Strategic Sourcing: Current Strategic Sourcing: Current Trends in State GovernmentTrends in State Government

Moderated by: Dianne Lancaster, ORModerated by: Dianne Lancaster, ORPanelists: Charles Covington, FLPanelists: Charles Covington, FL Paul Higgins, VAPaul Higgins, VA Mike Smith, ILMike Smith, IL

General Overview:General Overview:

What is it?

• Ask 10 different people, you’ll likely get 10 different Ask 10 different people, you’ll likely get 10 different answers!answers!

• The Merriam-Webster dictionary doesn’t even The Merriam-Webster dictionary doesn’t even have one. Instead they have words like have one. Instead they have words like stereochemistries and psuedotuberculosis!stereochemistries and psuedotuberculosis!

We like this definition:We like this definition:

Strategic SourcingStrategic 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 information to make business decisions about information to make business decisions about acquiring commodities and services more acquiring commodities and services more effectively and efficiently effectively and efficiently (Federal Office of (Federal Office of Management and Budget)Management and Budget)

Broad Overview of the ProcessBroad Overview of the Process

1)1) Investigation:Investigation: Examine/collect data & establish baselinesExamine/collect data & establish baselines Define needsDefine needs Develop specs and sourcing strategyDevelop specs and sourcing strategy

2)2) Solicitation:Solicitation: Determine methodologyDetermine methodology Evaluate bidsEvaluate bids Contract negotiationContract negotiation Total cost of ownershipTotal cost of ownership Vendor selectionVendor selection

3)3) ImplementationImplementation Vendor management/contract administrationVendor management/contract administration Performance monitoringPerformance monitoring Change managementChange management

Florida Florida

MyFloridaMarketPlace-- eProcurement• 66,000 Registered Vendors• 21,000 Minority & Women Vendors• 194, 000 Annual Purchase Orders• $1.3 Billion Annual Spend• 32 Executive Agencies on the System

Florida One Initiative• Equity in Contracting• Environmental Considerations• Certification of Drug Free Workplace• RESPECT• PRIDE

75-State Term Contracts•Mandatory use by Executive Agencies•Optional use for all other government entities (OEU’s)•Eliminated over 100 State Term Contracts•Approved Cooperative Contract Sources

- WSCA- HIRE

- MMCAP- US Communities- Other

Spend Management• MFMP-Analysis Tool• State Accounting System• P-Card• Vendor Sales Information• User Data

Office ConsumablesOffice Consumables Maintenance Repair and Maintenance Repair and

Operating SuppliesOperating Supplies Wireless VoiceWireless Voice Communication Communication

backbone infrastructurebackbone infrastructure Dry-Cell and Dry-Cell and

Rechargeable BatteriesRechargeable Batteries Office PaperOffice Paper Gasoline & other fuelsGasoline & other fuels Medical & Dental Medical & Dental

SuppliesSupplies

Courier ServicesCourier Services Officer’s UniformsOfficer’s Uniforms Can LinersCan Liners Audio Visual EquipmentAudio Visual Equipment Pest Control ServicesPest Control Services Hand Held & Power ToolsHand Held & Power Tools EnvelopesEnvelopes Tissue and TowelsTissue and Towels Lawn CareLawn Care

$250MM in Contract Savings for Waves 1 and 2

Telephone System Telephone System EquipmentEquipment

Lab SuppliesLab Supplies Security ServicesSecurity Services Janitorial ServicesJanitorial Services

Mail EquipmentMail Equipment Office EquipmentOffice Equipment Maintenance ServicesMaintenance Services Metal Detection and Metal Detection and

Scanning EquipmentScanning Equipment

Potential Strategic Sourcing Events for Wave 3

VirginiaVirginiaProcurement ScopeProcurement Scope

State Government

171 Agencies/Institutions of Higher Education

Central oversight of state contracts

Variety of systems, including 44 Enterprise Resource Planning (Financial) Systems

Approximately $5 billion annual spend

Local Government

350+ Cities, Counties & Towns

Plus Public Schools, Airports, Districts, Authorities and Commissions

Use state contracts

Variety of systems

Approximately $5 billion annual spend

Vendors

20-30,000 for state government

Mix of local vendors versus statewide vendors

20% get 80% of the orders (Approximately 6,000)

Virginia equals a Fortune 300 Corporation

Profile Spend & Baseline

Facilities

General Equipment & Consumables

Industrial Equipment & Supplies

Materials

Technology

Industrial Services

Logistics

Personnel Services

Professional Services

Utilities

Furniture & FurnishingsOffice EquipmentOffice Supplies

Packaging & Storage Materials(Containers, Corrugated, Pallets, Tape)Paper, Stationery

Building MaintenanceEnvironmental ServicesEquipment MaintenanceIndustrial Cleaning Services Infrastructure SupportSecurity Guard ServicesWaste Disposal Services

BenefitsContract LaborDomestic ServicesRelocationTemporary StaffingTrainingTravel & Entertainment

ElectricityTelecommunicationsUtility Billing Services

AccountingAdvertising & MarketingCommercial PrintComputer ServicesFleet ManagementInsuranceIT ConsultingLegalReal Estate

Cargo Transport (Air, Rail & Road)Courier/MessengerExpress DeliveryPostageWarehousing & Storage

HardwareSoftwareTelecom Equipment

Janitorial SuppliesMRO SuppliesSafety Equipment & SuppliesSecurity EquipmentSpare PartsVehicle Parts and Accessories

Building MaterialsHVACLighting, Fixtures & AccessoriesPipes, Valves & Fittings

Goods

Services

Area Category

Savings Results

$150 Million in Contract Savings Created

Selected Target Categories and Percent Savings

• Computer Hardware 12%• Janitorial Supplies 11%• Lab Supplies 13%• Office Supplies & Paper 18%• Computer Software 8%• Off-Road Equipment 6% • Enterprise Storage Devices 15%

• Temporary Services 32%• Uniforms 17%• Hotels 31%• Heavy Trucks 20%• Storage Media 30%• School Buses 3%• Printers and Accessories 15%• Maintenance, Repair, and Operating Supplies (MRO) 13%

Ultimately saved over $150M in 2 separate “waves” of strategic sourcing

Leveraged purchases across 200+ state agencies, institutions of higher education and other public entities

IllinoisIllinois

OrganizationOrganizationChief Procurement OfficersChief Procurement Officers

Dept. of Transportation – Highway ConstructionDept. of Transportation – Highway Construction Capital Development Board – Capital ProjectsCapital Development Board – Capital Projects Higher Education Higher Education Supplies and ServicesSupplies and Services

Authority/ApplicabilityAuthority/ApplicabilityIllinois Procurement CodeIllinois Procurement Code All state agencies, boards and All state agencies, boards and

commissionscommissions Competitive selection on all Competitive selection on all

procurements with few exceptionsprocurements with few exceptions Preferences for small businessPreferences for small business Goals for diversified businessesGoals for diversified businesses Agencies required to use master Agencies required to use master

contractscontracts Contracts available to local Contracts available to local

governments -- Joint Purchasing governments -- Joint Purchasing Program Program

Central Management ServicesCentral Management Services Center-leads all Supplies and Services Center-leads all Supplies and Services

procurementsprocurements• Manages Illinois Procurement BulletinManages Illinois Procurement Bulletin Created comprehensive Knowledge Management Created comprehensive Knowledge Management

system -- an electronic reference library and system -- an electronic reference library and communications systemcommunications system

Provides access and contracting opportunities for all Provides access and contracting opportunities for all vendorsvendors

