SUPPLY CHAIN RESOURCE COOPERATIVE

Several companies I’ve interviewed recently have been sharing how to structure or “tier” their supply base, based on impact on tier 2 suppliers or commodities.  As companies continue to outsource, one major segment is the management of leased equipment, that entails management of the aftermarket parts for major equipment.  One company I spoke with works with suppliers that are much larger than they are who are furnishing component replacement parts. The team spends a lot of time properly understanding the scale of the relationship that exist up and down the supply chain, and building a deep understanding of the product component parts market that drives quick response time for part delivery.  The company competes directly with the manufacturers of the equipment, but often have a more responsive and flexible response to customer requirements, which becomes a factor in a time-critical environment.

Another organization manages tier 2 raw materials for their automotive parts supply base on a global basis, with a global purchase team that looks at major categories such as steel, material, paint, adhesives, lubrication, and fuel.  Each of these global teams have commodity strategies at a central location, as well as a developer who works directly with major tier 1 suppliers on cost strategies.  The team is able to conduct global lowest total cost analyses to manage raw material supply to suppliers all over the globe, and conducts a complex analysis considering price analysis, logistics hubs, and supply routes that create the optimized mix by location.  Most of the contracts with tier 1 suppliers are local sources near assembly facilities, to promote the “buy where you sell, sell where you buy” culture that exists.  To further promote collaboration with tier 2 steel suppliers, the supply organization has established multi-year agreements with steel producers to enable hedging on raw materials such as coke and iron ore, and combines this with bank hedging agreements that also benefit steel suppliers.  A three month rolling price adjustment is established to enable long-term risk management on steel, a core component of tier 1 and 2 supply.

There is also an increasing recognition that supply base reduction poses a risk of pushing the contracting and relationship piece back onto tier 1 suppliers that are less capable of supply management than the buying organization.  An executive at a major oil and gas company noted that:

“As we have reduced the number of tier 1 suppliers, we are forcing our suppliers to do more subcontracting, and we are seeing issues as we have forced them to become general contractors.  They end up subcontracting the same people that we used to work with directly!  But they are not good at managing them.  So this raises a number of questions?  Who is the best supply manager for managing second tier suppliers?  Should we be directing them to work with tier 2 suppliers?  Do we have any business forcing relationships that didn’t exist before?  We are recognizing that supplier management is not a skillset that one develops overnight, it is a skill that needs to be built over time, and by reducing our supply base we are creating something that the supplier is not ready to do!”

As such supply base reduction strategies should always examine the impact on tier 2 suppliers as well.  Tier 2 suppliers are an important component of the supply chain, and as I’ve discussed in this blog, can dramatically impact availability, cost, quality, and technology innovation.

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A recent article in the Wall Street Journal points to the increasing pressure being felt by financial services, as well as insurance companies.

The article goes on to point out that the biggest Wall Street banks have slashed tens of thousands of jobs and pruned all manner of expenses since the financial crisis. But expanding pay packages and the rising cost of complying with government regulations have neutralized those efforts.  Put simply, banks can’t continue to slash employees, because they need these people to work in order to comply with all of the expanding set of onerous government regulations. With revenue pinched by a slowdown in trading and tepid loan demand, profits are coming under pressure this year.  The WSJ story points that in the first quarter, revenue at the six largest banks declined 3.2% to $104.86 billion. Profits declined 9.5% to $18.67 billion.

The squeeze is leading banks to look for new ways to save.  And that is where procurement is suddenly playing a role – because nowhere is there more of a need to find savings than in the area of indirect spending in banks.  This includes elements like temporary services, software, data providers, real estate, and many, many other categories of spending that banks and insurance companies spend money on to provide services.  The article cites the example of Morgan Stanley, which a few years ago announced plans to more-closely monitor costs such as BlackBerry usage through an auction platform. The sourcing process typically results in an additional 5% cost reduction on goods and services including business cards and printer cartridges, according to a spokesman.

For categories that cross multiple business units in banks and insurance companies, the effort to build a consensus among different groups is more challenging, but the opportunity is often greater.  This begins by understanding the individual within the business responsible for developing the strategy, and understanding how each point of view on requirements differs across the lines of business.  Finding opportunities for consolidation of supplier spend will vary, and in some cases, will be very difficult to do through a conference call with 10 people!  Still, low-hanging fruit can be discovered through these conversations that provide a very easy solution, leading to a starting point for taking on the tougher categories of spend.

