Tales from the Trenches:Evolution of Strategic Sourcing

Chuks Amajor – State of Texas Mike Smith – NASPO Life Member

Emerging Issues Committee – To keep NASPO members aware of important issues affecting state procurement, identify, and assess procurement trends and emerging issues as to their potential to affect the states.

Developed Project Plan

Interviewed States (CA, CO, IN, MA, ME, MI, NC, NY, OK, PA, TN, TX)

Presentation at NASPO Annual Conference

Develop Briefing Paper

Background

History Strategic Sourcing Overview

What is it? Strategic Sourcing Defined Common Misconceptions Strategic Sourcing vs. Traditional Procurement Steps, Stakeholders & Challenges

Survey Results

Discussion Questions

Agenda

Introduced in private sector in 1980’s/1990’s

State government – early adopters started in 2003/04/05

Implemented by federal government (OMB) in 2005

History

Defining Strategic Sourcing

“Strategic sourcing is an institutional procurement process that continuously improves and re-evaluates the purchasing activities of a company.” Wikipedia

“Strategic sourcing is the collaborative and structured process of critically analyzing an organization's spending and using this information to make business decisions about acquiring commodities and services more effectively and efficiently.” Federal Office of Management and Budget/GSA StrategicSourcing.gov

“A system and fact-based approach for optimizing an organization’s supply base and improving the overall value proposition.” University of Michigan

A systematic continuous improvement process that directs supply managers to assess, plan, manage, and develop the supply base in line with the agency’s stated objectives. It involves the constant re-evaluation of purchasing activities to insure alignment with long-term organizational goals. 2008 NASPO State and Local Government Procurement Guide

Common MisconceptionsPerception Reality

Strategic Sourcing = Single Source Strategic sourcing initiatives often result in multiple awards

Strategic Sourcing means buying the cheapest product, regardless of quality

Maintaining or enhancing quality is a key component of most SS engagements

Strategic Sourcing is about changing suppliers

A Strategic Sourcing initiative will sometimes, if not often, result in using the same supplier

Small, local and/or diverse business always lose out when contracts are strategically sourced

Socio-economic policies will often dictate these suppliers be included in Strategic Sourcing activities.

Common MisconceptionsPerception Reality

Strategic Sourcing is a one-size-fits-all approach to procurement

SS methodology anticipates and provides for unique circumstances and challenges

Strategic Sourcing is about strong arming suppliers

Strategic Sourcing is about understanding the marketplace, the category and the supplier community in order to obtain best value

Strategic Sourcing is a one-time project Strategic Sourcing involves continuous improvement over the life cycle of many contract iterations

Strategic Sourcing vs. Traditional ProcurementKey Differentiators

Advance research and analysis plays critical role Decisions driven by data More emphasis on aggregating demand Process leads to optimal number of suppliers Total cost of ownership Quality of goods and services measured Enhance relationship with supplier community Different skill set required of buying staff

Strategic Sourcing Process Flow

•Draft and Issue RFP•Establish Evaluation Committee•Evaluate Responses•Conduct Vendor negotiations•Award Contracts

•Track Actual Savings•Monitor Customer Satisfaction•Market contract•Survey Customer•Conduct Price Audits•Lessons Learned & Best Practices

• Identify key stakeholders• Identify Roadblocks•Validate research & Analysis• Identify potential process improvements• Finalize Strategy

•Conduct Market Research •Expand Benchmarking•Assess current state•Contact other states•Determine preliminary strategy Research &

AnalysisStakeholder Discussions

Procurement Event

Performance Management

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4 3

2

• Often not interested unless/until they hear from their constituents

• Will be interested in potential savings, but also in economic impact on SMWB and local businesses

Elected Officials

• Can be sensitive to potential loss of independence• Can be concerned with the potential loss relationships with

current vendorsCustomers

• Too often get forgotten in the process• Important to understand their perspective• Sometimes can be averse to change

Affected State Employees

• Upfront communication is key• Will fight hard to protect their interests

Vendors & Advocacy Groups

Who are the stakeholders and what is their prospective?

