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2005 sourcing strategies: processes, best practices, and defense initiatives

Rendon, Rene G.

Journal of

Journal of , Summer 2005, pp. 7-20. http://hdl.handle.net/10945/40275 Commodity Sourcing Strategies: Processes, Best Practices, and Defense Initiatives

This article discusses the transformation within the commercial and DOD sectors, specifically as it applies to developing procurement strategies and the implementation of commodity strategies as an application of .

BY RENE G. RENDON

Abstract Results Background Some challenges to strategic sourcing identified This research discusses the transformation in the research include access to the required occurring in the procurement and spend data, highly fragmented supply base, and function, specifically as it applies to developing goals. The research procurement strategies and the implementation also identifies best practices such as establishing of commodity strategies as an application of common processes and tools, using cross- strategic sourcing. The literature review presents functional teams, ensuring adequate team the theoretical framework surrounding the sponsorship and authority, and aggressively transformation of purchasing to supply man- managing purchasing requirements. agement along with its major developments such as integrated supplier relationships, total About the Author costs, cross-functional teams, supply DR. RENE G. RENDON, CPCM, CFCM, chains, e-procurement systems, and strategic PMP, C.P.M., FELLOW, is on the faculty of the sourcing strategies. Graduate School of and Public Policy at the U.S. Naval Postgraduate School (NPS) in Methods Monterey, CA, where he teaches graduate courses Strategic sourcing and developing sourcing in acquisition and contract management. Send strategies are discussed, and commodity sourcing comments on this article to [email protected]. strategies are also discussed in conjunction with This article is adapted from the research report Lasseter’s seven-step process for developing Commodity Sourcing Strategies: Supply Management commodity sourcing strategies. The application in Action, for the Naval Postgraduate School’s of strategic sourcing in the commercial sector is Acquisition Research Sponsored Report Series, discussed using examples from , along January 2005. More information on the Naval with applications within the Department of Postgraduate School’s Acquisition Research Defense (DOD). Program is available at http://www.nps.navy.mil/ gsbpp/ACQN/.

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Conclusion theoretical framework surrounding the transfor- The research concludes that strategic sourcing mation of procurement to supply management will initiatives have resulted in significant cost be discussed, along with its major developments. reductions, increases in productivity, quality Second, the application of commodity strategies improvement, and return on investment. DOD’s within the commercial industry will also be strategic sourcing initiatives have also resulted discussed along with initiatives within the DOD. in significant savings, albeit with some obstacles Finally, this article will identify lessons learned, and barriers yet to overcome. best practices, and recommendations for the Department of Defense’s commodity sourcing Introduction strategy initiatives. are operating in an environment characterized by countless economic and political From Purchasing to Supply Management disruptions to their sources of supplies and The transformation of the purchasing and services. In order to survive in this turbulent procurement function from a passive, admin- marketplace, these organizations must continually istrative, and reactive process to a proactive, monitor their competitive as well as strategic, boundary-spanning function was their internally controllable processes—especially predicted back in the early 1960’s purchasing the procurement process. The DOD is no literature when Henderson stated that the exception. The DOD annually procures billions procurement function would gain increased of dollars worth of systems, supplies, and importance in corporate management.2 As services in support of the national military we continue into this new millennium, the strategy. The Fiscal Year 2005 proposed budget purchasing and procurement transformation included $143.8 billion for RDT&E (research, continues to build up steam and reap benefits development, test, and evaluation) and procure- for leading-edge organizations. The procurement ment of defense-related supplies and services.1 transformation reflects a new approach to Faced with the challenges of the Global War on purchasing and procurement that embraces Terrorism and the fiscal battles of budget cuts the other management functions and constraints, the DOD must monitor of , , and physical its procurement process to ensure a continuous distribution—this new approach has been labeled flow of critical supplies and services. The DOD “supply management” by many organizations procurement process will continue to increase and industries.3 This supply management focus in importance as it acquires mission-critical and requires organizations to adopt a strategic complex supplies and services. orientation to their procurement function and As part of its “procurement transformation to look more at the total supply chain manage- initiative,” the DOD’s procurement process is ment process and its effect on the ’s currently undergoing a transformation similar competitive strategy. More specifically, the supply to the transformation being experienced by management focus involves linking the the commercial sector. This transformation is organization’s procurement strategy with its changing the way DOD manages its procurement corporate competitive strategy. This requires function—to include its people, processes, supply managers to become active participants practices, and policies. The DOD’s procurement in developing their organization’s strategic busi- function is currently transforming from a ness plan, which now includes the integration transaction-oriented perspective to a strategic- of supply, marketing, finance, and conversion oriented enterprise. This article will discuss the strategies.4 transformation occurring in the procurement Supply management has been described as a and purchasing function, specifically as it applies new management concept that integrates the to the implementation of commodity strategies company’s purchasing, , and quality as an application of strategic sourcing. First, the assurance functions with the supplier, working

