If the number of workers will be affected by outsourcing, which can be the case in certain situations, then you require an HR strategy to go along side it.  Once again, outsourcing is not a human resources alignment strategy

The job losses mentioned in the article are probably surplus  due to an economy on a downward cycle. The government could decide to keep them if they wanted to. Blaming them on outsourcing is just the wrong thing to do.

Renown outsourcing relationship and management expert Andy Akrouche discussing a February 20th, 2012 Canadian Business article “Analysis: Layoff talk sidestepped in outsourcing“

When you have been in this field for a certain length of time and hear something long enough – over, and over and over again, you can actually start to believe it.

Such is the case with outsourcing in that along with shared services, the strategy has often been villanized as being the reason for workforce reductions.  This is of course not entirely untrue but not for the reasons one might suspect.

Unfortunately, far too many organizations have missed the point and the benefits of an outsourcing strategy by oversimplifying the process to one of merely transferring responsibilities for key enterprise functions to a third party in an effort to boost bottom line financial performance – especially during a down economic period.  Do not get me wrong, cost reduction is a definite element of a successful outsourcing strategy, however by making this the sole focal point is tantamount to only seeing the tip of the proverbial iceberg.

In essence, outsourcing’s perceived benefits have been reduced to the ridiculous in the extreme in that it is viewed as being a reactionary tool as opposed to a proactive realignment of company capabilities that collectively, when managed properly, deliver substantially improved levels of service and increase profitability.

Sadly, the former perspective is the one that like the article to which Akrouche refers, is the usual headline grabbing angle most stories take.

In truth, outsourcing is an incredibly important vehicle provided that it is recognized as being as much an HR transformation strategy as it is a cost reduction mechanism.

Over the next week I will be taking an in depth look at outsourcing and shared services through a series of posts.

In the meantime, I would encourage you to share your experiences with outsourcing whether it be through either direct or indirect involvement.

Be sure to check out SRS’ new Source Relationships Not Deals Seminar . . .

“This seminar bridges the disconnect between executive vision and practical front line execution. It is unlike any I have seen or been a part of.”

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When I was asked to review a new seminar on outsourcing contracting I have to admit that the been there – done that sentiment almost immediately came to mind.  It is not that I am naturally cynical, it is just that so many seminars relating to the contracting process seem to advocate a dot the “I’s” and cross the “T’s” adversarial approach that does little if anything to ensure a successful outcome.  And when I use the term outcome I am not talking about the actual award of a contract to a selected vendor but, the actual structure of the contract itself in the critical area of a full and true disclosure of capabilities and how the parties will work together to achieve a mutually satisfactory outcome.

Let’s face it, and I am not just talking about outsourcing here but most complex contracting exercises, the vast majority fall far short of meeting the expected results.

Now a big part of the problem is the fact that the entire contracting process itself is seriously flawed in that it actually promotes both parties to the agreement to as IACCM CEO Tim Cummins once so eloquently put it “lie” about their respective capabilities.  (Note: refer to the March 9th, 2011 post in the Procurement Insights blog “Absence of Truth in Bidding Post Should Get Everyone in the Contracting Pews Standing Up and Shouting AMEN!“)

Or to put it another way, the contracting process has little to do with relationship building and more to do with getting the upper hand, one over the other.  This isn’t exactly laying the foundation for a collaborative effort, something by the way that is crucial to the effectiveness of an outsourcing or shared services agreement.

No wonder such a high percentage of contracts fail to achieve the expected results!  For a more detailed overview of said challenges, check out my interview with Phil Fersht (Sources For Horses and Other Outsourcing Insights).

This brings us back to the point of today’s blog post which is the new seminar from the Strategic Relationships Solutions people, and why on this rare occasion I am an enthusiastic supporter for their new seminar.

Over the next week I will at length review the highlights from their 2-Day Source Relationships Not Deals seminar and invite you to offer your thoughts on the course.

