View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by Calhoun, Institutional Archive of the Naval Postgraduate School Calhoun: The NPS Institutional Archive Faculty and Researcher Publications Faculty and Researcher Publications 2005 Commodity sourcing strategies: processes, best practices, and defense initiatives Rendon, Rene G. Journal of Contract Management Journal of Contract Management, Summer 2005, pp. 7-20. http://hdl.handle.net/10945/40275 Commodity Sourcing Strategies: Processes, Best Practices, and Defense Initiatives This article discusses the procurement 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 strategic sourcing. 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 purchasing spend data, highly fragmented supply base, and function, specifically as it applies to developing government procurement 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 ownership 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 Business 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 industry, 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/. Journal of Contract Management / Summer 2005 ■ 7 COMMODITY SOURCING STRATEGIES COMMODITY SOURCING STRATEGIES 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. Organizations 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 position 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 supply chain management functions and resource constraints, the DOD must monitor of materials management, logistics, 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 organization’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, engineering, and quality as an application of strategic sourcing. First, the assurance functions with the supplier, working 8 ■ Summer 2005 / Journal of Contract Management COMMODITY SOURCING STRATEGIES COMMODITY SOURCING STRATEGIES 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 service 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 price of supplies and services, should not be associated with traditional com- their ability to keep the production line running, modities such as copper, ore, cotton, or barley, and their ability to reduce the cost of the nor should it be associated with