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together as one team early in the procurement steps in the procurement process, involves the process to further mutual goals.5 Of course, identification and selection of the supplier whose the supply function has always existed in all costs, qualities, technologies, timeliness, organizations ensuring that all needs are met in dependability, and best meet the terms of quality, quantity, delivery, cost, service, organization’s needs.7 and continuity. However, the traditional view Strategic sourcing involves taking a strategic of supply focused more on the function’s opera- approach to the selection of suppliers—an tional or “trouble avoidance” contribution to approach that is more aligned with the organizational objectives. The new concept organization’s competitive strategy. Strategic described focuses on supply management’s stra- sourcing reflects the integration of procurement tegic contributions to organizational objectives, or sourcing strategy with corporate strategy. such as the opportunistic or profit-maximizing The integration of procurement and corporate aspects. In addition, this concept of strategic strategy is reflective of the transformation of supply management differs from the traditional purchasing to supply management. approach in the fact that the organization One example of strategic sourcing is the becomes integrated with selected suppliers, commodity sourcing strategy, which focuses working as one team toward mutual goals. on developing a specific sourcing strategy for a This concept also differs significantly from category or group of supplies or services. This the traditional adversarial approach to supply is just one application of strategic sourcing: the management in which suppliers were kept at development and application of a carefully an arms-length distance from the organization. crafted strategy for the procurement of quality Traditionally, purchasing managers’ performance supplies and services at the lowest cost.8 It was measured based on their ability to reduce should be noted that the term “commodity” the purchased of supplies and services, should not be associated with traditional com- their ability to keep the line running, modities such as , ore, , or , and their ability to reduce the cost of the nor should it be associated with non-complex purchasing department. With the new supply supplies or services. The term “commodity” is management focus, organizations are looking used solely to refer to categories or groups of to the supply management function to focus supplies or services. The success of commodity on -adding outputs such as quality, total strategies is based on maximizing the cost- ownership cost, time to , technology, and reduction advantages of leveraging combined continuity of supply. Other major developments buying power for volume discounts, using in the transformation of purchasing to supply market experts to formulate a sourcing strategy, management include the breaking down of and finally, forming strong relationships with functional walls with the use of cross-functional preferred suppliers.9 teams, the development and management of Commodity sourcing strategies require a supply chains and supply alliances, the use distinct strategy planning process developed of electronic procurement systems, and the for that specific group of supplies or services. adoption of strategic sourcing approaches.6 Lasseter’s Balanced Sourcing Model reflects a generic commodity strategy planning process Strategic Sourcing and involving the following seven steps:10 Commodity Strategies Strategic sourcing is probably the most signifi- (1) The spend analysis is the first step toward cant aspect characterizing an organization’s integrating an organization’s sourcing strategy transformation to supply management. It is with its competitive strategy. It is this critical also this aspect of supply management which step that forces an organization to analyze provides some of the most value-added benefits all the and services that are purchased to the organization. Sourcing, one of the major and are forecasted to be purchased in the

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future by the organization.11 This involves the supplies or services across a set of aggregating total purchases across all orga- differentiated supplier roles. The purpose of nizational divisions both for supplies and this step is for the buying organization to services and by supplier. Additionally, the determine the type of suppliers needed and spend analysis should also reflect the total the roles the suppliers should play in terms cost of ownership, not just the purchase of supply management. This may involve price of the supply or service, as well as the thinking in terms of sub- or various end-users throughout the organiza- end-users, or by stages of the life cycle. tion.12 The output of the spend analysis is a Whichever method is used, the important complete, documented understanding of the point is to segment the spend by suppliers organization’s past and future purchases for reflecting the cost drivers identified in the supplies and services, segregated by users previous phase. The different cost drivers, and suppliers. sub-commodities, or life cycle may indicate the need for a separate sourcing strategy for (2) The second step of the commodity strategy each sub-commodity, or life-cycle segment.17 process is an examination of the supply industry to determine the major suppliers (5) When the supply/service cost drivers and of the specific supply or service by market performance metrics are identified, and the share and geographical region.13 The industry supplier types and roles have been determined, analysis should also consider the various the next step is to confirm whether the competition dynamics using Porter’s Five buying organization’s business processes are Forces of Competition— power, properly aligned, prioritized, and integrated. supplier power, inter-company competition, The focus here is to use the analysis of cost threat of substitution, and new market drivers and supplier roles to realign busi- entrants.14 The result of the industry analysis ness-process priorities to reflect the desired should reflect a diagram of the supply industry degree of integration with selected suppliers. for that specific supply or service, highlighting The result of this step is a determination of the flow of product from key suppliers to which business processes should be realigned major , as well as the different to achieve better integration with suppliers, roles each company plays, such as assembler, thus committing to a relationship manufacturer, or distributor.15 and creating a competitive advantage.18

