STRATEGIC SOURCING

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STRATEGIC SOURCING BENCHMARKING - TAKING
PROCUREMENT TO THE NEXT LEVEL

• Presented By Fernando I. Prieto
• February 29, 2008
• Office [phone]

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What will we cover today?

• Strategic Sourcing
• What is it?
• The Model
• Why is it important?
• Benchmarking
• What is it?
• What is the value?
• Examples
• Current State
• How do we get to the next level?

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Strategic Sourcing What is it?

• Strategic Sourcing is an ORGANIZED and
  COLLABORATIVE approach to leveraging targeted
  spend with select suppliers that are best suited
  to create knowledge and value in the
  customer-supplier interface.
• Buyer Mentality
• vs.
• Supply Chain Management Mentality
• Which one best describes your institution?

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Strategic Sourcing What is it?

• Scenario A
• Purchasing from specific suppliers as needed,
  day to day, or a hand to mouth basis.
• OR
• Scenario B
• Managing relationships with suppliers on a long
  term basis that allows you to purchase from the
  source that provides the best value.

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Strategic Sourcing What is it?

• If you choose Scenario B then you are using
  Strategic Sourcing.
• If you choose Scenario A, then you may be
  missing out on
• More organized, systematic and collaborative
  process
• A reduction in cost and waste
• Improved service through strategic supplier
  relationships
• A more competitive advantage

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Strategic Sourcing The ModelKey Elements
Step 1 Assessing Current Spend
Step 8 Relationship Management and Maintenance
Step 2 Create Sourcing Teams
Step 7 Negotiate, Evaluate, Commit and Agree
Step 3 Create Current State and Develop Strategy
Step 6 Develop Future State
Step 4 Gather Market Information
Step 5 Develop Supplier Portfolio
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The Model Key ElementsStep 1 Assessing
Current Spend

• Create a profile of spend, and users
• Understand commonality across College/University
  campuses and business units
• Identify spending areas that could lead to
  leveraging opportunities
• Prioritize opportunities targets

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The Model Key ElementsStep 2 Creating
Sourcing Teams

• Identify and build cross-functional members
• Ensure cross-location (other business units
  represented)
• Establish roles that are defined, yet flexible
  and creative
• Organizational and stakeholder buy-in

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The Model Key ElementsStep 3 Evaluate Need
and Develop Strategy

• Detailed spend analysis cost baseline
  development
• Complete a current state or As-is Assessment
• Understand current supplier capabilities
• Gather business unit-specific requirements and
  usage
• Develop and deliver a communication plan
• Team Develops Best Strategy for Meeting Needs

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The Model Key ElementsStep 4 Gather Market
Information

• Research the industry and supplier landscape
• Interview suppliers and industry leaders for
  knowledge about new developments and best
  practices
• Assess the field of potential suppliers
• Develop the Long List of suppliers
• Become the Most Informed As Possible

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The Model Key ElementsStep 5 Develop Supplier
Portfolio

• Determine Short List of suppliers to receive
  official solicitation
• Establish criteria to evaluate potential
  suppliers
• Issue a Request For Information (RFI) if
  necessary
• Identify suppliers with key strategic
  university-wide roles
• Determine Short List of suppliers to receive
  official solicitation
• Release official solicitation such as RFP or
  invitation to bid

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The Model Key ElementsStep 6 To be or Future
State

• Set goals and develop the GAP analysis
• Understand and communicate a three phase process
  for vendor selection
• Phase 1 Procurement award based on best value
• Phase 2 Continuous improvement
• Phase 3 Innovation (ultimate money saver)
• Establish TOTAL COST OF OWNERSHIP criteria
• Create PERFORMANCE Matrix metrics criteria

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The Model Key ElementsStep 6 Example Total
Cost of Ownership

• Acquisition (25-40)
• Operating Costs
• Training Costs
• Maintenance Costs
• Warehousing Costs
• Environmental Costs
• -
• Salvage Value

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The Model Key ElementsStep 6 Performance
Matrix

• Unscheduled Downtime
• Service Measures
• Material Availability
• Maintenance Cost (reduced)
• Downtime due to products Performance
• Response Time
• Expenditure Reductions
• Internal Processes Improved
• Training Cost (reduced)

• Revenue Enhancements
• Manufacturing Defects
• Warranty
• Issues / Resolutions
• Meets Design
• Specifications
• Efficiency Measures
• On-Time Delivery
• Customer Satisfaction
• Transactional to Strategic

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The Model Key ElementsStep 6 Performance
Matrix

• Notice No Mention of in the
  Performance Matrix
• Of Course, Price Plays a Key Role,
• BUT Dont Focus on Price as your Sole Determining
  Factor