In some cases, external hires may be required with prior experience and capabilities in the category of focus.  For example, a large insurance company recognized that they needed category specialists to understand the current state and provide advice to lines of business on sourcing options:

“We had to hire an IT specialist to work with the IT group to assist in building their IT category strategy.  Travel was a similar story:  We didn’t have a focus around travel and recognized that to develop great travel deals we needed in-depth skills, and hired an individual who is now going out assessing process, tools, and skills on this team to ensure we can make the leap to build a comprehensive travel category strategy.  The procurement solutions team works optimally when we have those with good procurement experience and good functional experience.  So for our marketing category, we hired advertising agency people and taught them procurement.  That has its challenges, but the benefit we got from that ability to build a TRUSTED ADVISOR function was invaluable.  We are doing passive recruiting for more marketing people on our team because we feel we have solid procurement experience but need the marketing experience.” 

Financial service companies are also moving to establish a “service relationship owner” to manage risks from an operational perspective.  This approach recognizes that a center-led approach is not able to manage all the risk with outsourced relationships.  These positions are designated to act as an intermediary between those who manage commercial contracts and risk.  Companies have also sought to employ third parties to conduct some level of risk monitoring of credit scores, turnover of executives, and other dimensions that can provide updates to supplier profiles.

Developing an understanding of key supplier characteristics, buying channels, spend analysis, and capabilities is fundamental to building relationships and establishing criteria for segmentation of the supply base.   It also serves as the basis for establishing communication with suppliers and establishing procurement’s position as the driver of relationships.  An important change here is designating individual category owners who become the coordinator for spend decisions when it crosses multiple lines of business, or indeed within a single business.

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As organizations go about building supplier relationships using segmentation approaches, several of the companies I’ve met with are also thinking about how to structure such relationships when their supplier also happens to be an organization that is a major customer.  While the dreaded “reciprocity” issue must be avoided at all costs, the fact is that organizations can rarely build a “Chinese Wall” between sales and procurement and completely ignore this issue.

As such, more and more companies (especially in financial services) are considering how suppliers can also contribute to front-office revenue,  and whether they can become future customers when sourcing segmentation decisions are made.  The landscape can be viewed in the matrix shown below.

As shown, the upper right quadrant involves customers with whom your organization has both a high spend from a supply side, and high revenue from the organization on the customer-facing side, this represents a win-win opportunity to grow the business.  However, if a hugely important client is one which is only a small supplier, there is a need to use caution and seek to create opportunity to expand supply opportunities, in an effort to nurture the relationship.  For example, supply management wouldn’t want to put their business out to bid, and destroy goodwill that could translate into lost customer revenue.  One executive noted:  “Conversely, if we are spending hundreds of millions of dollars with them and they aren’t even looking at us for institutional investing or transaction banking, we have to be careful to avoid reciprocity, but we can certainly take steps to be more aggressive and ensure that connectivity with our sales organization occurs so that they are aware of the situation.  Normal selection criteria should always be used, and we can’t ever cross the line when it comes to compliance, but these relationships do matter.  Purchasing can become a big influence when a senior Managing Director sees banks as a commodity, and they can change the perception and create a new dimension to these discussions.”

In effect, organizations must continue to apply independent supplier selection processes that are methodical in nature, and independent from the notion of the client relationship.  But in the process of negotiating, tendering, and evaluating suppliers around a requirement, there are separate and distinct sales operations occurring with the same organization.  This represents a real opportunity for procurement to operate in a way to create top line revenue with banking relationships, to work in a way that benefits both organization, or at a minimum to ensure that there isn’t a clash that occurs because of an oversight of this fact.

Some organizations have assigned managers to consider the idea of a client relationship as a component and decision factor with the right level of weight as part of the supplier selection decision.  Compliance officers need to be involved as well, and as the tendering process runs its course, this officer can review it to at a minimum ensure that bad news isn’t delivered to the supplier on a day that sales are pitching them on a proposal, or that there is good news on a day when the information can be exploited.  This is only the initial phases of this approach, but organizations are beginning to consider how best to manage these segmentation situations in the future, and structure the decision in a comprehensive manner.

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Just finished speaking at the EurOMA conference in Palermo, and was excited by the discussions and feedback over the course of today.  I arrived in Palermo yesterday, and had an opportunity to wander the streets and experience the wonderful food, carefree and friendly people, and of course the wonderful mix of architecture and cultures that exist on this island.  During my visit, Giovanni Perrone, also emphasized how the Italian economy is seeing a resurgence of manufacturing and product development.  My walks through the city led me to many thriving markets bustling with small manufacturing and design enterprises, and Italian designers and apparel makers are no doubt some of the best in the world.  But there are many other industries that are also growing, which is heartening to see after many years of stagnant growth.

The discussion at EUROPA focused very much on the role of innovation in the networked economy.  The latter point is important, because it is becoming increasingly clear that organizations are part of a network, and that we can’t simply focus on buyer-supplier dyads.  The multi-tier nature of today’s supply chain means we need to think about customer integration, supplier integration, internal stakeholder integration, and also tier 2 suppliers and customers.  This poses many interesting problems for the research community.

Nowhere is this more important than when it comes to innovation.  As I discussed in my talk, one can think about product innovation, but a core component is also process innovation, and the ability for operations and supply chains to execute in the face of global complexity, challenging infrastructure, increasing government regulation, and talent shortages.

Product innovation will rely on the ability of organizations to harness and leverage the brain power that exists in their supply chain.  Several individuals I spoke with, including Steve Brown, Editor of IJOPM, emphasized that the biggest drivers of the economy will be small enterprises as the driver for innovation, and the ability of larger companies to identify, locate, develop, and commercialize innovations from their entrepreneurial roots, and bring about solid operations practices in doing so.  Many issues came up in discussions with researchers at the conference.  Intellectual property will continue to be an issue of concern, as companies need to find the best commercial contractual mechanisms to satisfy the lack of relational trust that exists in many of these smaller companies.  Another issue will be the ability of companies to establish business development methods that create the right blend of licensing, contract research, development, and manufacturing, leading to the idea of a “supply chain of knowledge”.  These are areas ripe for exploration in the future.

One of the big differentiators of process innovation will be the ability to deal with complexity and risk.  Organizations are faced with an increasing number of disruptions, and while there are strategies to deal with global disruptions (such as economic downturns) or local disruptions (such as supplier performance), there is comparatively little that exists when we think about systemic disruptions that involve one or more parties somewhere in our supply chain.  This will be a crucial differentiator for the future.  As companies begin to better understand the structural complexity of their supply chain, they will need to think about broader strategies that will also involve the government as part of the supply chain. This is especially important in finding solutions to inadequate or bottlenecks in infrastructure, compliance issues, human health and safety, and inadequate visibility into product and service flows.  Research issues will focus on innovations that provide greater insight into how to configure human decision-making, global process standards, and technology analytics to create the right blend of responsive and agile capabilities.

In my mind, a lot of this require that organizations focus on the core of the problem – getting the right people.  As discussed in my earlier blogs, People are at the core of the issue.  This means developing the right strategy for the long term that treats the problem of human capital development as a “Sales and Operations Planning” problem, including building a forecast, establishing demand requirements, estimating supply, and developing sources given uncertain retention, hiring, and recruiting success rates.  Because people are at the core of innovation.

Thanks again to Giovanni and the team at Palermo who put this conference together – great job!

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Jay Golden from Duke University and I have been working on a study of the biobased economy….

Throughout human history agriculture been used for non-food purposes including energy, clothing, shelter, medicines and every day human needs. With the industrial revolution, man was able to achieve great scientific and technological advances were available through the utilization of non-renewable resources that has been vital to the economy of the United States. As an example, in the 1950s, the U.S. chemical and plastics industry was responsible for over 5 million U.S. jobs, and a $20 billion positive trade balance for the United States. Jobs associated with the industry were typically among the highest paid in U.S. manufacturing (Landu and Arora, 1999). The challenges of the 21st century have created new socioeconomic and resources challenges, including rapid population growth and urbanization, an expanding global middle class hungry for automobiles and modern technology, resource competition and scarcity, environmental protection and regulation, and more volatile economic cycles that impact all countries in the global economy. The emergence of these factors have served as the catalyst for the emergence of what is being termed the Bio-Based Economy. The Bio-Based Economy is characterized by a new generation of environmentally friendly materials and products and economic opportunities for U.S. based agriculture, chemical, manufacturing sectors and their value chains, with far-reaching potential impacts on socioeconomic development and the resurgence of production in the United States.

