The world is full of choices, and we rarely find ourselves in a situation where we can only choose between the blue or the red pill. In Procurement, complex supplier award decisions require us to consider multiple decision criteria and balance business requirements and market opportunities. Scenario-based thinking allows us to understand and evaluate the choices and trade-offs we face.
Short on time? Here’s what you need to know:
· Scenario-based thinking in sourcing allows you to flexibly model, assess, and compare different strategic options for awarding your business
· Trying to evaluate scenarios in Excel is a challenge without the appropriate decision-support tools
· Making scenario-based thinking intuitive and easy to use allows Procurement to make holistic decisions
Scenario-based thinking is a concept developed by the US Military in the early 1990s. It was used to anticipate and model different strategic options and their potential implications in conflict situations. The underlying assumption was that there are always multiple ways to accomplish a mission, but the implications on resources would potentially differ. Understanding the options, therefore, supports decision-makers in evaluating the trade-offs.
This concept was since translated into strategic business management in multiple ways. You might have heard of war rooms, sandboxes, etc., which go back to the same underlying idea that we face options and need to evaluate the trade-offs between them before rushing into a decision.
This very concept is also highly relevant to Procurement, especially when it comes to sourcing. Complex sourcing events and supplier award decisions can easily feel like deciding between the red and the blue pill, but the implications and trade-offs are often not as straightforward.
In Procurement, sourcing teams must consider multiple sources of data in their decision-making. Besides the commercial aspects of a sourcing event, like price or payment terms, more and more data points need to be considered to ensure the supplier selection is aligned with corporate strategies around risk management, sustainable sourcing practices, supplier diversity ambitions, or simply quality & performance requirements. If we think of sourcing and the Total Cost of Ownership (TCO), all these elements become part of the equation as they can be turned into a cost or benefit for the organization.
These additional considerations or requirements originate in different places. Procurement might want to limit the total number of suppliers or ensure different award splits to spread the risk and increase supply chain resilience. Stakeholders might have a certain preference for the incumbent supplier or have reservations against too much change. Suppliers might have limited production capacities or can’t serve each geographical market needed by the organization.
All these considerations or information are what are called constraints or business rules. What they describe is basically a piece of information that needs to be considered and become true as part of the equation we are trying to solve. Considering individual or multiple of these constraints together and solving for them is what we call strategic options or sourcing scenarios in Procurement. Scenario-based thinking in sourcing, therefore, enables one to flexibly model, assess, and compare different strategic options for awarding their business.
Some of the most common scenarios relevant for Procurement are limiting the number of suppliers, working only with incumbent suppliers, or splitting the award across a desired distribution key. Alternatively, sourcing managers try to optimize for total cost, risk exposure, sustainability performance, supplier quality, or supplier diversity. While all these scenarios are highly relevant, trying to evaluate scenarios in Excel from a commercial perspective and understanding the opportunity costs of different options is a challenge without the appropriate decision-support tools.
Scenario optimization in Procurement, and the associated technology, referred to as sourcing optimization, has been around for almost two decades without breaking into the mainstream. Sourcing optimization basically means the process of solving complex mathematical allocation problems with powerful computers, using a combination of advanced linear mathematical models.
The same technology is used by Google Maps to guide us through foreign cities and countries with the push of a button. We can pick the mode of transportation and specify if we prefer the shortest or the fastest route. We can also decide to exclude tollroads, avoid taking the ferry, or whatever else might impact our journey. Unfortunately, applying this technology to Procurement has been less straightforward than using Google Maps. Most tools offering these capabilities are extremely complicated to use. Only specialists can derive value from them.
Making scenario-based thinking easy to use is the key to making it available to all sourcing managers in all sourcing projects and extending the scope beyond the most complex events. It is paramount to focus on intuitive and attractive user interfaces and key capabilities that drive value in tenders of various complexity levels. By providing default scenarios and easy ways to include business rules, scenario-based thinking can finally go mainstream and power holistic sourcing decisions.
The inclusion of additional data sources and rules in scenario analysis allows users to evaluate proposals more holistically and to identify the optimal supplier award decisions for their desired sourcing strategy. Understanding the cost implication of each rule and scenario against others brings transparency to the opportunity costs of internal and external constraints.
Transparency creates actionable insights that allow Procurement to have much more qualitative and holistic conversations around the trade-offs of different options with their stakeholders. With this, Procurement can turn subjective discussions around preferences into objective discussions around trade-offs and alternatives that unlock fresh savings.
Learn more about the power of scenario-based thinking and sourcing optimization in our “Introduction to Sourcing Optimization.” Watch the recording of our webinar or contact us to request a copy of our white paper.