Challenges for State Government

Lack of support/buy-in at Executive level Restrictive laws/rules/policies Legislative resistance/pushback Ability to train staff Strong policies regarding small/local/diverse business Agency resistance – decentralized environment

Reduce number of suppliers Look at total cost of ownershipLow price does not equal best value Use a defined processConsolidate enterprise needs StandardizeComprehensive review of contracts Conduct market researchEvaluate timing of solicitation Conduct front end spend analysisSystematic and structured approach Establish sustainable contractsDetermine best procurement methodology Target specific categoriesEngage others in decision making process

BUYING SMARTER!

How Do You Define Strategic Sourcing?

Survey Results

Survey Results

• 58% of states reported carve-outs for DOT• 50% of states reported an independent procurement shop

for IT goods and services

Is your Procurement function Centralized?

92% of states interviewed reported their procurement operations as centralized or partially centralized procurement• 100% had negotiated multiple mandatory-use contracts

However, most state reported agency-specific carve-outs or delegated authority

On a scale from 1-10 (with 10 being the highest) how much emphasis and focus does your state place on formal strategic sourcing activities?

Survey Results

High = 9.5 Low = 3 Average = 6.5

Some states noted their focus was increasing. Others have experienced a decrease in focus in recent years.

Does your states’ procurement organizational chart include a section, role or title specifically related to strategic sourcing?

Survey Results

A majority (58%) of the states interviewed have incorporated a formal strategic sourcing section or unit.

Size of section/unit ranged from ‘we just created it’ to as many as 16 staff.

Did your state retain a consultant to implement Strategic Sourcing?

Survey Results

83% of states interviewed reported use of a consultant.

• Extreme variance in total price paid – from tens of thousands to tens of millions

• Typical project duration was 1-3 years

What are some skills set attributes needed for strategic sourcing?

Survey Results

detailed oriented -- creative/innovative thinkerstrong communication skills -- analytical skillsthink outside the box – negotiation skillssee the big picture – rapport with stakeholdersunderstand total cost of ownership

Survey Results: Which Categories have been most Successful/Challenging?

Office Supplies MRO Print Food IT Hardware Fleet0

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2

3

4

5

6

SuccessfulChallenging

Category

# of

Inst

ance

s

Sourcing Complexity/Time Required

High Low

Savings Opportunity

Lo

wH

igh

Typical Categorization Matrix to Assist in Determining Opportunity

Tier 2: “Big Impact/High Complexity” Tier 1: “Quick Hits/Big Impact”

• Large spending• Data takes longer to compile and

validate• More fragmentation in category spend

across the all departments• High complexity in current supplier

relationships

• Large spending • Available and complete data• Known and competitive supplier base• Centralization/Concentration of spend• Ease of specifications

Tier 4: “Low Impact/High Complexity”

Tier 3: “Medium Impact/Less Complexity”

• Smaller spending• High fragmentation of spend• Difficulty in collecting data• High fragmentation of coverage by

suppliers• Less competitive supplier base

• Smaller spending• Some fragmentation/de-centralization of

spend• Longer timeframe for collecting data

WAVE I

WAVE 2

WAVE 2

Prioritize Waves (Multi-Dimensional)Assess each category and prioritize efforts on three or more of the most important factors.

WAVE I

What level of Support Have you Received from…Survey Results

• 83% of respondents indicate neutral or positive view.• Education/Communication is KeyLegislature• 83% had full support of their administration• Mid-stream administration changes can

drastically change level of supportAdministration

• 67% reported unsupportive Vendor Communities• However, a vast majority (88%) of them reported

that this negative view was shifting

SMWB Community

How has the growth of cooperative purchasing impacted strategic sourcing?

Survey Results

Consensus among states is that use of cooperative purchasing as an approach will continue to grow and be used as part of the strategic sourcing analysis.

Will strategic sourcing continue to grow, fade or change in state government?

Survey Results

Grow…

With caveat -- change in administration can sometimes change focus on strategic sourcing.

Discussion Questions

If your state is new to strategic sourcing, is it necessary to hire a consultant to help implement a program?

Is it necessary to create an organizational structure that includes a section/unit dedicated to strategic sourcing activities?

Discussion Questions

Will strategic sourcing work in a decentralized environment and/or an environment where select agencies have a high level of autonomy?

Is a robust eProcurement system required to engage in strategic sourcing activities?

How do you train staff to do strategic sourcing?

Conclusion: Why Do We Do It?

• Reduces the need to make even tougher cuts in other areas when budgets are tight

• Fulfills our obligation to be thoughtful and

cost-effective with Taxpayer dollars