(3) Identifying and documenting cost and (6) The savings quantification step of the com- performance drivers is the third step in the modity strategy planning process ensures commodity strategy process. The buying that the resulting commodity strategy results organization must have a thorough under- in measurable savings, and uses those saving standing of the cost drivers and other important targets as a metric for not only measuring performance metrics such as quality, level the process of the strategy, but also for of technology, flexibility, and timeliness. A “selling” the resulting commodity strategy suggested approach for implementing this to senior organizational management.19 step is to map the process and document the technology options at (7) The final step in developing the commodity each stage to get further insight into the strategy is to implement the plan. Implementing cost and performance drivers for the specific a commodity strategy plan should be supply or service.16 approached in the same manner as any other major project. Using a formal project (4) The supplier role analysis step of the com- management methodology and associated modity strategy process entails segmenting tools will ensure a successful commodity

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strategy plan implementation. This entails there are two related but distinct trends translating the planned strategy into a set of occurring. First, supplier assessment tasks that will result in the targeted savings. metrics will become more detailed and The tasks should reflect activities, , precise as purchasing spends more and and milestones for achieving the savings more time examining finer and finer levels targets.20 Various tools of detail in performance. Second, the such as work breakdown structures (WBS), metrics will become more individualized Gantt charts, network diagrams, and critical as companies specialize the metrics paths are useful tools for implementing the for individual supplier performance. plan and monitoring its progress. Companies will create supply strategies to achieve cost and technology advantages. Once the commodity strategy plan has been These two trends will increase the level implemented the organization must continually of complexity involved in managing sup- monitor its progress to ensure the strategy plier evaluation and assessment systems. remains effective and responsive to the changes Over the next 10 years, there will be an in the internal and external environment. This intellectual fight over designing metrics continual monitoring should include identifying that are very specific for particular chains. supplies or services that are (or will be) strategic However, the metrics cannot be so com- in the future and identifying changes in the supply plex that they are difficult to manage on environment threats and opportunities. In a corporate level. There is no strong trend addition, the organization must also continually occurring to reduce complexity and stan- monitor critical and current technologies that dardize as much as possible by applying must be pursued, as well as take action to one metric throughout a supply chain.23 minimize the possibility of supply disruptions and price increases.21 Additionally, the CAPS research also identified Lasseter’s commodity strategy planning purchasing strategy development—the linking process provides an effective template for of procurement strategy with corporate strategy— developing a commodity sourcing strategy for a as another trend influencing the transformation specific group of supplies or services. The next of the purchasing function. The CAPS study section of this article will discuss the application indicated that of strategic sourcing and commodity strategies in the commercial industry. It is likely that there will be increasing linkages between supply chain and Commercial Applications business unit/companywide strategy as The development and implementation of com- supply chain strategies become more modity strategies as part of strategic sourcing has focused and formalized, and as firms been considered a future trend and purchasing look for innovative sources of com- best practice of leading organizations. A 1998 petitive advantage. As supply chain research study conducted by the Center for management becomes more advanced, Advanced Purchasing Studies (CAPS) identified cost, technology, quality, and time drivers strategic sourcing as one of 18 trends that will throughout the supply chain will become influence the purchasing function within the better identified. Performance of the next 10 years.22 Specifically concerning strategic supply chain will be measured more sourcing, the CAPS study indicated that effectively, and executive performance will be linked to both internal and external Strategic sourcing will drive supply chain supply chain performance.24 management initiatives. Comments from the focus group participants indicate that Furthermore, in a 2001 purchasing study,

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the researchers identified 20 purchasing best to a strategic focus—where procurement is now practices that have been successfully adopted mission critical. IBM’s implementation of strategic by leading purchasing organizations. Two best sourcing included centralizing its purchasing practices include function and creating 17 commodity councils as a method for leveraging its corporate buying ■ Having a written sourcing strategy for every power. These commodity councils combined the supplier and every part/commodity, and requirements (such as drams, microprocessors, monitors, and electronic cards) of all of IBM’s ■ Implementing strategic planning and divisions and negotiated long-term administration. with suppliers, resulting in lower . These commodity councils also resulted in a major According to the research study, the commodity reduction in IBM’s supplier base with related strategy best practice has been implemented by cost savings. In 1993, IBM had about 4,900 Honda, Toyota, EMC, and Sun Microsystems. production suppliers. By 1999, IBM significantly These companies have dedicated commodity reduced its supplier base to a point where about teams that watch market trends and develop 85 percent of its $17.1 billion production buy reaction scenarios to take advantage of those was with only 50 suppliers. IBM’s procurement market changes. Leading organizations that transformation saved the company hundreds of have implemented strategic planning and millions of dollars during the mid-1990s and was administration include Harley-Davidson, Honda, instrumental in helping IBM return to profitability.27, 28 John Deere, and SmithKline Beecham. These Deere & Co., the world’s famous equipment organizations have increased the role purchasing manufacturer, implemented strategic sourcing plays in strategic planning by developing a strategy and commodity councils by developing procure- for each supplier and for each commodity. In ment strategies for four materials classifications: these organizations, commodity team members unique products, critical products, generics, and are continuously gathering commodity informa- commodities. The four categories represented tion and technology capabilities three to five 49 direct materials and 15 indirect materials. years into the future.25 These best practices have allowed Deere to A review of the top purchasing organizations reduce the number of MRO suppliers from indicate that strategic sourcing and, specifically, 1,675 to 20, and cut costs by 13 percent.29 commodity strategies are elements of a total Lucent Technologies implemented strategic purchasing transformation effort that has laid sourcing by developing and implementing sourcing the groundwork for tremendous cost reductions, strategies for about 70 different commodities increases in productivity, quality improvement, ranging from to memory chips. By taking and return on investment. Because of their great a commodity approach to sourcing, each strides toward integrated supply management, commodity team identified the top suppliers, IBM, Deere, Lucent Technologies, Cessna Aircraft, looking at each of their financials, global capacity, and Hewlett-Packard have all been awarded location, and technology advantage as well as the Purchasing Magazine Medal of Professional their competitors. In 2002, Lucent was able to Excellence. This coveted honor is awarded to reduce its number of suppliers from over 3,000 organizations that epitomize the best in to fewer than 1,500. About 60 suppliers now purchasing excellence and professionalism.26 for over 80 percent of Lucent’s spend. The following discussion summarizes these This is a drastic change from 1999 when more companies’ implementation of strategic sourcing than 1,000 suppliers accounted for less than 40 and commodity strategies. percent of the spend. Furthermore, Lucent has IBM significantly turned its purchasing experienced significant improvement on compo- operation upside down in the mid-1990s when nent prices, and in some commodities, Lucent it transformed from a tactical purchasing focus has been able to reduce prices by 50 percent.30

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Cessna Aircraft Co. has also implemented and has reaped the benefits of transforming its strategic sourcing by creating long-range strategic purchasing function to a strategic integrated plans and cross-functional commodity teams that supply-chain process. Based on these successes, have worked to rationalize the company’s supplier many government agencies are now beginning base. These commodity teams are made up of to implement and adopt strategic purchasing representatives from supply chain, manufacturing best practices. The next section will discuss engineering, quality engineering, product design, initiatives within the Department of Defense reliability engineering, product support, and (DOD) to implement strategic sourcing, and finance departments. These teams are respon- specifically, commodity strategies. sible for developing commodity strategies that directly support the corporate strategic objectives. Department of Defense Initiatives Based on its strategic sourcing efforts, Cessna As discussed at the beginning of this article, has realized an 86-percent improvement in the DOD’s procurement process is currently supply chain quality, 28-percent improvement in undergoing a transformation similar to the material availability, 113-percent improvement procurement transformation being experienced in production turns, and a significant by the commercial sector. This transformation cost takeout throughout the supply chain.31 includes changes to DOD’s procurement Hewlett-Packard’s (H-P) strategic sourcing processes, policies, and practices. The strategic initiatives have resulted in savings of $1 billion sourcing initiatives, and specifically the commodity in materials costs. Through its extensive spend- strategy processes, successfully implemented by analysis program and its database of spend data, the commercial sector are now being information can be sliced and diced by com- considered and implemented by the DOD. modity, supplier, region, and by business unit. The DOD is now taking a strategic approach With all of the H-P buyers having access to this to its procurement function. In February 2003, information through a secure Web site, they can Michael W. Wynne, principal deputy under have the advantage of negotiating better prices secretary for acquisition, technology, and or better terms and conditions on all commodity logistics (USD/AT&L), stated . Furthermore, H-P uses commodity teams—consisting of procurement engineers, I am challenging DOD’s acquisition product marketing, and research and development community…to take advantage of this specialists—to focus on new-product introduction opportunity to initiate dramatic improve- and on how new products and suppliers are ments to the procurement process…I performing. These commodity teams are request you establish a concurrent effort responsible for sharing product plans with in your respective organizations and suppliers, determining which supplier has the interact with our task force as we generate technology and products that will be needed, value-added changes to the rules and our and then formulating sourcing strategies for processes.33 these products. H-P’s commodity teams have been instrumental in reducing its supply chain Additionally, at the biennial Department of costs as a percentage of by 22 percent, Defense Procurement Conference held in May cutting inventory by 21 percent, and reducing 2004, Deidre Lee, director of defense procurement H-P’s logistics cost per box by 11 percent in and acquisition policy, identified DOD-wide 2004. Finally, H-P’s strategic sourcing programs strategic sourcing and commodity councils as have resulted in more collaborative and less procurement processes that are designed so transactional relationships with suppliers.32 more could be done with less by migrating large Each of these world-class purchasing organi- contracts to regional centers and consolidating zations has successfully implemented strategic like services.34 Thus, the DOD is poised to begin sourcing and commodity procurement strategies reaping the benefits of transforming its procure-

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Figure 1. Commodity Strategic Sourcing Process

1 2 3 4 5 Conduct Profile Conduct Develop Issue RFx & Implement Opportunity Commodity Supply Market Commodity Negotiate & Manage Assessment Anakysis Strategy Performance

