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P&G Expressive bidding and methodologies

P&G Expressive bidding and methodologies

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    P&G P&G Presentation Transcript

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