TransparencyTransparency Accountability Accountability Cost SavingsCost Savings

$17 billion in procurable spend$17 billion in procurable spend

ILLINOIS PROCUREMENT INITIATIVE ILLINOIS PROCUREMENT INITIATIVE STRATEGIC SOURCINGSTRATEGIC SOURCINGAugust 2003 - PresentAugust 2003 - Present

Goals Save $200+ million in two years Organizational transformation Standardize/streamline processes Improve transparency and increase vendor participation Build capabilities/knowledge management system

Results:Results: 27 projects -- $216 million of Validated Savings 27 projects -- $216 million of Validated Savings

Examples ----

Project Strategy SavingsFood Product substitution, bulk purchasing, $6.3 million

elimination of unnecessary items

Can Liners Change in specifications, renegotiation $737,000

Cleaning Supplies Combined multiple contracts, extended term $182,000

PC’s/Laptops/Monitors Demand management $1.8 million

Emissions Testing Renegotiation $10.2 million

Utilities/Electricity Changed rate plans to best suit state facilities $3.0 millionconsumption patterns.

Paper and Envelopes Combined multiple contracts, extended term $715,000

Family Case Mgmnt Enhanced federal reimbursement $24.2 million

ILLINOISILLINOIS

PROCUREMENT INITIATIVE ACCOMPLISHMENTSPROCUREMENT INITIATIVE ACCOMPLISHMENTS

$216 million in validated savings

Created new center-led organization to better manage procurements statewide and identify sourcing opportunities

Implemented 5-step procurement approach

Streamlined processes – eliminated unnecessary and/or redundant steps

Implemented procurement business case system to ensure all purchases are justified and to identify opportunities for savings

Implemented a toll-free call center to assist agencies and vendors – ensures consistent responses and that caller gets to appropriate person

Created comprehensive Knowledge Management system -- an electronic

reference library and communications system Greatly improved transparency into the process – more detailed publications of

procurement notices, supplier workshops, enhanced documentation of how decisions are made, published procurement opportunity reports

Increased opportunities for small and diverse businesses

Oregon Smart Buy ProjectOregon Smart Buy Project

CATEGORIZING PURCHASED EXPENSEFiscal Year 2003 Spending$ Billions

0.301.35

0.27

$1.05

$1.62

Total Total Purchased Purchased ExpensesExpenses

Non-Non-AddressableAddressable

PotentiallyPotentiallyAddressable Addressable Purchased Purchased ExpensesExpenses

EvaluatedEvaluatedIn-DepthIn-Depth

Potentially Potentially Addressable Addressable

in Future in Future WavesWaves

• Government Services• Interest

How Opportunities Were IdentifiedHow Opportunities Were IdentifiedState Spending OverviewState Spending Overview

To facilitate identification of high-savings opportunities, the team created a consolidated picture To facilitate identification of high-savings opportunities, the team created a consolidated picture of the State's spending, classifying spending into common expense categories, and conducting of the State's spending, classifying spending into common expense categories, and conducting a “deep dive” diagnostic into a large number of spending categories.a “deep dive” diagnostic into a large number of spending categories.

• The State purchased $1.62 billion of goods and services from vendors in fiscal year 2003, $1.35 billion of which is on purchases that are potentially “source-able”

• The initial Opportunity Assessment (conducted in October-December 2003) evaluated spending in the largest spending categories where there was significant cross-agency leverage – 65% of the State’s spending is with vendors who serve only one agency

• The State purchased $1.62 billion of goods and services from vendors in fiscal year 2003, $1.35 billion of which is on purchases that are potentially “source-able”

• The initial Opportunity Assessment (conducted in October-December 2003) evaluated spending in the largest spending categories where there was significant cross-agency leverage – 65% of the State’s spending is with vendors who serve only one agency

Note: Purchased expenses exclude interagency transfersSource: State financial systems (SFMA, ODOT, Lottery; Corrections, p-card); Silver Oak Solutions analysis

KEY OBSERVATIONS

Potential Wave 2Potential Wave 2

• Smaller, but still sufficient baseline to Smaller, but still sufficient baseline to warrant detailed spend reviewwarrant detailed spend review