The White House defines a biobased economy as follows:

“A bioeconomy is one based on the use of research and innovation in the biological sciences to create economic activity and public benefit.”

OECD in 2009 noted that “From a broad economic perspective, the bioeconomy refers to the set of economic activities relating to the invention, development, production and use of biological products and processes. If it continues on course, the bioeconomy could make major socioeconomic contributions in OECD and non-OECD countries. These benefits are expected to improve health outcomes, boost the productivity of agriculture and industrial processes, and enhance environmental sustainability.”

Various studies have explored the economic value both globally and domestically of the bioeconomy.  A 2012 release by the U.S. Biotechnology Industry Organization placed the national value at $1.25T.  The European Commission (2014), estimates that Bioeconomy to be worth over EUR 2 trillion (~$2.7T), providing 20 million jobs and accounting for 9 % of total employment in the Union in 2009.

However these estimates are preliminary, and a lot of work needs to be done to better understand how the bioeconomy will impact global supply chains.  There are many factors to consider which I will be sharing on this post over the summer…

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Many organizations are focused on driving analytics as a foundation for competitive advantage.  Often overlooked in this discussion is the importance of establishing a foundation for analytics through the process of data readiness and data cleansing.  The Data Readiness Level (DRL) is a quantitative measure of the value of a piece of data at a given point in a processing flow. It can be envisioned as the data version of the Technology Readiness Level (TRL). The DRL is a rigorous metrics-based assessment of the value of data in various states of readiness. It represents the value of a piece of data to an analyst, analytic, or other process and will change as that data moves through, is interpreted, or changed by that process. The aggregate change in DRL associated with a piece of data from raw input signal to finished product will contribute to the characterization of a given analytic flow in terms of accuracy, efficiency, and other performance metrics.

The process of preparing data for intended use, (one way of thinking about Data Readiness) in the context of Supply Chain Management can be defined by five distinct processes that span both software systems, process management, and decision support, (1) Data Cleansing (which includes Data Acquisition, Cleansing, Preparation, and Database Population), (2) Spend Analytics, (3) Contract Management, (4) Technology Applications, and (5) Customer Service.  In this discussion, we focus the discussion on Data Cleansing, which is the most time consuming and challenging of the elements. (Once one has a good dataset, the others fall into line more easily!)

Ensuring You Have Good Data

Access to the right data is essential, as accurate and properly coded data provides the foundation for category management strategies, including leveraging, pricing agreements, quantity discounts, value analysis, supply base optimization and other important cost management activities. Data Cleansing is actually a process that involves four stages, as shown in Figure 1.

Data Acquisition

First, the user is contacted and the “raw” data is collected from different sources.  Common sources of data can be the customers’ MMIS, GPO and local suppliers.  In a broader context, it may include structured and unstructured datasets.  It is important at this stage that all relevant data that is of potential interest to the intended target is included in the analysis.  Note that many providers restrict their data acquisition to only electronic EDI data, or structured data that is readily available, thereby missing a significant “chunk” of the total spend.   The net impact of this oversight is that it provides an inaccurate representation of what the healthcare system is truly spending on third party goods and services

Data Cleansing

Jason Busch notes that from a technical perspective, first generation data cleansing approaches were limited by the underlying architecture, development, analytical and visualization capabilities available to providers at the time.  This is still a major problem for many applications.  The limits of relational database technology based on disk storage and traditional data warehousing approaches to storing, querying and accessing information and reports are one example of the constraints that are often encountered, due to old technology platforms. New approaches by SAP with their HANA database is providing RAM storage approaches that can materially increase query speeds as well as workarounds to traditional storage and query models that greatly increase both the speed with which we can search and access information as well as the ability to search information sets in the context of each other.

One of the most important foundational shifts in data cleansing technology in the past 18 months has been an interest in greater flexibility and visibility into the classification process. Increasingly, more advanced organizations are starting to look for the ability to classify spend to one or more taxonomies at the same time (e.g., customized UNSPSC and ERP materials code) as well as having the ability to reclassify spend to analyze differ views and cuts of the data based on functional roles and objectives. Moreover, some organizations are looking to exert greater control over the spend visibility process; these individuals are often becoming distrustful of “black box” approaches to gathering and analyzing spend data.

It is important to note here that some providers we spoke with believed that data cleansing is not as valuable as data normalization.  The point was made that “normalization does not have to cleans the data to make effective use of the resulting analysis.”  We disagree with this point for several reasons.  First, if data normalization was acceptable without cleansing, healthcare would not be adopting GS1 standards, to address the issue of manufacturers publishing data with a “warranty” of accuracy.  Accurate and clean data is critical for any type of analytics or normalization effort.  In this case, if the “garbage” goes in, than the resulting output is more likely to be “garbage” as well!

Next, the data is checked for completeness and accuracy.  Access to the right data is essential, as accurate and properly coded data provides the foundation for category management strategies, including leveraging, pricing agreements, quantity discounts, value analysis, supply base optimization and other important cost management activities.  Data Cleansing and Enriching involves ensuring that the data has no duplicates, and is organized into a logical structure in a database.  This occurs through a process of first comparing the data to existing codes in the database, and determining if there is already a match that comes close to products already stored from other companies.  In cases where there are not any matches, then an individual known as a “mapper” will go about the process of cleansing the data item, or creating a new product code for it, along with the appropriate links to the manufacturer ID, the vendor ID, the unit of measure, and other pertinent information about it.

Data Classification/ Normalization

One of the most important foundational shifts in spend analysis technology in the past few years has been an interest in greater flexibility and visibility into the classification process. Increasingly, more advanced organizations are starting to look for the ability to classify spend to one or more taxonomies at the same time (e.g., customized UNSPSC and ERP materials code) as well as having the ability to reclassify spend to analyze differ views and cuts of the data based on functional roles and objectives. Category analysis using data classification codes can also identify areas where “system internal co-sourcing” is taking place.  This refers to situations where decisions regarding commodity items as well as physician preference items and actual determination of vendors where there continues to be a duplication of purchasing efforts at both hospital and system levels.  This is an expensive proposition, which includes duplication of effort for identifying products and suppliers, developing and managing requests for proposal and information, optimizing proposals and obtaining offers, finalizing awards, and implementing and monitoring contracts.  As systems migrate from being holding companies to operating companies, reduction of internal co-sourcing is an important strategic opportunity, but will rely on effective data cleansing and coding as the basis for analysis and action.

Here again, the classification of products using coding systems is commonplace in the industry. Almost all of the providers I reviewed in my benchmark study had systems that would recognize a product and enrich it with the correct manufacturer name and item number, UNSPSC code, and descriptions, before uploading it into an ERP.  It appears that DDS has this capability, as does Primrose.

An automated process augmented with a manual process is the current standard in the industry that increases efficiency and accuracy. Customer service is important in this stage, as involving personnel with the expertise, such as checking with subject matter experts to manage data is one of the key check-points. Further, proper coding of the data will require engaging subject matter experts to truly make sense of the data.  This is necessary to arrive at strategic sourcing decisions that will be effective.  In this regard, a third party should be willing to provide the level of consulting and coordination that is consistent with the level of effort required to perform a thorough spend management project.

It is also important to emphasize that there are many different ways of coding a product, but software providers tend to use the same standards, which include UNSPSC or GS1 industry standard nomenclature systems.  This is discussed later in more detail.

Database Population

Finally, the coded dataset is uploaded into the requisite application.  Once uploaded, the real power of the data can be leveraged through merging with other data forms for benchmarking and cross-reference analysis.  Application and data integration paradigms have already shifted in a number of non-healthcare applications from one of batch uploads from multiple source systems to real-time data queries that can search hundreds (or more) disparate sources while normalizing, classifying and cleansing information at the point of query. In the coming years, Oracle, IBM and D&B, all of which have purchased customer data integration (CDI) vendors, could begin to apply these techniques to spend and supplier information as well. CDI technology actually improves the integrity of the data from individual sources, allowing users to match and link disparate information sources with varying levels of accuracy. CDI tools can correct for data-entry mistakes, such as misspellings, across different data sources to provide an accurate picture.  Here again, the ability to accurately match UNSPSC codes to items is dependent on the accuracy and transparency of the original dataset.

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I had the opportunity to host a roundtable at Fleming’s Steakhouse in downtown Charlotte for a group of Chief Procurement Officers hosted by Accenture, sharing thoughts on the subject of SRM.  The gathering was an opportunity to get to meet peers in the procurement leadership in the Charlotte area, and exchange ideas on themes and issues of interest.