PRICE
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The Model Key ElementsStep 7 Negotiate,
Evaluate, Commit and Agree

• Conduct final negotiations
• Begin to share sensitive information
• Think longer term than previous agreements
• Ensure higher levels of trust
• Commitment to succeed required on both sides
• Establish effective communications
• Award Contract (Phase 1)
• FINALIZE PERFORMANCE MEASUREMENT FOCUS

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The Model Key ElementsStep 8 Relationship
Management and Maintenance

• Communicate effectively ABSOLUTE MUST
• Measure and monitor performance on both sides
• Re-evaluate when necessary
• Develop continuous improvement goals
• Improvement of internal efficiencies of both the
  University and the Supplier (Phase 2)
• Establish innovative mindset with supplier for
  value-added opportunities outside the framework
  of pricing (Phase 3)

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Strategic Sourcing Why it is Important
This isnt about BUYING stuff its about
MANAGING the stuff you buy!
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Strategic Sourcing - Why it is Important?

• Encourages us to think creatively about supplier
  relationships
• Focuses on opportunities to leverage spending and
  generate savings in targeted spending areas
• Requires us to develop new thinking about
  performance metrics
• May lead to other forms of value as well
• Quality improvement
• Improved internal teamwork and communication
• New sources not previously considered may be
  developed
• Streamlined business processes (internal and
  external)
• Innovation in the relationships with key
  suppliers
• Ensures that we end up with the BEST OVERALL DEAL
  in the long run

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Strategic Sourcing Why is it Important?Vital
Statistics (Sourcing Teams)

• 46 months timeframe until award step begins
• Requires dedicated of team member time
• Dont Over-Launch too many teams
• Use internal communications to announce team
  progress Communication plan is a MUST
• Team stays in place after award is made and plays
  part in quarterly follow-ups

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Benchmarking What is it?

• The process of improving performance by
  continuously
• best practices and processes found inside and
  outside an organization

identifying,
and adapting
understanding,
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Benchmarking A Classic 8 Step Process
Step 1 Select a Process
Step 8 Measure the Results and Make Corrections
Step 2 Determine the Project Scope
Step 7 Plan and Implement the Change
Step 3 Choose Relevant Measures
Step 6 Identify and Resolve Issues
Step 4 Study and Learn about Best Practices
Step 5 judge Appropriateness and Adapt
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What is the Value?

• Objective data
• External yardstick
• Better negotiating information
• Identification of opportunities focused
• Tool for setting priorities
• Institutional credibility
• Information to justify professional staff
  development
• Method for understanding, tracking, measuring,
  and showing performance relative to peers or
  other industries

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Challenges and Opportunities

• Keeping it simple
• Comparing apples to apples
• Maintaining usefulness over time
• Ensuring confidentiality
• Designing proper metrics
• Maintaining vendor relationships
• Takes some investment, time and effort involved
  to do it RIGHT

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Current State of Benchmarking

• Benchmarking from buyer point of view
• Focused on pricing
• Sometimes there are overlaps or gaps in specific
  service or commodity areas making
  apples-to-apples impossible
• Information can be limited
• Benchmarking from 3rd party point of view
• Consultancies offer multiple industry
  perspectives from their client portfolios
• Provide best practice insight on operational
  strategies technologies, beyond just
  procurement metrics

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Why Isnt Benchmarking Used More?

• Still difficult and time consuming
• Too little value is placed on the strategic
  aspect
• It is predominantly focused on

price,
and cost reduction
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Category Management A better approach
encompassing benchmarking

• Category Management is more typical in
  industrial and manufacturing setting but may have
  benefits for higher education
• Approach is best suited for tackling spend areas
  that are high dollar or increasingly complex
• Construction
• Science equipment technology
• Recruit or groom procurement staff with expertise
  and experience from key industries where money is
  spent
• Good category managers understand and influence
  the factors that align their organization with
  the BEST OVERALL DEAL

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What Procurement Professionals Need to Know

• Our profession is being asked to deliver more
  value than we ever have before
• Cost pressures on campuses across the country are
  increasing at enormous rates
• Procurements role is being called on to be a
  significant contributor to the viability of the
  institution

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What Procurement Professionals Need to Know

• The question is How will we respond?
• Will we show our ability to break the
  transactional mold and demonstrate our strategic
  talent?
• Will we help our campuses rise to the economic
  challenges they face?
• Will we transform our profession and assume a
  leadership role to help drive and guide our
  campus activities?

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Questions and Answers
Questions
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Appendix
Samples Examples
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Sample Sourcing Methodology 1
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Sample Sourcing Methodology 2