Strategic Sourcing Best Practices

Formalizes the way information is gathered Strategic sourcing is a price based approach Leverages purchasing power Utilizes Negotiations Identifies the best possible value Continuously improves and re-evaluates purchasing activities

Strategic sourcing requires analysis of what an organization buys, from whom, at what price and at what volume. Strategic sourcing differs from conventional purchasing because it places emphasis on the entire life-cycle of a product, not just its initial purchase price.

How much do we currently purchase? (Leverage) How much do we currently pay? (Baseline) Buying several varieties of the same thing? (Standardization) What is available? (Market Analysis) Things to consider….

Who can provide? (Increased Competition) What are our users needs? (End User Interviews) What will be our strategy? (Solicitation Approach) Are we getting what we expected? (Contract Management) Things to consider….

Leverage Baseline Standardization Market Analysis Increased Competition End User Interviews Solicitation Approach Contract Management Strategic Sourcing overview:

Spend Analysis End User Interviews Prioritize Categories Build Baseline Identify Savings Levers Opportunity Assessment

Gather Spend Data AP reports Other entity usage P-card data Invoices Supplier reporting System Metrics Spend Analysis

Cleanse Data Duplicate suppliers Miscoded Categories Evaluate and Prioritize Where is our biggest spend? Do we have a contract? What is the complexity? Market timing? Spend Analysis

Who are your users / customers? Do different customers have different needs? What is most important to each user? What is their objective? What are needs verses wants? Have recent acquisitions met your needs? Are there opportunities for standardization? What are the delivery requirements? End User Interviews

What is the annual spend by category? Is category currently under contract? Are their timing considerations? Competing major solicitations? Market considerations? What is the complexity of the category? Would smaller spend but less complex categories yield quicker savings? Prioritize Categories

Baseline is documentation historical purchases: What did we purchase? How much did we purchase? How much did we spend? Maintenance expenses? Inventory or just in time? Baseline can be a very limited and include only cost and quality characteristics Baseline very complex, comprised of a market basket of items or services Build a Baseline

How much do we currently pay? BASELINE !! Purchased Brand X laptops in 2011 for $1200 each Purchased a total of 100 laptops in 2011 Total spent on laptops in 2011 = $120,000 If we are to know how we have progressed, we must first know where we are…….

Complex Baseline Assessments Identify a Market Basket of Items Utilize the 80/20 rule Weight items based on volume Do not use bottom line sum

Baseline Examples Bottom line sum example: ItemVolumeVendor A Vendor B Printer Drum 20,000 $ $ 3,980,000 $ $ 4,180,000 Printer Toner 142,000 $ $ 5,538,000 $ $ 4,402,000 Printer Head 13,000 $ 6.00 $ 78,000 $ 4.00 $ 52,000 Cleaner 18,500 $ 1.50 $ 27,750 $ 4.00 $ 74,000 TOTAL $ $ Weighted Total $ 9,623,750 $ 8,708,000 Weighted Baseline example: by $2.50…. ItemVendor AVendor B Printer Drum $ $ Printer Toner $ $ Printer Head $ 6.00 $ 4.00 Cleaner $ 1.50 $ 4.00 TOTAL $ $ By $915,750!!

Volume Location – Domestic or international Scope - more favorable pricing for a broader scope Level of Service / Quality Maintenance Options Standardization / Consolidation Payment Terms Firm price or tied to index Delivery frequency Emergency Response Availability Freight Identify Savings Levers Cost is associated with many things other than price…..

How much volume do we currently purchase? One $1000 each Ten ?????? each LEVERAGE !! Give me a lever and I can move the world. Archimedes

Are we buying several varieties of the same thing? Will two, rather than ten, models to serve your customer needs? Are products over-specified? Rightsize! Can we utilize off the shelf products? STANDARDIZATION !!

What is available? What are the latest products being offered? What have other states paid for the same product? Are there reviews of products available? Which suppliers control market? Is an index for primary commodity available? MARKET ANALYSIS !!

Producer Price Index (PPI) commodities: Bureau of Labor Statistics Commodity Research Bureau Vehicles: Kelley Blue Book Companies: *

Who can provide? Which suppliers are registered for the commodity? Are other suppliers available? Do your end users have suggested suppliers? Have you included related category codes when searching the registered vendor lists? INCREASED COMPETITION !!

What will be our strategy? Will this be a single award? Will multiple suppliers be needed for coverage? Do we have internal expertise? Should this be strategically sourced? Do we intend to negotiate? What evaluation method will we use? Price analysis (very small purchases) Value analysis (total cost of ownership) When is best time to solicit the opportunity? SOLICITATION DEVELOPMENT !!

Are we getting what we expected? Are customers pleased with product or service? Are established milestones being met? Are prices consistent with submitted bid? Is quality delivered as promised? Are delivery requirements being met? Is supplier reporting performance? CONTRACT MANAGEMENT !! Monitor your contract progress!! Anything that happens after award is: