STRATEGIC SOURCING

A System-wide, Collaborative Purchasing Process

To develop and implement an effective system-wide, collaborative purchasing process designed to maintain or increase customer satisfaction (by enhancing product quality and service levels) and significantly lowering total cost by coordinating and leveraging common purchases across the UC system.

MISSION

Strategic Sourcing

Complete Customer Satisfaction.Continuous Improvement of Internal

Service Levels and Product Quality.Process Excellence. Significant Total Cost Reduction

(5%-15% Target).

Goals

Strategic Sourcing

Visible, Active Executive Sponsorship– A Single Vision– Internal Cooperation and Participation

End User Focus and Involvement– Clear Understanding of User Requirements– Use of Cross Functional/Departmental Teams

Data Integrity– Rigorous Analysis– Fact Based Decisions

Appropriate Use Of Technology– Internet Enabled E-Procurement– Solid, Reliable System Infrastructure

Continuous Process Improvement– Establish Best Practices/ Key Performance Indicators– Constantly Measure Results and Implement Improvements

CRITICAL SUCCESS FACTORS

Road Map

INCREASED CUSTOMER SATISFACTION and

SIGNIFICANT COST REDUCTIONS

Technology

Implementation of Best Practices

Identify/Prioritize Opportunities

Establish User requirementsExecute RFP Process/Select Supplier

Develop Timely and Accurate View of Spending Data

Simplify and Stream-line Processing (P-Card)

E-Procurement Development

Strategic Sourcing

Products and Services

Processes

Rationalize Current Specifications

Evaluate New/Alternative Products

Identify Non-Value Activities

Best Practices Analysis

Business Process Analysis

Implement Continuous Improvement Practices/Metrics

Conduct Spend Diagnostic

Launch Cross Functional/Divisional Teams

MISSION STRATEGIES TACTICS

Monitor Compliance

Collaborative Purchasing Process

Major Commodity Relationship Groups

Professional Services– Professional Services– Temporary Services

Miscellaneous– Utilities– Misc. Equipment– Printing Services and Supplies– Furniture– Business Equipment– Freight & Shipping Supplies– Misc. Other, Includes:

• Athletic & Rec. Supplies• Auto Rental• Collections• Departmental Stores• Explosives & Firearms• Literary Services• Medical Equipment• Misc. Supplies• Site Maintenance• Theater Supplies

Services– Medical Services– Food Services– Entertainment Services– Travel– Misc. Services– Security– Environmental Services

Supplies– Laboratory Supplies– Maintenance/Repair/Operations– Medical Supplies– Multimedia Supplies– Office Supplies– Pharmaceuticals

Telecommunications/Computer– Computer Equipment– Computer Supplies/Software– Telecommunications Equipment/ Services

Strategic Global Sourcing

A business model related decision on thetrade-off between: o Full Costs o Quality o Potential for Commoditisation o Lead Time o Delivery reliability o Product Innovation o Capabilities of Supplier o Public Security and Safety Risk o In-company focus

Global Sourcing ExcellenceFrom Fringe to Core • Sourcing as integral part of the business model • Securing Business Buy-In • From potential costsavings to monitoring thereal

benefits • From low cost to highquality sourcing • Managing the SourcingBusiness Processes –

recallmanagement • End-User Involvement

Strategic Sourcing

An analytical acquisition approach to achieve best value through standardization and leverage that results in significant savings and fulfillment of socio-economic and environmental requirements.

Strategic Sourcing -- Strategic Sourcing -- the the collaborativecollaborative and and structuredstructured process of critically analyzing an process of critically analyzing an organization’s spending and using this organization’s spending and using this informationinformation to make business decisions to make business decisions about acquiring commodities and services about acquiring commodities and services more effectively and efficientlymore effectively and efficiently

Strategic Sourcing is…A Disciplined Analysis of Purchases, Markets and

Suppliers

To Identify Opportunities for Savings

By Negotiating Contracts and Employing New Tools and Practices

That Lowers Costs and/or Adds Value

While Maintaining Goods and Services

Page 12

Conduct Opportunity Assessment

Market AnalysisDevelop Commodity Strategy

Execute Acquisition Strategy

Implement & Manage Performance

2 3 4 5

ProfileCommodity

COMMODITY STRATEGIC SOURCING PROCESSCOMMODITY STRATEGIC SOURCING PROCESS1

Commodity Identification

Identify and Prioritize Develop plan and strategy Implement, Measure and Adjust

New Tools & Techniques

Conduct product value analysis and engineering

Substitute materials Pursue system buying alternatives Optimize life cycle costs

• Reengineer joint processes• Share productivity gains• Integrate logistics• Support supplier operations improvement

Establish/develop key suppliers Employ strategic alliances/partnering Examine strategic make versus buy Develop integrated supply chain

Expand geographic supply base Develop new suppliers Profit from global supply/demand imbalances

