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P&G Expressive bidding and methodologies

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  1. 1. Changing the Game in Strategic Sourcing at P&G<br />Expressive Competition enabled by Optimization<br />Dinesh Pradeep | Ramakrishna krishnaswamy | Sunayan Pal<br />Lavanya Divi | Arun Kumar S | Amit Kumar <br />
  2. 2. Two moments of truth<br />Was the experience satisfying enough?<br />Will it be a P&G Product?<br />
  3. 3. Complexities<br />Sourcing - Evolution<br /><ul><li>Win-Win deals
  4. 4. Slow
  5. 5. Lacks Transparency
  6. 6. Low levels of competition among suppliers</li></li></ul><li>Issues with Reverse Auctions<br /><ul><li>Poor Allocation Decisions
  7. 7. Optimal bundling based on suppliers preferences and not buyers
  8. 8. Side constraints not supported
  9. 9. Buyer cannot express business rules
  10. 10. Suppliers cannot express production efficiencies – Exposed to bidding risks
  11. 11. Amount and type of information provided by suppliers reduced
  12. 12. Suppliers forced to cut their profit margins
  13. 13. Suppliers not allowed to compete on their strengths through collaboration with the buyers
  14. 14. Buyers lacked adequate tools for balancing cost savings</li></li></ul><li>CombineNet REV<br /><ul><li>CombineNet’s REV – An industry-independent optimization-based market-clearing engine</li></ul>P&G’s Approach<br /><ul><li>Business Rules and Stakeholder preferences
  15. 15. Limiting the total number of suppliers
  16. 16. Bundled Offers
  17. 17. Conditional Volume Discounts
  18. 18. Innovative Alternative Item specifications</li></li></ul><li>Initial Benefits<br /><ul><li>Aroma Chemicals Purchase</li></ul>300 items and numerous suppliers<br />Savings upto 13.5 %<br />Reduction in the number of suppliers<br />Quantitative understanding of the cost of business rules<br /><ul><li>Extended it to six sourcing events</li></ul>Savings of about $100 mn<br />
  19. 19. Expressive Competition<br />Expressive Competition – <br />The Paradigm Shift<br />Expressive <br />Allocation<br />Evaluation<br />Expressive Competition<br />Expressive <br />Bidding<br />
  20. 20. Expressive Bidding<br />Suppliers bid on an arbitrary number of self constructed package of items<br />Suppliers offer rich forms of discount scheduling<br />Suppliers can offer conditional discounts<br />Suppliers can specify a broad variety of side constraints<br />Suppliers can bid using attributes<br />Suppliers can express free-form alternates<br />Suppliers can express detailed cost drivers<br />
  21. 21. Expressive Allocation Evaluation<br />I don’t want more than 200 winners<br /><ul><li>Buyer can express
  22. 22. Operational Constraints
  23. 23. Legal Constraints
  24. 24. Business Rules
  25. 25. Prior Contractual Obligations
  26. 26. Other Business Caveats</li></ul>Carrier X has to win at least $3 mn<br />Minority Suppliers should win at least 15%<br />
  27. 27. Benefits<br />Buyer can update constraints from its business rule databases<br />Buyer obtains a quantitative understanding of the tradeoffs between sourcing cost and other considerations<br />Helps align the members of the sourcing team as the negotiation is based on facts rather than beliefs<br />
  28. 28. Pre-packed Displays<br />Retailer used prepacked display to merchandise their products<br />Display can have different sizes of one product or contain multiple products<br />Suppliers would design, procure and assemble turn key displays<br />P&G Spend $140 million annually in north America on display<br />Little visibility into the costs and quality of alternate methods<br />Cost tradeoff between buying traditional turnkey display and buying components<br />Case Study – Sourcing of Displays<br />P&G –CombineNet Team to the rescue..!!<br />
  29. 29. Process<br />P&G want the annual spending on display to be more efficiently utilized supplier base while improving quality , reliability and services. <br />Three key elements :<br />Bidding structure to capture component specific information<br />Simple way for suppliers to understand and participate in the bidding process<br />To enable P&G product managers to embrace the new process<br />Reduce cost<br />Supplier were asked for :<br />Bid on specification<br />Off specification bid ( use 3 colour printing in place of 4 colour)<br />
