Optimization Plus Negotiation Leads to Profitability and Provides a Strategic Advantage
Optimization can put your team in a strong negotiating position that should translate into profitability and a strategic advantage.
Today it is far easier to collect big data then it is to use it to create a strategic advantage.
There are procurement tools that will help you optimize the results of your RFP events.
Many of these tools provide a cherry pick scenario using limited constraints.
This can be helpful as a starting point but if your organization has many constraints, these tools fall short.
Let me share a couple of straightforward examples to illustrate my point.
A materials manufacturer has a handful of key commodity ingredients that are used in over fifty applications.
- There are dozens of providers for these ingredients and the manufacturer has plants is 65 locations.
- Each supplier has limited capacity and services a defined geographic region.
- Other factors include quality, past delivery performance and total cost of delivery.
Another example is for a property management company that services 1,500 locations.
- Each location utilizes up to 15 different services.
- A typical service can be provided by 5 to 15 companies.
- Each service provider services a defined geographic region.
- Past performance is a crucial factor in the award and local management creates a scorecard on key performance indicators.
- Other factors include the service providers hiring practices and capacity to scale.
You can imagine how long it would take to evaluate these basic constraints using Excel and a cherry pick scenario is typically based primarily on price.
Of course, there are many other relevant constraints that can be considered.
Now for the good news.
Collecting relevant data from suppliers during the RFP will follow normal procedure.
The internal data related to performance should be included in the RFP, so it can be included along with rest of the data to the optimization module.
Naturally, any internally generated evaluation points would be hidden from the suppliers.
The data collected is then sent to the optimization tool for a deeper dive.
Additional constraints can be layered in to create the base case.
An example could be limiting the number of providers to each facility.
The art in this analysis comes in designing the base case.
The base case should include all the constraints that are a must.
Now comes the fun part.
You can typically run additional cases in under an hour and many times during a coffee break.
The goal is to create the lowest cost allocation given all the constraints and finding the right balance between operational complexity and maximizing savings.
Another goal is to understand the sensitivity of other constraints. This is very powerful information that can be used in your negotiations and is a dream for folks that love “what if” scenarios.
A most likely scenario or set of scenarios will emerge and this can become the jumping off point for negotiations.
Consider this – if you know the very best allocation possible and you can combine it with the sensitivity data – you will be able to negotiate from a position of strength.
In fact, you should be able to take a counter offer from a supplier or multiple counter offers and evaluate the impact on your profits the same day.
Your ability to use optimization to analyze and understand the impact on profitability is only limited by your imagination.
The time it takes to create cases will no longer be a major factor.
Most people in procurement are feeling overwhelmed by enormous amounts of data and the demands of stakeholders.
Optimization gives you the tool to gain control and, in the process, create strategic advantages.
Do you have events with a sizeable number of items or suppliers and other constraints?
If you do, optimization is a tool you should consider.
Ask better questions, make changes and 2018 will be your best year ever.
Action Step: If you are uncertain where to start the process of change, a procurement professional like myself can provide guidance and expertise to help your organization achieve the results you want.
If you want to go explore this topic in greater detail, please contact me. I invite you to request 30-minute discovery conversation. In my experience the next step will be apparent at the end of the call. I never assume that what I have to offer will be right for everyone, so don’t expect a sales pitch. You can reach me at 973-936-9672.
If you would like to know more ways to reduce costs without changing the way you do business, simply give me a call or send me an email with your contact information and the best time to reach you.
You Won’t Drift to Success©
Commit to taking the next step.
Until Next Time, I Wish You Great Success in Your Business and in Your Life