• Significant savings percent range Significant savings percent range based on benchmarking or historical based on benchmarking or historical savings experiencesavings experience

• Support from key stakeholders or no Support from key stakeholders or no anticipated push backanticipated push back

• Can be agency-specific categories Can be agency-specific categories without cross-agency leverage, as long without cross-agency leverage, as long as above 3 criteria are satisfiedas above 3 criteria are satisfied

Wave 1Wave 1

• Sufficient baseline to warrant Sufficient baseline to warrant detailed spend reviewdetailed spend review

• Historic savings experience in Historic savings experience in categorycategory

• Cross-agency leverageCross-agency leverage• Positive results from benchmarking Positive results from benchmarking

and market analysisand market analysis• Medium to High ease of captureMedium to High ease of capture

PRIMARY SELECTION CRITERIA

Category Selection Criteria

By evaluating top-spending areas with joint leverage opportunities in a number of areas, two waves of spending categories were identified.

SCREENING MATRIX

• Wave 1 CategoriesWave 1 Categories

Potential Wave 2 CategoriesPotential Wave 2 Categories

Savings Opportunity

High

Low

Low Ease of Capture High

• PC Hardware/Peripherals

• ITPS• Office Supplies

• TCPERS• Telecom LD/Data

• Express Mail• Tires • Telecom Cellular

• Copiers• Software

Lab Supplies

Hot Mix Food

Janitorial Supplies

Blade Server/Mainframes

Postage Meters

Emulsions

HARD DOLLAR IMPACT 1 BREAKDOWN By Completed Category$ Thousands

CategoryCategoryAnnual Annual SpendSpend

ROBROBImpactImpact

Annual Run-Annual Run-Rate ImpactRate Impact

Contract Contract Length Length ImpactImpact22 % Impact% Impact33

PC HardwarePC Hardware    $12,318$12,318    $4,151$4,151    $3,036$3,036  

$16,396$16,396  

25%25%

Office SuppliesOffice Supplies    11,106 11,106    3,634 3,634   2,994 2,994

  14,403 14,403

  27%27%

Telecom CPE & Related ServicesTelecom CPE & Related Services    7,8267,826    738738    1,2671,267  

7,5197,519  

16%16%

Telecom LDTelecom LD    2,4792,479    670670    690690  

2,0772,077  

28%28%

PC PeripheralsPC Peripherals    3,6633,663    579579    682682    3,4223,422    19%19%

Telecom CellularTelecom Cellular    1,7581,758    148148    133133    272272    8%8%

Express MailExpress Mail    1,3971,397    140140    140140    376376    10%10%

CopiersCopiers    3,0393,039    122122    152152    2,9982,998    5%5%

SoftwareSoftware    5,2765,276    3535    3838    198198    3%3%

        

TotalTotal $48,861 $10,215 $9,132 $47,597 18%

Identified hard dollar impact is projected to be $9.1 million per year (or 18% of baseline spend) and will accrue to the State over many years.

1 Includes spend reduction savings, rebates and increase in VCAF (Vendor Collected Administrative Fee), due to fee increase in some Smart Buy price agreements2 Contracts vary in length by category from 2 – 6 years, and savings are expected to accrue over the lives of these contracts3 Defined as (Annual Run-Rate Savings/Annual Spend)4 Information gathered as of February 2, 2005

The type of savings vary by commodity spending category.The type of savings vary by commodity spending category.