Assess and Conduct market Develop and issue prioritize analysis to identify RFx based on opportunities industry trends, sourcing strategy, based on a supply & demand conduct nego- thorough levers, potential tiations, evaluate department- new suppliers, proposals, and wide spend negotiation levers, award contract(s) analysis and available Develop detailed contract vehicles Develop Implement contract, profile of commodity organizationwide process and policy including spend commodity changes; continually profile & specifications acquisition measure, track, and strategy based manage performance on commodity profile & supply market analysis

Source: Strategic Sourcing & Spend Analysis Briefing, DoD Procurement Conference, May 27, 2004, Censeo Consulting Group ment process to reflect an integrated strategic As of May 2004, the DWSS had established the supply management perspective. following pilot programs with the services. These DOD’s current initiatives are focused on the programs will initially review the commodity strategic sourcing of services, and specifically, areas of miscellaneous , on the establishment of service commodity management/advisory services, and IT services. teams. Through its DOD-wide Services Sourcing The following discussion highlights some of (DWSS) Program, the department is trying to the DOD’s components’ more notable efforts in achieve these objectives: implementing strategic sourcing and commodity strategies. ■ Develop department-wide cross-functional As part of the DWSS program, the U.S. Navy acquisition strategies in order to improve total has launched a commodity team for the purchase cost of ownership for acquired services, of administrative support services, which is comprised of support functions such as trans- ■ Address improvements in meeting socio- lation, courier services, and word processing. economic goals through the use of strategic Using the five-step strategic sourcing process sourcing, illustrated in Figure 1, the navy is currently conducting its spend analysis for its service’s ■ Leverage commercial best practices in order spending in order to assess and prioritize to streamline and standardize DOD opportunities for commodity sourcing strategy. acquisition business processes, and The U.S. Air Force kicked-off its strategic sourcing initiatives in FY 03 with its first com- ■ Improve overall skills of DOD acquisition staff modity council—the Information Technology through the utilization of commercial tools Commodity Council (ITCC). The air force’s and processes. commodity council process, as illustrated in

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Figure 2. AF Commodity Council Operations Process

Review Create Approve Current Future Strategy Strategy Strategy

Evaluate and Assess Roll Out Monitor and Current Market Strategy Continuously Improve

Forecast Establish Future Contractual Demand Instrument

Develop Communication Plan Execute Communication Plan Develop Implementation Plan Execute Implementation Plan

Informational Guidance, AFFARS 5307.104-93

Figure 2, included an extensive spend analysis for aircraft landing gear/tires/breaks, accessories, that identified the top three configuration for and support equipment.38 computers—one for desktops and two for laptops. The Defense Logistics Agency (DLA) has Taking advantage of these configurations also implemented some of these procurement throughout the air force major commands transformation initiatives, specifically strategic (MAJCOMS), the air force was able to leverage sourcing and strategic alliances. Through DLA’s its buy on these standardized computer products. Strategic Material Sourcing (SMS) program, a In August 2003, after conducting an initial spend and demand analysis was conducted on competition, the air force awarded a $7.5 mil- over 3.4 million hardware items. Currently, lion contract to Dell for the purchase of 12,500 224,000 items are being sourced through long- computers. The savings on this procurement term contractual arrangements, leveraging DOD’s allowed the purchase of an additional 2,500 buying power. Additionally, DOD’s objectives in computers from the original planned pro- its Strategic Supplier Alliances (SSA) Program is curement.36 In December 2003, the air force to move away from transactional, one-time buys completed another commodity buy saving over and to establish more long-term contractual $4 million, with the purchase of 14,863 desk- arrangements. Through SSAs, DLA has been tops and 763 laptops for three different major successful in achieving overall price reductions commands.37 of 20 percent for the items under long-term Based on these recent successes, the IT contracts, with initial efficiencies aggregating Commodity Council is developing a commodity $55 million savings from FY 1999 to FY 2003 strategy for digital printing and imaging products from one-time inventory reductions.39 such as printers, scanners, and faxes. Other air force commodity councils in development Challenges to Strategic Sourcing include air force medical services (professional DOD’s procurement transformation initiatives services, clinical support services, facilities and are not without challenges to implementation. maintenance support, and contingency services), Not only do the same barriers that affect the force protection (gate security and vehicle commercial sector also impact DOD’s inspection), and office supplies. The air force is transformation initiatives, but also some unique also developing commodity sourcing strategies government obstacles affect the transition.

