Strategic Sourcing Contracts by hwt84746

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									Strategic Sourcing:
What’s All the Buzz
Whether you are a senior                    Strategic sourcing holds promise as           Commercial companies as diverse
                                            one of the most effective acquisition       as Bristol-Myers Squibb; Palm, Inc.;2
procurement executive,                      initiatives in recent years. Ask 10         Cable & Wireless; and Ford3 have
                                            people what strategic sourcing is and       been successfully practicing strategic
a contract specialist, or                   you will get 10 different answers. If       sourcing for years. Between 1996 and
                                            you look up “strategic sourcing” in         2002, Bristol-Myers Squibb’s global
a purchasing agent, you                     the Merriam-Webster online diction-         strategic sourcing group saved $1.6
                                            ary, you will not find a definition.          billion of its total corporate spend
can use strategic sourcing                  Instead, you are offered alternative        of $10 billion by leveraging corporate
                                            words ranging from stereochemistries        spending for chemicals, packaging,
to make a difference in                     to pseudotuberculoses; strategic            information technology (IT) hard-
your organization. How                      sourcing is not a branch of chemistry       ware, professional services, and
                                            nor a disease. Based on my experience       telecommunications. Bristol-Myers
do you begin? Just start!                   with strategic sourcing, I offer the        Squibb reorganized its procurement
                                            following definition: “A logical and         group around commodities instead
BY JOA N I E F. N E W H A RT                systematic process for managing and         of customers.4 In April 2005, after suc-
                                            prioritizing an organization’s spending.”   cessfully transforming to a strategic
                                               We know what strategic sourcing is;      sourcing business intelligence strategy,
Note: The Securities and Exchange           let us review what strategic sourc-         the vice president of purchasing at
Commission, as a matter of policy,          ing is not. It is not bundling, and         Cable and Wireless stated, “My people
disclaims responsibility for any            it is not narrowly focused on just          are not buyers….They are commercial
private publication or statement            saving dollars. The Small Business          problem solvers.”5
by any of its employees. The views          Reauthorization Act of 1997 defines            Government organizations have
expressed herein are those of the           contract bundling as “consolidating         recently opened their eyes to the ben-
author and do not necessarily reflect        two or more procurement require-            efits of strategic sourcing. Pennsylvania
the views of the Commission or of the       ments for goods or services previously      governor Edward Rendall began a
author’s colleagues upon the staff of       provided or performed under separate,       strategic sourcing initiative in 2004
the Commission.                             smaller contracts into a solicitation       that saved the commonwealth more
                                            of offers for a single contract that is     than $140 million in 20046 on an
          About the Author                  unlikely to be suitable for award to a      annual spend of $3.1 billion.7 In
 JOANIE F. NEWHART, CPCM, is the
                                            small business concern.”1 Strategic         late June 2004, California Governor
 procurement chief at the U.S. Securities
                                            sourcing is an overall strategy to          Arnold Schwarzenegger announced
 and Exchange Commission. She is
                                            obtain better value by obtaining            a plan to implement strategic sourc-
 a member of the Washington, D.C.,
                                            cheaper pricing, more favorable war-        ing to leverage his state’s $4 billion a
 Chapter. Send comments on this article
                                            ranties, better terms or conditions,        year spend.8 With spending of nearly
 to cm@ncmahq.org.
                                            and/or increased realization of socio-      $826 billion in FY03,9 it is no surprise
                                            economic goals.                             that the federal government has also