Supplier Relationship Management is an area that is of real interest to everyone in the room, for different reasons.  Although organizations are in different stages of maturity as it relates to building a procurement organization that drives customer value, SRM is an important topic regardless of where you are at.  Some of the organizations were at the early stages of building a supplier performance measurement system, and had only begun to begin to segment their supply base.  Segmentation is critical, as it helps organizations to understand who are the key players, and the capabilities they have to offer.  Even more advanced companies are only beginning to truly drive integrated partnerships with their top 20 suppliers worldwide, whereas others are trying to drive internal engagements with physicians to build a capability-based set of decisions for supply base management.

One of the key insights that came out of this discussion was the fact that internal facing relationships are important to drive external supplier relationships.  Everyone across the business must be on the “same page” when it comes to understanding how supplier relationships are segmented, and the process for doing so.  Second, the need for addressing intellectual property concerns came up as an ongoing barrier, and there must be a way to ensure that supplier’s efforts are incentivized and rewarded if engagement with them is to be successful.  Over time, trust can be established that leads to on-going integration efforts, but this takes time and a track record of “doing what you commit to doing.”

Some suppliers will need to establish the right level of capability to meet a buying company’s needs, and may need help understanding what that expectation is.  This is particularly true as companies expand into global regions.  In such cases, there is an opportunity to bring along your top performing suppliers to drive joint ventures with local emerging market suppliers, to help them get on board and learn operating rules for engagement and performance.

Another topic that came up was the importance of employing performance measurements and scorecards to drive supplier relationships.  Several people talked about how “taking control” of supplier quarterly meetings using scorecards as a basis for discussion of performance was critical.  This drove productive discussions as well around internal issues that sometimes resulted in suboptimal performance, when suppliers receive different messages from different touch points in the organization.

Finally, the topic shifted to the types of capabilities for supplier relationship managers.  Everyone agreed that it was best to pull in someone from the business who was most closely aligned and familiar with the category he or she was managing, whether it be IT, HR, engineering, quality, or other related area.  Pulling someone who has direct interface with the supplier should be augmented by a senior executive sponsor assigned to that relationship, to ensure that there is the right pull and the right venue for a dialogue that will result in follow-up and action.

Overall, the session was a great launching point for many productive discussions, and I hope to be able to be part of this meeting again going forward!

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In today’s environment, hospitals continue to outsource their sourcing capabilities to a national or regional group of Group Purchasing Organizations (GPO’s), who claim to obtain leveraged savings for groups of large commodities.  To truly become more strategic, however, healthcare providers need to adopt a strategic intent to insist on visibility and cleanliness of all data, not just what is easily accessible.  Further, the data needs to be captured into an analytical environment that allows the flexibility to drill deeply into different types of data sets to unearth opportunities through benchmarking, analysis of non-traditional spending areas, and engagement of key stakeholders to review the results of these analyses.  Data is the only true enabler for change in the healthcare supply chain.

My position is that to get out of the muck, hospitals need to start to take control of their data, and not outsource it to others to manage for them.  My research points to the fact that healthcare is well behind most industries when it comes to the maturity of their procurement and spend management activities.  Most organizations in other industries have already proceeded through an evolution of basic processes in supply management. Instead of relying on third parties and trying to force clinicians to comply with their list of items on contracts, hospitals must first begin by establishing a charter to do so with their executive team, and make a commitment to moving away from a transaction-price-based focus.

In the second level of maturity, supply chain managers begin to engage clinicians in sourcing decisions, particularly high value and clinically sensitive items.  These teams are directed to make decisions on defining value relative to needs, analysis of spending patterns, measurements of supplier performance, and establishing a baseline set of data to analyze trends.  However, the most important component of success at this stage is physician and clinical engagement in decision-making that explicitly considers patient outcomes and total cost, not just year-over-year product price reductions.  In later stages, organizations can move to material and service visibility throughout the supply chain, management of total cost a system-wide basis, engagement of suppliers into hospital operations, integration of new technology deployment that drive down total cost and improve patient outcomes.

Based on our interviews and analyses of healthcare providers, we observed that many systems are still “stuck” in the first stage of supply chain maturity.  Many do not even have a charter for change established with the C-suite. As noted earlier, many hospital administrators are frustrated by their inability to engage with physicians in supply chain decisions.  A typical scenario for decisions often centers around the major gaps that exist between the four major stakeholders in healthcare, which includes Hospital Operations, Physicians, Supply Chain Management, and Suppliers.

On the other hand, industries such as automotive, electronics, oil and gas, industrial manufacturing, and others are well into the third or fourth stages of maturity.  To get there, they have all relied on using a detailed spend analysis to identify opportunities for improvement.  This begins and ends with having a good “spend cube” of data.

A spend cube is essentially a database that organizes transactional data into groups, according to:

  1. Categories of like items (e.g. information technology, surgical and medical supplies, capital expenses, pharmaceutical purchases, etc.)
  2. The suppliers the company spent money with on these categories (e.g. Pfizer (pharmaceutical), Cardinal Health (medical surgical supplies), or Lawson (information technology).
  3. The user groups who spent funds in the past year with these suppliers (e.g. the specific facility, the operating room, administrative services, etc.)

In this way, the database consisting of these three areas forms the three side of the spend “cube” that characterizes the data.  A spend cube is constantly being updated as new transactions with suppliers occur, and is either periodically updated, or in more modern applications, updated in real-time or on a weekly basis in batch mode.

A spend cube can help a hospital understand how much each facility and the system as a whole is spending on external products and services TODAY, and how much the organization is projected to spend NEXT YEAR and in the future. On a regular basis, the supply chain management team must carefully examine spending patterns to identify any irregularities or trends, as well as identify areas where spending can be cut. This activity is known as spend analysis.

Spend analysis is the process of collecting historical data by commodity, relative to demand from the lines of business, with the exception of personnel expenses, occupancy, and corporate spend. The data should go into the appropriate level of unit-level detail required for analysis and category management, and should also be rolled up at an aggregate level on every element of what we spend. The resulting spend cube database provides a common understanding of historical spend relative to demand from each end user within an organization, based on accurate information collected through defined and automated procure-to-pay systems.

Just like any individual analyzes their budget and their spending habits from time to time, healthcare organizations use the spend cube database to conduct a spend analysis and process answer a wide variety of questions. For example, senior management might want to know:

  • What categories of products or services make up the bulk of company spending? How do these figures compare to historical levels or to other firms in our industry?
  • Are suppliers meeting our cost and performance criteria and are we getting enough value vs. the amount we are spending?   Are some categories of goods or services better served than others? Are some suppliers performing better than others?
  • Are there opportunities to improve the firm’s purchasing performance?  For instance, can we use purchase consolidation to lower costs by pooling purchasing requirements across multiple areas?

Because the questions can vary so widely, there is no single “correct” approach to spend analysis.  The most important element however is to ensure that the data that goes into the spend analysis is correct, and does not contain errors.  Otherwise, as the old saying goes, “garbage in” results in “garbage out”, in the form of faulty information being provided in the spend cube.

 


[1] Handfield, RB; Supply Market Intelligence. Boca Raton, FL: Auerbach; 2008.

[2] Robert Handfield, PhD, (Bank of America Professor of SCM) Tom Faciszewski MD (Orthopedic Spine Surgeon, Marshfield Clinic and Medical Director Supply Chain, Ministry Health Care), and Thomas Nash, (Chief Supply Chain Officer, Ministry Health Care), “Assessing Health Care Supply Chain Maturity: Creating a Baseline for Cost Savings, Value Creation and a Defined Structure for Growth, Keynote presentation, World Healthcare Congress”, January 25, 2010.

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Gerard Chick and I are working on a new book, that is effectively questioning whether procurement, as we know it, is on the right track, and if not, what it will take to get it back on track.  There is certainly a lot of work to be done, and this exciting project that we’ve been traveling through will I believe provide some provoking ideas to drive the profession of procurement to new heights.

One of the first questions we begin with in the first chapter is, if indeed, procurement is a profession.  Here is an excerpt from this chapter that should give you a flavor as to where we are headed…

Procurement began with various dubious roots.  Twenty-five years ago, one of the co-authors regularly attended purchasing conferences at an organization known as the “National Association of Purchasing Management”[1].  The meetings, by and large, served largely as a social function for a lot of buyers to get together, sit at the bar, and tell war stories.  Someone listening in on these conversations was likely to hear people discuss how they had “gotten a great price” from a supplier, after I “threatened to go with someone else”, followed by guffaws and other discussions.  Many of the buyers who attended this conference had been promoted to buyers as a result of working in a warehouse, an administrative assistant role, or even as an assembly line worker.  If one were to attend a supply management conference today, one would meet a very different type of individual, and engage in a very different set of conversations.