Compare “total” costs Model “should-costs” Renegotiate prices Unbundle pricing

Consolidate number of suppliers Pool volume across units Redistribute volume among suppliers Combine volume from different

commodity categories

Exploit Buying Power Create an Advantage

ExpandSupplyBase

Best PriceEvaluation

VolumeConcentration

ProductSpecificationImprovement

JointProcess

Improvement

RelationshipRestructuring

StrategicSourcing

Profile OfSourcing Group

Sourcing Strategy ForSourcing Category

Supplier Portfolio Generation

Competitive Supplier Selection

Operational IntegrationWith Suppliers

Continuous Benchmarking OfSupply Market

Selection Of Implementation

Path

4

1

2

3

5

6

7

Online (“e”) RFPsInternet Negotiations (Reverse Actions)

New Tools

Source: http://www.naspo.org/documents/Strategic_Sourcing_All.ppt....

Strategic Sourcing in the Public Sector

Overall Sourcing ApproachFairness ConsiderationsOpen Competition

Drivers of Competition Broad participation, enabled

by effective outreach Transparent procurement

processes Effective documentation of

results and approach

Factors for Consideration Disabled Veterans Business

Enterprise requirements Small business participation

goals Other federal and special fund

requirements

Effective and Balanced Approach to Drive Results Competition and fairness used

to drive traditional sourcing approach to achieve savings and preserve policy priorities

GlobalSourcing

Best PriceEvaluation

VolumeConcentration

ProductSpecificationImprovement

JointProcess

Improvement

RelationshipRestructuring

StrategicSourcing

Sourcing Activities

Training

Savings Administration

Change Management

Major Project Components

State of California RoleTeam CGI-AMS Role

Communications and Change Management — Internal Stakeholders and External Vendors

Phase I – 45 Days Phase II

September 2004

Opportunity Assessment

Wave I SourcingOpportunities

Wave II SourcingOpportunities

January - July 2005 April – May 2005 June 2007

Example- Project Roadmap Plan

4 + Months depending on category

Savings Collection

Three Year Project Outlook

RevenueGrowth

Effective Cost Management

Effective Asset Management

•Broaden Offerings•Improve Customer Value Proposition

•Internal Cost Structure•External Cost Structure

•Reduce Assets•Improve Utilization

How to Economic Value Added

The Key Players

Internal Customers Suppliers Subcontractors Contract Admin Legal Finance Quality Others

Goal Comparison

Business Operations wants

– Continuity– Quality of Service– Budget Optimization– Supplier

Management

Business Strategy Demands

– Maintain or improve competitive position

– Maintain product or service performance

– Reduce controllable spend by 3% per year

– Supply Chain Optimization

Analyze Current Situation

Initial GO

1 2 43

Assess Supply Base

Develop Sourcing Strategy

Strategy GO

Engage Suppliers

Execution GO

5

DevelopTransition

Plan

Gather Information

Implement Strategy

6

Manage Supply Base

Strategic Sourcing

Procurement Source: http://www.pptsearch365.com/Sourcing-Improvement.html....

Critical Elements

IdentificationAnalysisTotal Cost Modeling

– Process redesign– Supplier reduction– Leverage– Disintermediation

Supplier Management

• What is the $$spend• Who are the users • Who are the suppliers• What is service level• What is value-added• How many transactions are involved• What is the impact on cash flow• How long do they take• How much inventory exists• Where does inventory exist• Is this asset intensive

Establish Baseline Metrics

Additional Baseline What is the labor cost How does technology fit Who will lead the team What skills are needed What resources are available to the team What is the scope What are the boundaries How will we secure commitment How will we maintain commitment What are the incentives

Why is this team being formed?

What authority does the team have?– Perform a task?– Improve a process?– Solve a problem?– Make a decision?

How will decisions be made?

Forming

Storming

Norming

Performing

• History of purchases (G/L)• Unit prices by suppliers

(invoice files)• Volume purchased by

supplier (A/P)• Seasonality of purchase

(A/P, G/L)

• Information on current and past suppliers

• Unit prices• Price and pricing bases• Supplier characteristics

— Capacity— Quality— Location

• Term of payments• Supplier constraints• Product specs• Potential suppliers• Spend Analysis Software

• Product specs• Potential suppliers (name,

capabilities, quality)• Current supplier (capability,

quality, certification)• Bill of material structure• Possible alternative

products

• Seasonality of end product• Sales Dept. requirements to

Purchasing Dept. (local, content, advantaged suppliers…)

• Target sales markets

• Incoming quality history• Volume by site• Seasonality of usage

• Volume history• Pricing• Service performance• Technical specs

Sales Dept. Manufacturing Dept Suppliers/Others

Accounting Dept Purchasing Dept Technical/Engineering Dept.