26 ■ Contract Management / January 2006
About?
jumped on the strategic sourcing           systems (PEO
bandwagon.                                 EIS), small and
  Strategic sourcing represents a          disadvantaged
paradigm shift, further moving pro-        business utiliza-
curement from a tactical function to a     tion (SADBU)
strategic function. This shift continues   offices, and
the trend of the past few years in         ITEC4; the air
which procurement professionals are        force chief infor-
viewed not just as buyers but also as      mation officer
value-added business advisors.             (CIO) and SADBU
                                           offices; the Navy’s
Strategic Sourcing Process                 CIO office; and
Let us next examine the strategic          the Defense Logistics
sourcing process. To make it easier to     Agency. Contractors from
understand, I am going to discuss the      Censeo Consulting and Dun
process in the context of a case study     and Bradstreet supported the team.
with which I was involved — the            Censeo provided its strategic sourcing
Department of Defense (DOD) hand-          model for the team to use. In four
held wireless commodity team. This         months, the team accomplished the
team was one of three commodity            process I will next describe.
teams formed by DOD to investigate            The team first attended a one-day
strategic sourcing, learn the process,     training session that focused on strate-
and determine how strategic sourcing       gic sourcing and the process developed
could benefit the department. The           by Censeo Consulting. This training
other two teams studied clerical ser-      was important, as most of us on the
vices and medical services. The U.S.       team had not previously been involved
Army was designated the executive          in strategic sourcing. The team then
agent for the DOD handheld wireless        proceeded through the three steps of
commodity team, and information            the strategic sourcing process.
technology, e-commerce, and com-
mercial contracting center (ITEC4)         Drilling Down
director Bryon Young was the               Step 1: The first step in the process
chairperson of the team. I assisted        is to understand the commodity and
him with that effort. The team was         how it is being procured. At this stage,
composed of multiservice representa-       we had to define “wireless handheld
tives from army’s program executive        devices” in order to set boundaries for
office for enterprise information           the scope of our research and analysis.


                                                                                      January 2006 / Contract Management ■ 27
S T R A T E G I C       S O U R C I N G :     W H A T ’ S      A L L    T H E    B U Z Z     A B O U T ?



We determined that we would consider        currently in place and to understand        is now the biggest supplier in this
continental United States (CONUS)           the features of the contracts, we           market. We extensively researched
cell phones, pagers, and e-mail devices     looked at various contracts available       how small business fits into the market
within a nonsecure environment as           throughout DOD. We were a bit sur-          and discovered that there were no
such devices. This definition helped         prised to discover that DOD had more        small businesses with the capability to
us tailor our tasks. Next, we studied       than 350 separate contracts with            provide nationwide telecommunication
how much DOD is spending and how            wireless providers. After the first step,    service. We came to understand what
it is doing the spending. We initially      our findings showed (1) DOD lacks a          makes up the total cost of ownership
looked at individual contracting            strategic policy for wireless procure-      (TCO) for the wireless handheld
action report (DD Form 350) data,           ment; (2) DOD has multiple contracts        device industry. The TCO includes
credit card spend data, and data from       in place with a huge variety of plans       purchase price, cost to acquire, and
existing army-wide blanket purchase         and prices; (3) current contracts           cost of use. The market analysis looks
agreements (BPAs). Not surprisingly,        often do not include best practices         at all the cost elements and their
we did not have a lot of confidence          for procuring wireless, such as pool-       drivers. Cost components in this case
in the data. After talking to several       ing minutes, obtaining technology           were items such as equipment fees,
other individuals involved in strategic     refreshment, periodically reviewing         activation fees, monthly recurring
sourcing in other agencies, we found        plans, and eliminating activation and       charges, and long-distance charges.
that this lack of confidence in available    termination fees; and (4) there is a        We found that average revenue per
data is a common problem. We then           noticeable lack of controlling and          user was increasing in the business
decided the best approach was to ask        capturing spend data within DOD.            segment but decreasing in the con-
the top suppliers themselves to tell us                                                 sumer segment. We also found that
what we were spending. It took some         Step 2: The second step in the process      it costs suppliers several hundred
persuading, but we finally got responses     is market research and industry analysis.   dollars to acquire a new customer.
from all the suppliers. We found that       We needed to develop an understanding       Our analysis showed a battleground
the suppliers typically showed twice        of what drives industry costs and           of competition among the top suppli-
the spending that our records showed.       pricing, including market size, key         ers for enterprise customers who can
The final data showed that DOD col-          suppliers, and price drivers. We were       provide a large and ready-made sub-
lectively spends nearly $200 million        not too surprised to find that six           scriber base. Based upon our analysis,
on wireless handheld devices! At this       national players account for 79 percent     we concluded that DOD could gain
point, we understood how much               of the wireless market in this order:       some significant benefit in its wireless
we were spending — we then needed           Verizon, Cingular, AT&T, Sprint,            procurements by taking an enterprise
to look at how we were buying the           T-Mobile, and Nextel. Interestingly,        approach, meaning leveraging the
products and services.                      Cingular and AT&T and Sprint and            entire organization as opposed to
   To understand what contracts were        Nextel have since merged, and Cingular      pieces of the organization.