Modern societies have for some time articulated the division of expert labor into various ‘professions’. These professions, of which medicine, accountancy, and law are the most obvious examples, are found, on analysis, to meet certain common criteria. It is generally accepted that there are seven criteria, which generally need to be satisfied to describe an activity as a profession. These are:

  • That the members of the profession are engaged in the performance of a service, which is vital to the society.
  • Their performance is based on a specialized and codified body of knowledge.
  • Those who enter the profession must first undergo a program of broad general education as well as further education and training for a career in the specialty.
  • Candidates for the profession undergo an examination to test their qualifications to enter practice.
  • The profession promulgates a code of ethical conduct for members and makes arrangements to enforce compliance to this code.
  • The profession offers a secure career to its members.

The seventh relates to a license to practice. Whilst the first six criteria can be satisfied by the existence of organizations such as The Chartered Institute of Purchasing and Supply (CIPS), who provide for all six points through their Charter and via their standards, qualifications and certifications, it is the seventh criteria which remains to be achieved. Another organization in the United States, the Institute for Supply Management, has a similar focus on engaging in all of the first six elements, but not the seventh.

That said, at no time in its 80 years has CIPS, ISM, or its members seen so many opportunities for creativity and leadership via professional procurement. Some of these opportunities can be seized and realized by individuals, but more usually they require a team effort under some professional sponsorship.

For a body of specialists to be accepted as professional requires that they meet their obligations to society at large with respect to that specialty. No one wants to become a professional through self-appointment. The deep-down satisfaction comes when others regard one as having earned the status of professional through their deeds.

Within the terms of the criteria outlined above, one can decide whether a case for professionalism in procurement can be made.  And while procurement has undoubtedly come a long way, a para-profession may be, it still has far to go if it wishes to be seen in the same light as medicine or the law.



[1] Today that organization is known as the “Institute for Supply Management”.

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Winning team

We had another great set of student projects during our Spring SCRC student poster session.  Students presented a total of 26 projects, including both practicum projects from our undergraduates, our MBA, and the new Local Food Systems Class.

A big part of the event involved the bi-annual student poster competition.  Executives voted on the best poster, and voted the following in the top three:

1.  John Deere – Supply Chain Visibility – MBA Team:  Jessica Newsome, Nithin Seshandri, Delia Smith, Bo Zhang – Project Sponsor:  Mark Burton, John Deere.  Advisor:  Dianna Wenta, NC State.

2.  NACCO – ROI and TCO Options  - MBA Team:  Robert Elder, Chris Godfrey, Alex Stewart – Project Sponsor:  Chris Cox, NACC.  Advisor:  Cecil  Bozarth, NC State Faculty.

3.  Bayer Crop Science – Internal Procurement Audit – Undergraduate Team:  Hamilton Brewer, Emily Ciriano, Scott Gray.  Project Sponsors:  Robert Waked, Allen Harrison.  Advisor:  Tracy Freeman, NC State Faculty.

All of the projects were well scoped, out, and had a direct application to the companies.

One of the rewards of this type of event is when our project sponsors provide us with direct feedback.  Here is a note sent to the team by Mark Burton, who flew in all the way from Moline, IL to be with the team at this event:

What a great day and a half I got to spend with you all. You are to be congratulated on, and very proud of, the work you did. It was a team effort, and I was impressed by how such a diverse group came together to attack the project in such a thoughtful and productive way. For sure, we will utilize the output from your team as we strategize on the new long term agreements that we will be negotiating over time with our tire supplier partners.

Dianna thanks to you, as well, for being the team’s coach/mentor/adviser, etc. Your insights and guidance were evident in the team’s constitution, as well as their output.

I could not have been prouder of the two awards you all won, in addition to being selected to present to the Conference this morning. My expectations were surely exceeded, and being able to meet you all at the conclusion of your work was a great personal capstone for me.

I hope our paths cross again someday, and will not soon forget our time together, and the great work you did.

Take care, work hard, keep doing the right things, and may God bless,

Mark R. Burton, C.P.M.
Strategic Sourcing Manager – Tires, Wheels, and Mounting Systems
Purdue University Recruiting Team
John Deere World Headquarters – Enterprise Supply Management

Well done to all of our graduating students – we are proud of you, and we will be sure to keep up with your careers in the future!

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