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These include multiple sources of data, incon- Spend Analysis Pilot Program. This pilot pro- sistent or erroneous item identification and gram will develop a net-centric spend analysis supplier identification, and lack of qualified capability that can be scalable across the DOD, available resources.40 prove the possibility to reduce the complexity A significant obstacle to implementing strategic of data integration across the DOD, and dem- sourcing activities, specifically commodity coun- onstrate key net-centric attributes by pulling cils, is accessibility of the required spend data data from disparate data sources, mapping and for a commodity group of supplies or services transforming the data to a common model, and in order to conduct a valid spend analysis. The producing DOD enterprise spend reports. The DOD currently has limited insight into what it pilot program will produce the following seven buys and from whom it buys (at the enterprise spend analysis reports—total spend, total number level), thus resulting in many obstacles. In addi- of contracts, average dollars per contract, tion, each military service and agency procures geographical dispersion, supplier concentration, similar supplies and services across the DOD, with supplier diversity, and total dollars by supplier. little coordination among procurement offices. The pilot will also produce an ad hoc capability Furthermore, current existing procurement than can be leveraged in strategic sourcing data resides in numerous disparate applications activities.43 located throughout the DOD.41 The fact that DOD’s procurement processes One obstacle to conducting a spend analysis are governed by public law and are focused on includes the highly fragmented supply base achieving public goals and objectives results in supporting the DOD, along with the numerous another category of challenges and obstacles in contracting offices throughout the DOD awarding implementing strategic sourcing and commodity contracts. The DOD has air force, army, and strategies. As stated in the Federal Acquisition navy contracting offices scattered all across the Regulation (FAR), the vision of the Federal globe, each office conducting its own procurement Acquisition System is to deliver on a timely for services and supplies. Having access to the basis the best-value product or service to the detailed types of information needed to assess customer, while maintaining the public’s trust its spend data is one area in which the DOD is and fulfilling public policy objectives.44 Federal facing challenges. procurement contracts are used as vehicles for Another obstacle includes the numerous implementing social programs that promote problems associated with the DD Form 350— dispersion of by providing economic Individual Contracting Action Report. This opportunities for small business and disad- report, submitted every time a contract is vantaged business as well as other classes of awarded that obligates funds, is used to collect protected groups.45 Some of these public policy data on contract placement within objectives include maximizing competition and DOD. The data gathered by means of the DD providing maximum opportunities for small and Form 350 are used for reporting the size and disadvantaged . The implementation distribution of DOD procurement actions, as of strategic sourcing and commodity councils well as other procurement statistics. The DD has the potential to restrict competition and Form 350 has frequently been plagued with limit opportunities for small businesses. Thus, coding or data entry errors, insufficient details, there are multiple stakeholders involved in, and or incomplete data. These data errors and defi- who have an influence on, the DOD procurement ciencies have always existed, but now they are process. These multiple stakeholders may impacting the DOD’s ability to access current eliminate the possibility of an optimized pro- and accurate procurement data, which is critical curement solution—such as a strategic sourcing for conducting an effective spend analysis.42 strategy that leverages the buying power of the The DOD is responding to the challenge of DOD, may limit or exclude small businesses accessing valid spend data with its Acquisition from the procurement.

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Finally, an additional challenge to implementing teams, is also considered a critical success strategic sourcing is the DOD’s ability to evaluate factor in implementing commodity strategies. and analyze the return on investment (ROI) These teams consist of the various functional of strategic sourcing initiatives. Obviously, the representatives having a stake in the item or instant savings realized from large-quantity service being procured. These team members leveraged buys of specific commodities, such are educated and multi-skilled in all aspects of as IT products, provide an initial assessment of the commodity such as requirements analysis, dollars saved per procurement. However, the cost analysis, purchasing and supply chain long-term implications to life-cycle cost (LCC), management, and negotiations. Critical to the also known as total ownership cost (TOC), establishment of cross-functional teams is the have yet to be determined or quantified. The inclusion of end-user customers and technical ripple-effect resulting from standardizing the experts in the decision-making process. Such configuration of procured supplies (for example, inclusion would more likely affect successful computer desktops) and procuring in high customer participation and collaboration.48-50 volume for an increased number of customers, as it relates to system supportability and main- Team Sponsorship and Authority tainability, have yet to be balanced with the Especially critical to the success of commodity additional costs of implementing strategic sourcing, teams and commodity strategies is the sponsorship such as training and costs. of the strategic sourcing initiative; likewise, the level of authority given to the sourcing team Best Practices in Strategic Sourcing is vital. The commercial and defense sector’s Strategic sourcing, and specifically commod- experience indicate that proper governance ity sourcing strategies, has been successfully and strong sponsorship of commodity teams implemented by commercial companies as well are essential elements to ensuring the success as by DOD agencies. The best practices and key of the commodity strategy. The sponsor’s role elements that have proven to be critical suc- includes providing goals and resources, as well cess factors in strategic sourcing initiatives are as being an advocate of the sourcing initiative common throughout both sectors. These best and knocking down obstacles and barriers. practices and critical success factors include the Equally as critical is the authority given to the following elements. commodity team. By being held accountable for meeting the sourcing goals, and by being given Common Processes and Tools the authority to make decisions, the team will Since commodity strategies focus on leveraging keep from becoming a “committee reduced to the purchasing power of the entire organization, offering hopeful recommendations.”51, 52 with all its various geographically separated sub-units, one best practice involves the Requirements Management development and implementation of common Commodity strategies involve consolidating all purchasing processes and purchasing tools. of an organization’s requirements for a specific The establishment of a standard commodity- supply or service into one or a few standardized strategy process and the implementation of configuration requirements. This typically spend-analysis tools to determine the what, receives negative responses and push-back from who, where, and when of organizational end-user customers. This is one area where the spending is certainly a critical success factor in team sponsor must take an active role. How an strategic sourcing. 46, 47 organization manages the specification of the supply or service being procured determines the Cross-Functional Teams degree of leverage power that organization has The use of cross-functional teams, more in the marketplace. Successful strategic sourc- specifically trained and educated purchasing ing will require stern specification management