                                                                                        Step 3: Understanding these dynamics
                                                                                        helped the team develop a commodity
                                                                                        strategy, consisting of recommendations
                                                                                        of specific actions DOD can take both
                                                                                        near term and long term to procure
                                                                                        wireless handheld services in a more
                                                                                        efficient manner. For near term, the
                                                                                        team recommended that DOD estab-
                                                                                        lish a strategic wireless policy and
                                                                                        then develop one contract for each
                                                                                        of the top suppliers. In preparation for
                                                                                        developing the contracts, DOD needs
                                                                                        to build upon the team’s work and
                                                                                        do further research on industry best
                                                                                        practices, including participation
                                                                                        of small businesses. DOD could
                                                                                        accomplish this through one-on-one
                                                                                        meetings with the top suppliers. We
                                                                                        recommended the contracts contain
                                                                                        best practices captured to date and
                                                                                        that the industry analysis be used


28 ■ Contract Management / January 2006
                    S T R A T E G I C      S O U R C I N G :      W H A T ’ S      A L L    T H E     B U Z Z     A B O U T ?



to negotiate favorable pricing and         to have handheld wireless devices.          various commodity teams and
terms. We felt it was essential that         The work of the DOD handheld              facilitate cross-service sharing of
the contracts contain provisions           wireless commodity team was wrapped         information, and a strategic sourcing
for capturing spend data, which fed        up in October 2005, as was the work         directors board composed of heads
into our long-term recommendation.         of the clerical service commodity team,     of the various SSCGs and senior
After DOD captured spend data and          led by Tom Essig, director of program       representatives from other agencies
understood its wireless needs even         analysis and business transformation        (such as the Defense Logistics
better, the team then recommended          in the Office of the Deputy Assistant        Agency). This board will recommend
that the supplier base be pared down       Secretary of the U.S. Navy (Acquisition).   the commodities for strategic sourcing
to fewer contractors using a competi-      Next, a series of briefings detailing the    initiatives and the executive agent,
tive process. The team envisioned          process, findings, and recommendations       both of which are approved by the
user-friendly contracts including best     to army, navy, air force, and DOD           Acquisition Governance Board. Finally,
practices in the industry and simple       leaders began. Concurrently, the            a strategic sourcing program man-
e-tools to place orders and review         Office of Defense Procurement and            agement office (PMO) will be
bills. By implementing the commodity       Acquisition Policy prepared a stra-         developed within the Office of Defense
strategy recommended by the wireless       tegic sourcing concept of operations        Procurement and Acquisition Policy to
team, we estimated DOD could save a        (CONOPS), which was a road map              support the strategic sourcing direc-
significant amount of budget dollars,       to pave the way ahead.                      tors board.
meet user requirements more effectively,     On January 14, 2005, the DOD                DOD is not the only federal agency
and procure its wireless products and      Acquisition Governance Board                implementing strategic sourcing. On
services more strategically. Significant    approved the strategic sourcing             May 20, 2005, the Office of Management
savings could be gained by refreshing      CONOPS. DOD’s CONOPS strategy               and Budget (OMB) issued a memo titled
aged lines, eliminating overage charges    includes cross-functional and cross-        “Implementing Strategic Sourcing.”10
and underusage of plans, and leveraging    service commodity teams, which are          This memo required chief acquisition
competition. Additional savings could      appointed as the executive agent for        officers (CAOs) to (1) identify by
be generated by managing demand —          a particular commodity, a strategic         October 1, 2005, no fewer than three
in other words, strategically managing     sourcing coordination group (SSCG)          commodities that could be purchased
the number of users who were authorized    within each service to oversee the          more effectively using strategic sourcing




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S T R A T E G I C       S O U R C I N G :      W H A T ’ S      A L L    T H E    B U Z Z     A B O U T ?



and (2) provide an annual report to the      aviation, boats, copiers, energy, facili-   credits the success of the program to
Office of Federal Procurement Policy          ties, facilities security, fleet vehicles,   dedicated commodity council members,
(OFPP) beginning this month regarding        IT, mail, office supplies, professional      senior management buy-in, and par-
reductions in the prices of goods            services, training, uniforms, and           ticularly the visionary support of the
and services, reductions in the cost         weapons and ammunition. DHS has             undersecretary for management and
of doing business, improvements in           designed and implemented an opera-          the chief procurement officer. The
performance, and changes in achieve-         tional governance structure to ensure       DHS strategic sourcing program has
ment of socioeconomic acquisition            the viability and success of its program.   saved nearly $200 million in less than
goals. According to Lesley Field, OFPP       Commodity councils, which are the           two years and is anticipating greater
policy analyst, agencies appear eager        core of the program, receive oversight      savings and synergies in the future.
to participate in the initiative judg-       and guidance from the strategic                The U.S. Postal Service (USPS) has
ing by the excellent response rate to        sourcing group (SSG), a cross-func-         had a strategic sourcing program in
OFPP’s memo.                                 tional body with representatives from       place for five years but considers it only
   Strategic sourcing is one of OFPP’s       each of the major components and            one piece of its overall supply chain
top five initiatives, with a goal of insti-   chaired by the director of strategic        management (SCM) strategy. This
tutionalizing strategic sourcing into        sourcing and acquisition systems.           strategy goes far beyond purchasing
agency planning processes. This, in          The SSG reports to the DHS joint            to include all supply chain activities
turn, will assist agencies in making         requirements board, a body of senior        from requirements initiation and early
smarter business decisions to satisfy        department executives responsible           supplier involvement/collaboration
customer requirements and achieve            for the review and approval of major        through closeout and disposal. USPS’
mission success. OFPP’s plan to assist       investments. Additionally, the board        SCM strategy is part of a broad-based
agencies in identifying opportunities        reviews and approves the initial plan       transformation effort, including struc-
for multi-agency strategic sourcing          of each commodity council and per-          ture, process, people, technology,
solutions was launched in July 2005          forms periodic reviews of the council’s     policy, and metrics. The transformation
with an information-sharing session          plans. Based upon an extensive DHS          is based upon proven commercial best
attended by a core team of strategic         acquisition program spend analysis in       practices and resulted from USPS’
sourcing leaders from various agencies       FY04, the strategic sourcing program        need for increased productivity and
and departments. These same leaders          was able to target $5.5 billion of the      competitiveness. USPS has 86 com-
are participating in a community             $13 billion in department acquisition       modity strategy plans that cover 80%
of practice (COP) being developed            spending for potential strategic sourc-     of its spend, which was $11.5 billion
by OFPP and Defense Acquisition              ing opportunities. As a result, the         in 2004. Keith Strange, vice president
University (DAU) and available at            DHS program has realized commodity          of sourcing management at USPS,
https://acc.dau.mil/msc. The COP is          price reductions of 35 percent for          explained that the sourcing manage-
designed to foster the collaboration         pistols, 31.25 percent for ammunition,      ment is organized by portfolios, which
of knowledge sharing by serving as a         and 37 percent for express mail. In         reflect the major spend categories of
repository for strategic sourcing infor-     addition, through partnering with the       transportation, supplies, service, mail
mation and also by supporting online         Defense Logistics Agency and General        equipment, and facilities, plus three
strategic sourcing courses, including        Services Administration (GSA) on            support organizations that manage
strategic sourcing overview and spend        strategic energy requirements, DHS          inventory and distribution. These
analysis strategies, which are available     has achieved price savings from 5           portfolios are composed of 15 category
now. Once the COP development is             percent to 14 percent. Benefits from         management centers (CMCs), which
completed, it will be included in the        strategic sourcing also have been real-     are further organized into commodity
overarching mission support contract-        ized in the form of cost avoidances         teams. The CMCs are charged with
ing (MSC) COP and be available to            and improved service levels. For            developing, managing, and evolving
the public at https://acc.dau.mil/           example, the enterprisewide strategy        their category strategies with the
strategicsourcing.                           for the acquisition of pistols used a       active participation and concurrence
   Several federal agencies initiated        unified testing procedure to support         of their internal clients. USPS’ key
strategic sourcing efforts even before       the source selection vice each compo-       measure of success is called “SCM
issuance of the OFPP memo. Maximizing        nent performing its own testing. This       Impact,” and encompasses cost reduc-
the value of each dollar spent is the        process improvement allowed DHS             tion, cost avoidance, and revenue
cornerstone of the Department of             to realize nearly $1 million in cost        (primarily in the form of rebates),
Homeland Security’s (DHS) strategic          avoidance. Further, the intense com-        which are directly attributable to
sourcing program. The DHS program            petition resulted in a contract with        SCM initiatives. Commodity strategy
has 14 active commodity councils             double the normal warranty period.          sourcing plans are updated annually
engaged in the sourcing of strategic         The principal architect of the DHS          and reviewed by the USPS leadership
commodities and services, including          strategic sourcing program, Al Sligh,       team. USPS views cross-functional


30 ■ Contract Management / January 2006
S T R A T E G I C       S O U R C I N G :      W H A T ’ S      A L L    T H E    B U Z Z      A B O U T ?



teaming and effective communication          GSA and asked it to assist with some        current on how other organizations
as absolutely essential for success of its   of these efforts. GSA’s mission is to       are finding strategic sourcing success.
SCM program. USPS has saved approx-          “help federal agencies better serve         Start tracking your successes to build
imately $2.1 billion over five years,         the public by offering, at best value,      a case for further strategic sourcing
with $780 million saved in FY05 alone.       superior workplaces, expert solutions,      efforts. Just take the first step — after
   Strategic sourcing success can be         acquisition services, and management        all, “the distance is nothing, it is only
obtained with smaller initiatives, as        policies.”13 Because GSA is involved in     the first step that is difficult.”15 CM
well. The Department of Agriculture          nearly $66 billion                          Endnotes
did a simple purchase card spend             of federal spending — more than
                                                                                         1. Office of Federal Procurement Policy,
analysis and found it spent $28              one-fourth of the government’s total
                                                                                            “Contract Bundling: A Strategy
million on office supplies. By negoti-        procurement dollars — it is ideally            for Increasing Federal Contracting
ating a blanket purchase agreement           positioned to effectively implement            Opportunities for Small Business,”
(BPA) with BCOP Federal off its GSA          strategic sourcing throughout the              October 2002, available at www.acqnet.
Schedule contract, the department            federal government.14 GSA enthusi-             gov/Notes/contractbundlingreport.pdf.
is saving approximately $2.5 million         astically agreed to participate and set     2. J. Carbone, “Strategic Sourcing Is Palm’s
a year.11 The prices in the BPA are          up the following goals for the effort:         Pilot,” Purchasing, 132(7) (April 17, 2003): 32.
about 10 percent lower than those on         test the ability to strategically source
                                                                                         3. Ibid.
the GSA Schedule, which had already          across federal agencies; establish
been discounted as much as 40 per-           mechanisms to increase savings, value,      4. A. Porter, “High-Hanging Fruit,”
cent.12 The smaller agencies — there         and socioeconomic participation;               Purchasing, 132(6) (April 3, 2003): 23.
are approximately 90 within the fed-         share good practices and build the          5. M. Wheatly, “Turning Data into
eral government — often do not have          strategic sourcing community of prac-          Decisions,” Supply Management 8(11):
the assets to set up resource-intensive      tice; learn lessons applicable to future       (May 22, 2003) 22.
governance structures and strategic          strategic sourcing efforts at federal       6. Available at www.governor.state.pa.us/
sourcing strategies. In their case,          or agency levels; and avoid unneces-           governor/lib/governor/thermometer_
success can be obtained by simply            sary duplication of effort in pursuing         chart_v2.pdf.
piggy-backing on existing government         OMB’s strategic sourcing initiative.        7. B. Harris, “Strategic Sourcing,” Government
initiatives, such as the DOD emall.          The kickoff meeting for what is being          Technology online, May 2004, available
The DOD emall is open to all federal         termed the “Federal Strategic Sourcing         at www.govtech.net/magazine/story.
agencies and provides significant sav-        Initiative” was set for November 16,           php?id=90187&issue=5:2004.
ings in areas such as office supplies         2005, and represents an unprec-             8. Anonymous, “Who’s Got Strategic
and IT hardware. A simple stock              edented partnership between large and          Sourcing on the Brain?” Purchasing
number or item description search            small agencies, OFPP, and GSA.                 133(13) (August 17, 2004): 24.
provides instant competition among              Whether you are a senior procure-        9. J. Weisman, “Government Outgrows Cap
its suppliers, easy purchasing via the       ment executive, a contract specialist,         Set by President,” washingtonpost.com,
government purchase card, and quick          or a purchasing agent, you can use             November 12, 2003.
delivery. The DOD emall can be found         strategic sourcing to make a differ-        10. Available at www.uspto.gov/web/offic-
at https://emall.prod.DODonline.net/         ence in your organization. How do               es/ac/comp/proc/OMBmemo.pdf.
scripts/emLogon.asp.                         you begin? Just start! Do not worry
                                                                                         11. K. Palmer, “OMB May Add ‘Strategic
   What I find most interesting at this       about getting perfect spend data,               Sourcing’ to Management Agenda,”
juncture is the strategic sourcing part-     and do not worry where you start.               February 14, 2005, online, available
nering effort being initiated between        Whether you analyze purchase card               at www.govexec.com/dailyfed/0205/
government agencies. The CAOs and            data, discuss this year’s IT hardware           021405k1.htm.
senior procurement executives (SPEs)         procurements with your customer, or         12. K. Palmer, “Agencies Buy Goods and
realized that many agencies are strate-      make an office supply purchase on                Services Without GSA’s Help,” March 4,
gically sourcing the same commodities        DOD emall does not matter. Whether              2005, online, available at www.govexec.
and decided to pool their information        you set up a governance structure               com/dailyfed/0305/030405k1.htm.
and resources to see                         within your organization and/or join        13. Available at www.gsa.gov/Portal/gsa/
whether they could achieve better            the federal strategic sourcing initiative       ep/contentView.do?contentType=GSA_B
strategic sourcing successes by using        does not matter. Enlist your sup-               ASIC&contentId=9789&noc=T.
their synergy. This partnering effort,       pliers as partners in this endeavor.
                                                                                         14. Ibid.
led by Tom Sharpe, senior procure-           They can teach you a lot about the
ment executive and deputy CAO of             industry and assist you in determin-        15. From Madame Marie du Deffand,
                                                                                             available at http://en.thinkinexist.com/
the Department of Treasury, has only         ing your spend. Do research on the
                                                                                             quotation/the_distance_is_nothing-
recently begun, but it took an interest-     Internet — discover best business
                                                                                             it_is_only_the_first_step/214987.html.
ing turn when Mr. Sharpe approached          practices for your commodity. Keep


32 ■ Contract Management / January 2006

								
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