Sources of Preliminary Category Information

Suppliers

Financials Total Annual Revenues Total Assets Annual revenues in the outsource

segment Financial rating Sales Growth

Processes• Implementation and acceptance of

technology• Strength of management

experience• Qualifications of operating

management• Qualifications of the work force• Quality of labor management

relations• Current best accounts

Organization• Structure• Culture• Dedication to business development • Accounts lost in last 3 years• Policy on open book cost disclosure

and independent financial audits• Incentives for performance• Years providing product or service

Where to find• Directories

– Yellow Pages– Chamber of Commerce– Minority Purchasing– Thomas Register

• Networks– Internet– Minority Councils– SBA– Trade Shows– Other buyers

What is Outsourcing?Outsourcing -

“the strategic use of outside resources to perform activities traditionally handled by internal staff and resources” Dave Griffiths

Why Outsource?Provide services that are scalable, secure, and efficient, while improving overall service and reducing costs

What is outsourced?

Advertising Architecture/Engineer

ing Audio Visual Asset Repair Communications Computer systems

support Construction Customs Brokerage Environmental Facilities

Management Fleet Management Food Service Fork Truck Repair Graphic Arts

Hearing Testing Human Resources

Internal Audit Inventory

Management Investment Recovery Janitorial/Custodial Laboratory Services Legal Logistics Mailroom Management

Information Systems Manufacturing

Engineering Manufacturing --

Subassembly

Marketing Medical Order Entry Payroll Printing Purchasing Quality Assurance

and Control Research and

Development Real Estate Records Managment Recruiting Relocation Risk Assessment

and Management Safety

Security Security Alarm

SystemsTelecommunications

TelemarketingTemporary Labor

Training Translation Services Travel Vehicle Maintenance Vending Management Vibration Analysis Warehousing Waste Hauling Wellness Programs

OUTSOURCING

Outsourcing Decision Model

1. Is this product or service critical to the success of our business?

Definite candidate foroutsourcing

Outsource, develop relationship with one or moresuppliers as required, develop measures andawareness of performance requirements.

YesDo we understand and can we fund and implement the

process or technology?

YesCan we manage it?

NoOutsource

NoOutsource

YesThe “yes” answer implies that this isan area where we are capable ofdistancing ourselves from ourcompetition. Develop as a specificsource of differentiation, a possiblecore competency of the business, anecessity of the marketplace; wedefinitely want to be doing this longterm.

3. Non Strategic Determination

Manage Outsource Relationship

2. Non strategic determination 2. Strategic determination

3. Strategic DeterminationShoot for Best in Class, what is the gap between wherewe are and present best in class - what will it take toclose the gap,

4. Non Strategic Determination

Evaluate -- has anything changed that would movethis fron tactical to strategic activity. If so, shouldwe reconsider outsource decision?

4. Strategic DeterminationEvaluate - if in a reasonable period of time sufficientprogress is not made to close the gap, consideroutsourcing to a strategic supplier, this just might not beyour thing.

5. Exit StrategyCan you develop an exit strategy if you commit tooutsourcing? If not, outsourcing may not be yoursolution.*Adapted from a model developed by Hamel and Prahalad

Reasons to Outsource Improve the business focus Improve service level Access to larger capabilities Share risksAccelerate benefits of re-engineeringReplace outdated systemsReduce or control costs

– Provide a cash infusion– Make capital funds available– Free non capital resources

Dependent on the category and the supplier

• Define Appropriate Management Structure

• Contract Management• Issue Resolution• Market Dynamics - suppliers position

relative to market• New Products,services & technology• New suppliers• Competitor evolution• Pricing relative to market

• Communication Plan

• Confirm goals• Understand issues & current

metrics• Create metrics• Confirm collection methods• Set up review procedure• Take action based on metrics• Communicate results

Supplier Management

• Set Goals• Review progress• Communicate results

Structured Process ImprovementRelationship Management Metrics

Why do Companies Outsource?

When to Outsource

GreyArea

Not Outsourced

In House if Possible Outsource

Competitive

Strategic Non-Strategic

Non-Competitive

PricewaterhouseCoopers Model

How to Implement Outsourcing Program initiation

– Opinions and ideas shared to form draft contract

Program implementation– Transferring staff – Service Level Agreement (SLA) – Establish communications between partners – Actual transfer of the service – Establish management procedures

Contract agreement Contract fulfillment

Problems With Outsourcing

Loss of Control Increased cash outflow Confidentiality and security Selection of supplier Too dependent on service provider Loss of staff or moral problems Time consuming Provider may not understand business environment Provider slow to react to changes in strategy

Strategy – checklist of applications• Reassess – check for internal resources• Selection – evaluate vendor(s) SWOT• Negotiate – schedules and contracts• Implementation – start activities, training• Monitor – Reports, resources and activities• Accept – Validate and accept or reject• Renew – All is well, renew/extend contracts• Exit – All is not well, accept and exit

Outsourcing Life Cycle - Detail

Outsourcing Models

• Data administration – Local and Remote• Application development and maintenance• Remote Infrastructure management

Business Continuity – Data Storage• Business Processes, Engineering Processes• Complete testing processes- Reduce time to market• Knowledge Processes

Outsourcing Models