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from the WashingtonExec December 5th, 2011 post “Bob Kipps 2012 Outlook: GovCon Game Is A Lot Like Football” by Brynn Koeppen

Which direction will government contracting take in 2012?

As the classic song goes . . . this is the most wonderful time of the year, in that between eggnog and Christmas trees, turkey and warm feelings around the fireplace, it is also the time for industry pundits to don their prognosticative hat and tell one and all what the coming year holds for us . . . in the world of government contracting.

What is most interesting is that the public sector, and in particular government contracting, is potentially one of the most lucrative markets with which to deal yet it is also one of the most paradoxically frustrating – especially given the earnest shift away from relationship engagement as part of a misguided attempt at creating what amounts to a false transparency.

Add into the equation the advent of procurement contests (which I covered at length this past summer in a series of posts), and I would have to say that if nothing else 2012 does have the makings for a few interesting and perhaps even noteworthy developments.

Yes I know, many are suggesting that with the economic conditions and budgetary shortfalls in the coffers of governments at all levels – wasn’t it the Governor of Illinois who referred to his as being a deadbeat state, the main highlights during the next 12 months will centre on austerity.

While this may be true to a certain extent, developments relating to for example the GSA’s $2.5 billion cloud computing RFQ is certainly significant, especially given the corresponding study out of Washington which found that 92% of all government IT leaders have reservations about making the move to the cloud. Talk about an irresistible force meeting an immovable object.

As mentioned earlier, procurement contests are another interesting development as governments look to transfer both the risk and responsibility to competing vendors in terms of coming up with innovative solutions to solve specific problems.

It is an interesting twist in that while RFQ’s have been traditionally influenced by a trusted vendor with an inside track that ultimately limited as opposed to stimulated competition, the contest approach doesn’t start with the selection of a solution that qualified vendors can then bid on but, instead starts with a problem and let’s the vendors (within of course a pre-defined guideline) offer up what they believe is the best means by which the stated problem or requirement can be addressed.

Even though, and as demonstrated by the recent case involving a Colorado firm’s proposal for a Regional incineration project in Gatineau, Quebec, there have been points of contention as to the parameters of creativity afforded a participating vendor, procurement contests actually hold the promise for delivering to the public sector innovative solutions that might not have otherwise been considered.  Questions surrounding IP ownership notwithstanding.

Based on the above, while the news of strategic acquisitions of technologically innovative smaller players by the big boys is an interesting angle to be certain, I just do not think that 2012 is going to be the stand pat year that the WashingtonExec article’s writer is suggesting.

What are your thoughts . . . another year of same-old, same old bureaucratic manoeuvring or, the exciting start to a new era in government purchasing? Share your prognosticative musings in the comment section below.

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Considering the current squeeze on the public purse, suppliers are going to be more inclined to take their chances with the courts. So watch out buyers.

from the November 21st, 2011 SupplyChainStandard article “Rising tide of supplier challenges brings danger” by Nick Allen

My initial reaction to reading the above story is that there is something seriously wrong with the acquisition process when an increasing number of suppliers can and are turning to the courts to settle disputes relative to the public sector bidding process.

Don’t get me wrong, the ability to challenge an award is an integral part of the RFP exercise in that it supposedly ensures an objective, third-party (at least in concept) hearing of grievances that is designed to keep the system honest.  Unfortunately, and as intimated by the article the real question is whether or not challenges that ultimately find their way into the courts are more punitive on the part of disgruntled suppliers than productive.

A point that is especially worthy of consideration when you consider Allen’s suggestion that “cuts to public spending have left many procurement departments lacking the necessary ‘in-house’ experience,” which implies that with the absence of important expertise in the vendor selection process there is an increased likelihood for reversible errors.

Truth be told, and referencing a roundtable discussion I had hosted on my radio show in April 2010 on transparency in government purchasing, this is nothing new.  In fact, one could make a reasonable argument that long-standing issues with buyer capability fuelled by inherently flawed policies within the public ranks has always been a problem.  At least this was the opinion of 35 year plus public sector expert author Colin Cram.

Cram’s opinion would tend to challenge, at least to a certain degree, Allen’s belief that “information, guidance and expert knowledge is going to be increasingly important to procuring organisations if challenges are to be avoided.”  This is due to the fact that the public sector belt with suspenders mindset actually cultivates if not encourages outright unimaginative, just following orders thinking.  Or to put it another way, all the expertise in the world will not overcome a culture of unthinking adherence to a flawed vision of a transparent and level playing field.

It is this homogenized view that all vendors and all vendor relationships are equal or at least the same that is more likely at the heart of the problems that ultimately opens the door to winnable challenges in the courts.

So while procurement legislative reforms such as the ones introduced in the UK in December 2009 may have had a direct impact on the number of challenges that have made their way through the legal system, the real issue is to find a way to loosen as opposed to tightening the legislative shackles associated with a flawed equal opportunity mindset.  Only when this has been accomplished can the government then look to attract the expertise that can be leveraged to deliver real value while reducing if not eliminating the reasons for said challenges to occur in the first place.

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from the PwC White Paper “Pharma 2020: Supplying the future: Which path will you take?”

Considering the concern relating to what some would refer to as the growing drug shortage, in which crucial treatments for diseases such as cancer are being negatively impacted (read my October 7th post “Whether created artificially or reflective of a very real and serious issue, pharmaceutical supply chain problems can have deadly consequences for patients“), the timing of the PwC paper (or for that matter any such paper of this nature) could not be better.

Putting aside the possible origins relating to the shortages, there is little doubt that the pharmaceutical industry’s supply chains are experiencing a transformation of considerable magnitude.

As we continue our series examining this seminal shift, starting today, and over the remainder of the week, I will review the four options highlighted in the PwC paper for “restructuring the pharmaceutical supply chain” which are; the virtual manufacturer, the service innovator, the low-cost provider and the profit center.

What is most interesting is not so much the options themselves but the fact that they are divided into two distinct categories.  Specifically, the virtual manufacturer and service innovator are the strategies PwC recommends for pharmaceutical companies that focus on specialist therapies including the treatment for orphan drugs, while those focused on what the report calls mass market medicines are advised to consider the low-cost provider and profit centre options.  The interesting part of course is how these suggested strategies would be able to address the drug shortage question.

For example, deficiencies with Ohio-based contract manufacturer Ben Venue Laboratories Inc. were cited in a recent Globe & Mail article as being responsible for shortages involving a number of cancer drugs including Caelyx, which is used to treat ovarian cancer.

Even through alternative treatments are being pursued they are being done so with considerable reluctance as factors such as potential side effects and the alternative medications’ overall effectiveness come into play in terms of patient confidence.

While many believe that the problems are tied to the increasing concentration of drug production with a handful of companies such as a Ben Venue, which produces liquid and freeze-dried products, the Director of Government Relations and Public Affairs for the Canadian Pharmacists Association Jeff Morrison believes that they are more systemic in nature and as such could, if they haven’t already, become common.

The possible problems to which Morrison is referring may, as some suggest, include; contamination or scarcity of raw ingredients, manufacturing glitches as well as regulatory challenges.

In the case of Ben Venue, a company spokesman indicated that “manufacturing capacity restraints” are at the heart of the company’s current inability to fulfil orders.

While all of the above may indeed be contributing factors, there are also indications that these shortages might be reflective of a product vacuum that includes manufacturers cutting back production on older and/or limited use drugs – also referred to as orphan drugs, in which the level of demand does not justify (at least financially) continuing production.

Alternatively, shortages with newer drugs such as Caelyx present a problem in that while demand is not an issue, the lack of availability of generic versions means that production shortages leave doctors and their patients with little alternative but to pursue new courses of treatment.

The extent to which the PwC paper takes these real-world situations into account and prescribes viable solutions will ultimately determine both the immediate and on-going viability of the options being presented.

Over the next week we will determine the answers to these as well as other relevant questions.

Next Installment: Pharma Supply Chains (Part 3): Virtual Manufacturing

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from February 24th, 2011 About.com article “Pharmaceutical Supply Chain Issues” by Martin Murray

It is an interesting paradigm in which the effort to balance innovation and the introduction of newer drugs and treatments centering on illnesses such as Parkinson’s, could have such a significant impact on a pharmaceutical company’s supply chain so as to effect it’s current offerings.

After all, and if I follow the development and launch cycle of a new product in the high tech sector as described to me by a friend who works in this area for Cisco, an impact on existing product lines seems unlikely as such development usually takes place in relative isolation in relation to existing lines. Therefore the suggestion that the recently reported shortages of existing drugs that are essential to treating diseases such as cancer due to innovation and medical breakthroughs seems remote. Or is it?

To start, innovation in the medical profession is an ongoing and complicated process in which expected breakthroughs offer the promises for longer and healthier lives. In fact in my December 31st, 2010 segment with healthcare expert and author of the book Navigating The Healthcare Maze Jeff Knott, we reviewed the years most promising top ten medical breakthroughs and their expected impact on the industry.

What was most interesting is that unlike a Cisco which doesn’t have to contend with the same regulatory compliances that say a Johnson & Johnson does, the stakes of innovation in the pharmaceutical industry seem to be much higher and riskier than other industries which by and large do appear to operate in relative world of self-determination in which consequences for a product miss are delivered by the end user as opposed to a regulatory body such as the FDA.

Although I am certain that from the standpoint of having to stand before a congressional hearing as a result of an accelerator problem with their cars Toyota executives would beg to differ as it relates to this assertion.

Automotive industry exceptions aside, in which grievous infractions – anyone remember the Pinto’s gas tank that exploded on impact – generated a resounding outcry from the public, no other industry seems to be shackled or scrutinized in terms of new product launches to the same degree as the pharmaceutical industry. Based on both the civil and criminal convictions of late within the sector, whether or not such scrutiny is justified is a discussion for another day. For today, the real question is whether or not reports such as the one offered by Price Waterhouse Coopers points to an indigenous supply chain problem relating to new products and its effects on delivering existing drugs in the face of a decline in demand or, a demand that fails to generate the necessary revenues to warrant further production. In short, and if not directly, do the normal and expected challenges associated with a new product introduction actually have a direct impact on existing product lines or, is it merely a convenient excuse for the drug companies to drop offerings that are no longer generating the required revenues . . . even if said cessation has a negative impact on the public?

Click to access PwC Report

This of course is the moral divide that separates the pharmaceutical industry from all others, in that a Cisco is unlikely to garner the same widespread general public outcry for discontinuing a router that say a Schering Canada Inc. is for the lack of availability for its Caelyx drug, which is used to treat ovarian and other types of cancer.

It is also the point at which we come to the proverbial fork in the road as to the reason or reasons behind the shortages.

If you ascribe to the government’s take on why there are interruptions in the supply of such vital yet decreasingly profitable drugs, they are as pointed out in the August 18th, 2011 Globe & Mail article, due to an increased concentration of drug manufacturers. In essence, declining competition brought about by mergers and acquisitions such as was the case with Schering Canada’s parent Schering-Plough who, in a US$41 billion deal merged with competitor Merck in November 2009, are the reasons behind diminished capacity and availability as opposed to the reasons cited in the PwC Report.

Even though the PwC report focuses its attention on the development and launch of new products and the resulting logistical challenges in the here and now, pharmaceutical companies have been in the business for some time and as such the failure to reference supply chain problems with the launch of previous products and how those were addressed so as to enable drug companies to generate the profits they have for so very many years, represents a big hole in the firm’s research.

In short, and as is the case with the ongoing evolution in the product development process, manufacturing techniques and distribution management that has through the ages impacted business as a whole, being singularly focused on the introduction of new products fails to establish an historic trend through which one could identify the real reasons behind the recent shortages. Or to put it another way, and if one is to believe that improvements in current or future supply chain processes can also be applied (at least in principle) to existing offerings, the issues of product shortages and a changing global supply landscape are not mutually exclusive and therefore must be viewed through a collective versus isolated lens.

The real impact of drug shortages

It is within this context or view that I will in Part 3 of the series, examine more closely the four potential supply chain options highlighted in the PwC report, two of which are directed towards companies whose focus is on specialist therapies and treatment for orphan diseases and, the remaining two options for companies focused on mass market medicines.

Next Installment: Pharma Supply Chains (Part 2): The cornerstones for improved delivery!

Click to Join the Pharmaceutical Supply Chain Group

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Under the banner of a legitimate report on negotiating cloud contracts, Gartner’s latest offering should be viewed in the context of my January 7th, 2011 post “Madison Avenue ooops . . . make that Gartner, names Oracle as a leader in supply chain planning.”

Leveraging the old IBM classic FUD approach (not Elmer but Fear, Uncertainty and Doubt), the Stamford Connecticut company which as I had pointed out in the January article is owned by a UK-based advertising firm, deftly and subtly I might add, attempts to walk the tightrope between embracing an emerging technical reality while simultaneously eschewing the up and coming players that are its driving force.  Its kind of like trying to separate the salt from pepper duo or Rogers from Hammerstein . . . it’s unnatural.

However, you gotta give the Gartner crew kudos for trying to set the tone of uncertainty right out of the gate in that they weave a cautionary tale of vulnerability in an effort to submarine indigenous cloud providers while leaving the door open to the old guard that by and large pay the bills to keep the lights on.  Maybe being owned by an ad firm with a crack copy-write team has its advantages?

The real question is simply this . . . will the market listen?

Given the results of a ScienceLogic Survey that was released at the FOSE conference in Washington this past summer, which indicated that there are serious and more universal reservations regarding soon to be former Federal CIO Vivek Kundra’s Cloud First policy the answer, at least in terms of the U.S. Federal Government, would seem to be yes.

As covered in my July 27th, 2011 post Fear and loathing in Washington: Why a recent survey found that 92% of government IT leaders have reservations about making the move to the cloud, it does appear that Gartner has a ready audience whose fertile minds are just waiting to have their worst fears confirmed by a supposed objective third party.  Or to put it another way, Gartner is merely giving that segment of the market what they want . . . a reason to keep things the same.  If you think about it, it is a brilliant dance in which mutually motivated, non-arms length stakeholders on both sides of the contracting fence seek a way to legitimately operate within the relative safety and familiarity of a lucrative and long-standing working arrangement.

An arrangement I might add that has its origins with Gartner founder Gideon Gartner, who spent many years working in IBM’s competitive intelligence operations division.

In fact, prior to starting the company that bears his name,  and immediately following his departure from IBM, Gartner joined Oppenheimer & Co. where “he was rated as the top individual securities analyst in the technology field for seven straight years by Institutional Investor.”  

To further stress my point regarding the importance of the relationship between Gartner and its client firms, in its early years it became well known for its “insider” perspective on IBM and the “comprehensive information that it possessed about the company’s products and services.”

Gideon Gartner

While this relational proximity did pose problems in the company’s early years as demonstrated by a lawsuit in which IBM alleged that Gartner and company had illegally revealed IBM trade secrets (the suit was later settled out of court), the die relative to the Gartner business model was nonetheless cast and over time perfected.  This is of course my point in that there is eventually a line that can be crossed when the revenue from the vendors you are covering become your lifeblood.

For this reason alone I will, if nothing else, offer a true arms length assessment of the Gartner findings by way of a 9-Part Series starting this Friday, in which I will review what the analyst firm calls the Nine Contractual Terms to Reduce Risk in Cloud Contracts.

For those who may not be familiar with the concept, I recently published the 3-Part Procurement Contests Review series that you can access through the provided link. It is a pretty interesting read as I have been told, and it should provide a solid foundation in terms of understanding the primary aspects of a very interesting approach to leveraging the procurement process to drive innovation within the public sector.

All this being said Cram’s key points relative to maximizing the opportunity for success are indeed worth noting . . . at least this is my opinion.

