Best practice: The devil is in the data, details from the big picture

Strategic sourcing is a term that is used very loosely in the healthcare supply chain world. In order for it to be a best practice we need a consistent definition and understanding of what it is and what it isn’t. It is not just preparing and sending a request for proposal (RFP). Nor is it selecting a vendor partner to try and jointly drive down costs.

One good definition comes from Brent Johnson, vice president of supply chain at Intermountain Healthcare. Strategic sourcing is a disciplined, systematic process of analyzing corporate expenditures and developing strategies to reduce the total costs of externally purchased materials and services. The biggest difference between standard contracting and strategic sourcing is the preparatory work that goes into the effort. Rather than concentrating on negotiations and contract award, strategic sourcing starts with opportunity assessment and spend analysis, category analysis including specification development, market research that may or may not include a request for information (RFI), and – with all that information available – developing a strategy around the best way to approach the spend.

That strategy and its implementation are what make strategic sourcing such a powerful tool. It is all about using your resources in the best way to maximize the outcome for the organization. And maximum value does not necessarily mean lowest price. Strategic sourcing focuses on the total cost of ownership, not just price. And it looks at the entire supply chain, not just the internal.

Implementing a strategic sourcing program will result in a change in the way you use your group purchasing organization. The traditional focus on the organization’s GPO has been to use as many of the contracts as possible. Under a strategic sourcing program, such use will go down. There will continue to be product lines where the effort to self-contract will not be worth the gain as well as product lines where the volumes contracted through the GPO will deliver better value than a self-contracted deal could drive. For these areas the GPO remains the best option.

But for many other products that you now rely on the GPO contract, a well-conducted strategic sourcing program will bring additional value. How much will continue to go through the GPO vs. self-contracting will depend on the resources within the organization and the maturity level of the program. A newly formed program with limited resources might target 10 percent of the spend while a well-staffed, mature program might cover as much as 80 percent. The size of the organization will also have some bearing on the level.

A strategic sourcing program does require resources. Depending on your situation you may be able to begin a fledgling program with your current resources. But to build a strong initiative you will need additional, skilled purchasing professionals and analysts. