers’ offers. From the supply side, allow suppliers to provide their own bricks designed around their best offers or to bid more flexibly based on their capabilities, as they have seen many other solutions at their customer base.

Internal collaboration means collecting requirements and constraints within the company to assess alternative options and their impact. Government regulations, internal strategy requirements, supplier and market constraints, and quality conditions, among others, are expressed on many levels, including across all countries or specific regions, across an entire business or individual business units, and across specific suppliers or specific items. What the bricks should look like and how they should be put together is based on each person’s view of how the business should be run. Normally, these requirements take the following forms: Fewer than 10 suppliers are needed with at least five incumbents, at least 75 percent of business needs to remain with current suppliers, and all awarded suppliers must have quality certifications.

To expand the number of options, CO explores five opportunities:

Relax specifications
Challenge service levels
Review business allocation constraints
Change the operating model
Review business requirements

External collaboration on the supply side moves away from traditional sourcing, which forces suppliers to bid “on spec” so offers are comparable (bricks of the same shape, size, and color). This simplifies procurement but restricts suppliers from offering their specific strengths, which in turn limits the number of solutions. CO accepts a variety of bricks, or specific supplier strengths, to challenge the status quo and create new opportunities and competitive dynamics. Bids are more competitive and allow suppliers to use expressive bids that articulate their competitive ideas, strengths, and capabilities. If, for example, item re-specification is possible, then a finished product can be sourced by taking into account various options of raw materials or even the mix options between them. This way, procurement compares both as-is items and re-specified items while also highlighting the cost differences. It is also possible to compare the difference between buying a finished product versus unbundling its procurement into raw materials and production services. As a result of this bidding freedom, the size of the sourcing event grows in terms of the number of items, specification variants, and invited bidders. But keep in mind that managing bidding complexity is CO’s main strength (see sidebar: Tired of Sourcing Complexity?).

Tired of sourcing complexity?

You know the drill: There are plenty of offers from suppliers but not enough time to properly compare them and make the best award decision. To complicate matters, there’s the enigma of how to extract value hidden from mounds of supplier data and an array of internal needs.

External factors compound the situation: global competition for customers and supply, high demand for product customization and its impact on procurement, shorter product life cycles, new technologies, sustainable sourcing, and environmental responsibility, to name just a few.

Internal factors add even more complexity: mounting management pressure to cut costs, more all-inclusive approaches to total value sourcing, and many complex internal requirements to meet the demands of global competition.

Procurement managers often find themselves between a rock and a hard place, reconciling the demands of internal stakeholders with the offers of external suppliers (see figure). Given the intricacies of modern sourcing, this is not an easy task. Mature procurement organizations have negotiated margins down in most categories and now face another challenge: Companies expect year-on-year savings to continue. Beyond managing demand, the next step is to address systemic costs, deeply embedded in the way each particular organization works. The key is to understand the system elements behind an organization’s product or service offering and to define what is driving the cost, how they interrelate with each other, and which of these drivers can be influenced.

Procurement can help suppliers cut costs and offer better prices by understanding their suppliers, their costs, and economies of scale; by challenging the historic constraints; and by breaking down organizational silos to make award decisions on a wider scale. How well procurement can address these challenges will determine whether savings are left on the table or are captured to improve the bottom line.

Supply-side options can be increased in a variety of ways:

Creation of new market competitiveness, by adding more supply tiers to the scope or collecting bids on a more granular basis

Collaboration of partners along the value chain, resulting in a bundled competitive offer

Alternative bids, solutions, and service levels, to take advantage of a more cost-effective offering from the supplier, such as a different transportation equipment or cardboard type in packaging

Packaged or bundled discounts in which suppliers offer discounts based on the awarded service bundle to take advantage of optimizing the supplier’s portfolio

Conditional volume discounts to encourage suppliers to offer discounts based on the awarded business volume overall or in selected areas to take advantage of economies of scale in production

Conditional investments to reflect the upgrade, renewal, or purchase of equipment

Capacity constraints that allow suppliers to specify their service limitations but remain in the game with limited but potentially competitive offers with a fair chance to compete

Payment terms discounts in which suppliers offer a price cut if paid earlier than the default payment terms to improve the cash flow

Contract length discounts that benefit suppliers by securing business for a prolonged period of time and allow for the advantage of business continuity

These elements give suppliers room to match the bid requirements with their business capabilities and motivate them to provide tailored options that create win-win, sustainable savings opportunities.

The main strength of CO is its analytical ability to create the best blueprint, taking into account the variety of supplier offers. In other words, you consider all expressive bids from suppliers and match them with applied business constraints. All bid combinations are evaluated to arrive at the minimal total costs across an expanded opportunity landscape. Although an expanded area for award solutions is likely to make the sourcing event more complex because there are more bricks to build with, collaborative optimization can successfully handle this and serve as a source of greater savings and competitiveness.

Striking a balance between implementation and savings

Optimization should be carried out several times to assess the costs of constraints using various blueprints. There are three typical scenarios (see figure 2):