Why don’t you have a look and get back to me with your thoughts?

Colin Cram’s 5 Recommendations for a Successful Procurement Contest:

1. I can see nothing wrong in principle. The government announces the prize at the outset, so participants know how much money they will receive.

2. There needs to be an agreement that the government will use the specification – turning it into a rather more generic one – to invite bids to supply. So the prize-winner may not win a contract that stems from it.

3. It enables the government to find out if the problem can be solved.

4. It does not necessarily mean that companies are subsidising the government. They don’t have to go in for the competition. The downside might be that the government has to offer a prize that is greater than it might otherwise pay. Alternatively, it limits its financial risk.

5. The risk is that significant competition is avoided, though it should be evident if only a couple of suppliers choose to go in for the competition. So there need to be some safeguards so the government can demonstrate probity and genuine competition.

I will be posting the date and time of the Colin Cram interview that will air on the PI Window both here and in the Procurement Insights Blog Portal, where you can tune in to the LIVE or on-demand broadcast.

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NOTE: Here is the on-demand link to my interview with the City of Gatineau’s Alain d’Entremeont, Head of Public Relations @ Gatineau’s New Supplier Portal.

As the City of Gatineau launches its new supplier portal does this mark a new era of engagement in the Capital Region?

I will be seeking the answer to this as well as other questions as I welcome Alain d’Entremont who is the Head, Public Relations Communications Department with the City of Gatineau to learn more about the municipality’s new supplier portal and what it means to local businesses on Buckingham This Week!

Click Here to tune in Live or On-Demand

Here is an example of the other questions that I will be asking Mr. d’Entremont:

1. What was the main impetus behind creating the portal?
2. Is the portal a natural progression of the amalgamation?
3. How will this address the potential challenges in terms of the pre-amalgamation relationships between say Buckingham and its suppliers?
4. Is the premise for the portal to create a centralized resource that will feature the best of the best in terms of suppliers?
5. What challenges do you anticipate in terms of supplier response/usage?  What about buyer response and usage?
6. Is it for example mandatory for suppliers to be on the portal?
7. Is it mandatory for buyers to use the portal has their first step in the purchasing process?
8. What tracking system or process have you created to capture relevant data as a means of demonstrating that the portal represents the best value for buyers and the best access point to municipal business for the suppliers?
9. Is the approach to a centralized supplier resource going to mirror what has been done with other governments?

Given my extensive research and work in this area, it should be a very interesting segment.

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from the book Straight to the Bottom Line: An Executive’s Roadmap to World Class Supply Management by Robert Rudzki, Douglas A. Smock, Michael Katzorke, Shelley Stewart Jr.

In yesterday’s post I had indicated that the authors of the Straight to the Bottom Line book did not hold back any punches in terms of placing responsibility for the disconnect between purchasing and finance on the shoulders of executive leadership.

This limited or limiting vision on the part of senior management relative to the power of purchasing was reiterated in another book from the same authors titled On-demand supply management: world class strategies, practices, and technology.  In this text they had made the observation that “The same supply management leader who received corporate accolades for leveraging savings from spend analysis . . . quickly begins to hear the CEO’s and CFO’s relentless question, what have the suppliers (read: and you) done for me lately?”  The authors then go on to say that the previous “glory” has been replaced by even greater challenges.

The challenges to which they are referring is a common lament by purchasing professionals in that having harvested the low hanging savings fruit, there is an even greater expectation for duplicating the effort in subsequent years.  As indicated by a CAPS 2003 study in which the utilization of Reverse Auctions did not produce sustained levels of savings (in fact savings actually decreased before flat lining once the buying price was corrected to reflect actual market conditions), this is not an easy task.  As a result, purchasing departments are still confronted with management’s query demanding an answer to the question “how come you did so much better last year.”