  30. 30. Detailed Information on the costs collected..!!<br />Corrugated film , Paper, tray<br />Supplier offer:<br />Piece price,<br />Fixed &variable cost<br />Assembly rate <br />Packing, fright<br />
  31. 31. Sourcing Event<br />40 Suppliers<br />Manufacturers only<br />Assemblers only<br />Manufacture and Assembler<br />Two online rounds followed by one round of off-line negotiation<br />Supplier goes for Component based bidding and Unique expressive bidding<br />Bid on their own term<br />Volume discount<br />Bundles pricing<br />Alternate product and services<br />
  32. 32. Win – Win Scenario<br /><ul><li>Suppliers could bid on their own terms
  33. 33. Suppliers submitted two bids
  34. 34. Full turnkey displays
  35. 35. Services that could be supplied directly
  36. 36. Greater business insights
  37. 37. Large number of What-if Scenarios</li></li></ul><li>Results<br />60% unconstrained savings<br />48% implementable savings ($67 million annually)<br />More insights into costs (collaborative planning )<br />Ability to separate the true cost of must-have components from nice-to-haves<br />Annual procurement cycle dropped from 20 to 8 weeks<br />Better Supplier relationships<br />Suppliers could bid on their own terms and didn’t commoditized the offerings<br />
  38. 38. Another Win – Win Scenario<br /><ul><li>Sourcing Event of $885 mn
  39. 39. 7161 lanes and 137 carriers as bidders</li></ul>Case Study – Sourcing of Truckload Transportation Services<br /><ul><li>Submitted 720 package bids and offered lower prices for combination of lanes (Reduction in empty driving)
  40. 40. Submitted 33 conditional discounts and six discount schedules
  41. 41. Carriers to bid on both P&G’s and retailers trucking lanes
  42. 42. 550 Scenarios navigated before settling with the final bid
  43. 43. Implementable savings were $6 mn</li></li></ul><li>Impact<br /><ul><li>Savings of around $294.8 mn by March 2005
  44. 44. Unconstrained savings by Expressive bidding around 16.9% ($517 mn)
  45. 45. Implementable savings ended up at 9.6%
  46. 46. Savings by Category
  47. 47. Transportation – 3.6%
  48. 48. Packaging – 23.3%
  49. 49. Services – 29.8%
  50. 50. Raw Materials – 10.9%
  51. 51. Indirect Materials – 23.9%
  52. 52. Improved Supplier Relationships
  53. 53. Greater Supplier Participation in Sourcing
  54. 54. Solutions that satisfy operational constraints
  55. 55. Alignment of stakeholders in the buying organization
  56. 56. Suppliers participated in Expressive competition recommend it to other buyers
  57. 57. Suppliers who boycotted reverse auctions returned
  58. 58. Suppliers provided positive feedback about the creative alternatives</li></li></ul><li>Complexity<br /><ul><li>Clearing Problem or winner-determination problem – Complex combinatorial optimization problem
  59. 59. Expressive Competition – Much Richer problem – NP hard</li></ul>Optimization Techniques<br />
  60. 60. Optimization Technology<br />REV uses sophisticated tree-search algorithms<br />CombineNet invented host of proprietary techniques<br />Great deal of effort in developing techniques that deal with side constraints<br />REV supports all the side constraints by abstracting them into eight classes (from an algorithmic perspective)<br />CombineNet invested considerable effort on stability i.e. techniques that are robust<br />Incorporated its technology in ClearBox, a back-end clearing engine<br />
  61. 61. Hosted Mode<br />Packaged technology for use by domain experts, not optimization experts<br />Much faster and less error prone than traditional mode<br />Web based products and Application-Service-Provider (ASP) make optimization available on demand<br />REV supports different form of expressiveness<br />Sealed-Bid Events<br />Live Events<br />
  62. 62. Scenario Navigation<br />Organization with departments having different preferences<br />Buyer specify a set of constraints and preferences to find optimal allocation<br />Rapid clearing time allows the buyer to explore the side effects of various side constraints and parameter settings<br />Automated Scenario Navigation – Next generation REV<br />Incremental transition from traditional sourcing to expressive competition possible by REV<br />