7.1 Introduction

Sourcing teams commonly manage spend equal to 30 70% of their firm's revenue. In addition, they function as the boundary between their firm and its supply base, requiring them to build and execute sourcing strategies in an environment where demand, supplier performance, pricing, and material availability constantly change. The magnitude of the dollars at stake in sourcing decisions can lead even small percentage miscalculations in either price or quantity to have dramatic effects on a company's margins, top line performance (through lost sales) and balance sheet (through inventory). Double-digit percentage reductions in stock prices, nine-digit misses in revenues, and ten-digit inventory write-offs are all well documented and recurring events attributable to mismatches between supply and demand. Given the magnitude of the uncertainties present in sourcing decisions, as reflected in the typical forecast errors in material requirements and supply conditions, avoiding such miscalculations is both extremely challenging and extremely valuable.

When it comes to managing risk and flexibility in your supply chain, it is all about reducing the time it takes to position assets, such as capacity or inventory, and then maximizing the revenue earned on those assets. Of course, in the absence of considerable supply and demand uncertainty, the time pressure on the supply chain would reduce considerably and the risk of having invested too much or too little would all but disappear. Unfortunately most business tools and approaches take a limited view of the uncertainty problem; for example relying only the point forecast...