Even though this reflects a one-dimensional understanding of the purchasing department’s power to significantly impact an organization’s bottom line, the author’s suggestion that “Seasoned supply professionals who read this book will certainly recognize this attitude shift,” which they contend is “driven by the dynamic nature of the competitive market game,” means that the onus or pendulum can also swing to the buyer side of the collaborative equation in terms of the need to make a responsible contribution.  In essence we can no longer claim ignorance in line with the you can’t manage what you don’t measure axiom.

Being aware of senior management’s limited understanding of purchasing beyond the traditional adjunct of finance view, coupled with the identification of key performance indicators such as ROIC and Earnings Per Share “EPS”, it is incumbent for each and every purchasing professional to demonstrate a broader, more enterprise holistic reach of their activities to demonstrate true value and finally silence the what have you done for me lately executive refrain.

While I had previously identified how a purchasing department’s proficiency (and efficiency) can have a positive impact on ROIC, today we will examine the extent to which the purchasing process and performance can and will have an impact on EPS.

What is Earnings Per Share?

According to the Stock Research Pro website, EPS is defined as follows; A company’s Earnings per Share (EPS) represents the portion of the company’s earnings (after deducting taxes and preferred share dividends) that is distributed to each share of the company’s common stock. The EPS measure gives investors a way to compare stocks in an “apples to apples” way.

For newer companies the EPS is based upon future or projected earnings, while the EPS for larger, more established companies is based upon actual earnings.  In the latter case, if earnings drop, the company’s share price will likely be impacted negatively.

Regardless of whether you are employed by a newer company or an established organization, the ultimate bottom line is just that . . . how can purchasing positively influence earnings re the bottom line numbers?

According to Investopedia, Most companies aim to improve their bottom lines through two simultaneous methods: growing revenues (i.e., generate top-line growth) and increasing efficiency (or cutting costs).  It is obviously in the reduction of costs where purchasing can have the greatest and most direct impact on a company’s EPS.

However, not all roads lead to the promised land of reduced spend and increased net earnings.  In reality, most organizations employ outdated and ineffective strategies such as vendor rationalization or centralized contract compliance as the levers to achieve the desired outcome.

As a regular subscriber to this blog you will undoubtedly think of the countless posts I have written about these purported best practice initiatives that when broadly applied across all areas of spend actually serve to undermine efforts to realize increased savings and earnings.  The key phrase here is the broad application of a specific strategy across all areas of spend.  This is important to keep in mind as your read the following paragraphs.  For those first time readers, here is the link to the post Kraft Buys Into the Mirage of Vendor Rationalization, that I am sure you will find interesting as it will serve as a primer in terms of explaining the logic behind my thought process.

Relative to today’s article, and in an effort to maintain a consistency of information source, I will once again refer to the On-demand supply management book and the Kennametal case reference in particular.

According to the book’s authors, Kennametal achieved cost reductions of about $16 million per year after taking their first steps towards spend analysis and the resulting move to establish “corporate contracts” in combination with a deliberate effort to “focus on key suppliers.”  Prior to this shift in strategy, cost reductions hovered between the $5 to $6 million range.

A key component of the initiative was to funnel 85% of spend within a given category through their top five suppliers.  The authors noted that other organizations strive to direct 95% of their spend through only two suppliers with one being designated as being in a dominant position, while the other being viewed as being in an opportunity position.

What is worth noting is that even though the company stresses compliance, at Kennamore it is not mandatory.

Referencing what management called malicious compliance, the company’s executive leadership recognized the fact that a blindly and broadly applied edict is tantamount to shooting oneself in the foot as it removes the leeway for a buyer to acquire something at a better price such as a loss leader.

Though forward thinking examples like the one provided by the Kennametal case reference is exciting, as it represents a long overdue move away from the aforementioned and lingering one dimensional view of the purchasing function, it is nonetheless an epiphany that continues to elude the majority of executives.

Hopefully, as more purchasing professionals take the initiative to understand the connection between procurement and EPS, we will see a Kennametal-type transformation occur more frequently and with greater urgency.

Tomorrow in Part 4 of the series I will examine the link between purchasing and Economic Value Add “EVA.”

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