SOURCES OF SAVINGS AND SERVICE IMPROVEMENTSBy Category

  CategoryCategory

Source of SavingsSource of Savings

  CommentsComments

Lower Lower Negotiated Negotiated

PricingPricing

Right-Right-Spec’ing Spec’ing (Demand (Demand

Management)Management)

Best-in-Best-in-Class Class

Buying Buying PracticesPractices

Office Supplies & PaperOffice Supplies & Paper • In addition to lower negotiated pricing, significant In addition to lower negotiated pricing, significant incremental savings can be obtained through adoption of incremental savings can be obtained through adoption of essential items list and best-in-class buying practicesessential items list and best-in-class buying practices

PC HardwarePC Hardware • In addition to lower negotiated pricing, significant In addition to lower negotiated pricing, significant incremental savings can be obtained through adoption of incremental savings can be obtained through adoption of standard configurationsstandard configurations

• Additional savings possible through quarterly bulk-buysAdditional savings possible through quarterly bulk-buys

PC PeripheralsPC Peripherals   

• Created new peripherals contract where one did not existCreated new peripherals contract where one did not exist

Telecom Customer Premise Telecom Customer Premise Equipment and Related Equipment and Related ServicesServices

• Competitive solicitation created savings with incumbent Competitive solicitation created savings with incumbent vendorvendor

Long-Distance TelecomLong-Distance Telecom      

• Competitive solicitation created savings with incumbent Competitive solicitation created savings with incumbent vendorvendor

Express MailExpress Mail      

• Incumbent negotiations resulted in lower pricingIncumbent negotiations resulted in lower pricing

Cellular Phones and ServicesCellular Phones and Services      

• Savings through migration to optimal price plans that Savings through migration to optimal price plans that minimize cost based on observed usageminimize cost based on observed usage

CopiersCopiers      

• Savings through adoption of 48-month rental terms and Savings through adoption of 48-month rental terms and copier specifications that meet, but not exceed, actual copier specifications that meet, but not exceed, actual needsneeds

SoftwareSoftware   

• Incumbent negotiations resulted in lower pricingIncumbent negotiations resulted in lower pricing

Telecom DataTelecom Data • Short-term savings identified but not recommendedShort-term savings identified but not recommended• Larger Wave 2 savings approach identifiedLarger Wave 2 savings approach identified

Impact on the Vendor Impact on the Vendor CommunityCommunity

Small, Minority and Women-Owned Small, Minority and Women-Owned BusinessesBusinesses

- Policies to increase opportunities, i.e., - Policies to increase opportunities, i.e., utilization plansutilization plans

- Marketing efforts/outreach- Marketing efforts/outreach

- Supplier diversity programs- Supplier diversity programs

- Monitoring/tracking activities - Monitoring/tracking activities (requesting/requiring more information)(requesting/requiring more information)

- Counter-balancing activities (bundling - Counter-balancing activities (bundling vs. vs. unbundling)unbundling)

Different from “Business as Usual”Different from “Business as Usual”

- Reduction in the Number of Overall Awards

- Best value vs. best price

- Changes in the RFP process, i.e., reverse auction

- Total cost of ownership

- More purchasing options, i.e., lease vs. buy

- Data-driving decision making

- More RFP’s and multi-step bids

- Understanding of the industry—contract staff has increased knowledge of supply chains & costs

- Uniform Price Card

- Length of Contracts

- Performance Management: Data driven vendor performance, i.e., automated and electronic tracking systems

- Improving Relationships with Suppliers: More communication, face-to-face meetings (quarterly review sessions)

Commodities/Categories of Commodities/Categories of ItemsItems

Popular items that have already been sourced:Popular items that have already been sourced: Office supplies/equipmentOffice supplies/equipment Cleaning/janitorial suppliesCleaning/janitorial supplies CopiersCopiers IT hardware/software/servicesIT hardware/software/services FoodFood Telecom servicesTelecom services Mail servicesMail services HMO/Hospital rate negotiationsHMO/Hospital rate negotiations

Commodities/Categories of Commodities/Categories of ItemsItems

What is planned for the future?What is planned for the future?Commercial servicesCommercial servicesUtilitiesUtilitiesLease vs. purchases—equipment & facility Lease vs. purchases—equipment & facility

spacespaceProfessional servicesProfessional services

Questions?Questions?