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on the part of the commodity team, and full or services. As the DWSS initiative continues, backing by the sponsor, with justice for additional research will be needed in the areas “maverick spenders.”53, 54 of conducting spend analysis for multiple DOD organizations, defining standardized configurations Conclusions and Recommendations for supplies or services acceptable to DOD-wide This article discussed the procurement trans- customers, and finally, implementing strategic formation within the commercial and DOD sourcing initiatives which leverage the buying sectors, specifically as it applies to developing power of the DOD. Furthermore, additional procurement strategies and the implementation research exploring the implications of the of commodity strategies as an application of DOD’s strategic sourcing and other procurement strategic sourcing. The theoretical framework transformation initiatives on the department’s surrounding the transformation of procurement management infrastructure (such as procurement was discussed, along with its major developments. workforce transformation, training and Corporate procurement strategy and procurement of commodity teams, and the establishment of strategy development methods were then commodity team or sourcing program manage- discussed, along with the use of commodity ment offices) will be needed. JCM strategies and commodity teams as methods for implementing focused procurement strategies. Endnotes Commodity sourcing strategy lessons learned, 1. G. Cahlink, “Seeking Services,” Government best practices implemented, and recommenda- Executive (August 15, 2004): 46. tions for the Department of Defense were also 2. B.D. Henderson, “The Coming Revolution in identified. The implementation of strategic Purchasing,” Journal of Purchasing and Materials sourcing initiatives within the 11, no.2 (Summer, 1975): 44-46. sector has resulted in significant cost reductions, 3. K.R. Bhote, Strategic Supply Management: A increases in productivity, quality improvement, Blueprint for Revitalizing the Manufacturer- and return on investment. The DOD’s strategic Supplier (New York: AMACOM, 1989). sourcing initiatives have also resulted in 4. D.N. Burt, D.W. Dobler., & S.L. Starling, World- significant savings, albeit with some obstacles Class Supply Management: The Key to Supply and barriers yet to overcome. Chain Management (New York: McGraw-Hill Strategic sourcing in the DOD is still in its Irwin, 2003). infancy and has a way to go before it becomes a 5. Bhote, Strategic Supply Management: A mature core competency. As DOD continues to Blueprint for Revitalizing the Manufacturer- adopt strategic sourcing more adeptly, each mil- Supplier Partnership. itary service will successfully be implementing 6. Burt, World-Class Supply Management: The Key commodity strategies for services and supplies to . for its specific military department. This will 7. Ibid. include conducting spend analysis and 8. E.G. Gabbard, “Strategic Sourcing: Critical Elements commodity management within the specific and Keys to Success” (Paper presented at Institute military service’s organizations. of Supply Management International Conference, The next step in realizing the full potential of Tempe, Arizona), April 2004. Retrieved from the DOD’s buying power is the implementation www.ism.ws/ConfPastandOnlineDaily/Files/ of joint strategic sourcing initiatives, including Apr04/HA-Gabbard.pdf on November 12, 2004. the use of joint commodity councils across the 9. T.S. Reed, D.E. Bowman, and M.E. Knipper, DOD agencies. The DOD’s Services Sourcing “The Challenge of Bringing Industry Best (DWSS) Program initiative will be instrumental Practices to Public Procurement: Strategic in developing DOD-wide cross-functional acqui- Sourcing and Commodity Councils,” in K.V. Thai, A. Araujo, R.Y. Carter, G. Callander, D. Rabkin, R. sition strategies, thus achieving improved total Grimm, K.R.E. Jensen, R.E. Lloyd, C.P. McCue, and ownership costs (TOC) for acquired supplies J. Telgen (Eds.) Challenges in Public Procurement:

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An International Perspective (Boca Raton, Florida: Sourcing and Commodity Councils.” PrAcademic Press, 2005). 29. D. Smock, “Deere Takes a Giant Leap,” 10. More in-depth information on these seven Purchasing Magazine Online (September 6, steps can be found in T.M. Lasseter’s Balanced 2001). Retrieved from www.manufacutring.net/ Sourcing: Cooperation and Competition in pur/ on November 6, 2004. Supplier Relationships. (San Francisco: Jossey- 30. J. Carbone, “Lucent’s Supply Chain Focus Bass, 1998). Fattens Margins,” Purchasing Magazine Online 11. J.R. Carter, “Development of Supply Strategies,” (September 19, 2002). Retrieved from www.man- in J.L. Cavinato and R.G. Kauffman (Eds.), ufacutring.net/pur/index on November 6, 2004. The Purchasing Handbook: A Guide for the 31. S. Avery, “Cessna Soars,” Purchasing Magazine Purchasing and Supply Professional (New York: Online (September 4, 2003). Retrieved from McGraw Hill, 2000). www.manufacutring.net/pur/index on 12. T.M. Lasseter, Balanced Sourcing: Cooperation November 6, 2004. and Competition in Supplier Relationships. 32. J. Carbone, “Hewlett-Packard Wins for the 2nd 13. Ibid. Time,” Purchasing Magazine Online (September 14. M.E. Porter, Competitive Strategy: Techniques for 2, 2004). Retrieved from www.manufacutring. Analyzing Industries and Competitors (New York: net/pur/index on November 6, 2004. The Free Press, 1998). 33. Department of Defense Procurement 15. Lasseter, Balanced Sourcing: Cooperation and Conference, “Strategic Sourcing and Spend Competition in Supplier Relationships. Analysis (May 27, 2004). Retrieved from www. acq.osd.mil/dpap/about/Procurement2004/pre- 16. Ibid. sentations/D_BoydConsolidatedPanel.pdf on 17. Ibid. November 12, 2004. 18. Ibid. 34. E. Layton, “Director, Defense Procurement and Acquisition Policy, Holds Procurement 19. Ibid Conference,” Defense AT&L (September-October 20. Ibid 2004): 90-95. 21. Burt, World-Class Supply Management: The Key 35. Department of Defense Procurement Conference, to Supply Chain Management. “Strategic Sourcing and Spend Analysis.” 22. The complete study, “The Future of Purchasing 36. T. Temin, “Air Force Council Saves on First PC and Supply: A Five- and Ten-Year Forecast.” Commodity Buy, Government Computer News (Tempe, AZ: Center for Advanced Purchasing (August 27, 2003). Retrieved from www.gcn. Studies, Strategic Supply Research/Institute for com/vol1_no1/daily-updates/23299-1html on Supply Management, September 1998). November 6, 2004. 23. Ibid., p. 28. 37. Air Force Print News (December 9, 2003). 24. Ibid., p. 30. Retrieved from www.af.mil/news/story_print. asp?storyID+123006166 on 27 December, 2004. 25. D. Nelson, P.E. Moody, and J. Stegner, The Purchasing Machine: How the Top Ten 38. Department of Defense Procurement Conference, Companies Use Best Practices to Manage Their “Strategic Sourcing and Spend Analysis.” Supply Chains (New York: The Free Press, 2001). 39. D. Gottlieb, “Military Declares War on Spend,” 26. J. P. Morgan, “Book of Winners,” Purchasing Purchasing Magazine (May 20, 2004): 44-48. Magazine Online (2004) Retrieved from 40. Gabbard, “Strategic Sourcing: Critical Elements www.manufacutring.net/pur/index on and Keys to Success.” November 9, 2004. 41. Department of Defense Procurement Conference, 27. J. Carbone, “Reinventing Purchasing Wins the “Strategic Sourcing and Spend Analysis,” p. 55. Medal for Big Blue,” Purchasing Magazine Online 42. Ibid. (September 16, 1999). Retrieved from www.man- ufacutring.net/pur/index, on November 9, 2004. 43. Ibid. 28. Reed, “The Challenge of Bringing Industry 44. Federal Acquisition Regulation (2000). FAR 1.102. Best Practices to Public Procurement: Strategic Retrieved from http://farsite.hill.af.mil/VFFARa.HTML.

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45. K.V. Thai, “Public Procurement Reexamined,” Journal of Public Procurement, 1, no. 1 (Boca Raton, Florida: PrAcademic Press, 2001): 9-50. 46. R.H. Buckenmayer and C.H. Noland, “Strategic Commodity Management: Lessons From a Major Implementation,” (Presentation at the 1998 NAPM International Purchasing Conference). Retrieved from www.ism.ws/ResourceArticles/ 1998/98cp10.cfm on October 3, 2004. 47. Reed, “The Challenge of Bringing Industry Best Practices to Public Procurement: Strategic Sourcing and Commodity Councils.” 48. Buckenmayer, “Strategic Commodity Management: Lessons From a Major Implementation.” 49. Reed, “The Challenge of Bringing Industry Best Practices to Public Procurement: Strategic Sourcing and Commodity Councils.” 50. Department of Defense Procurement Conference, “Strategic Sourcing and Spend Analysis.” 51. Buckenmayer, “Strategic Commodity Management: Lessons From a Major Implementation.” 52. Department of Defense Procurement Conference, “Strategic Sourcing and Spend Analysis.” 53 Buckenmayer, “Strategic Commodity Management: Lessons From a Major Implementation.” 54. Department of Defense Procurement Conference, “Strategic Sourcing and Spend Analysis.”

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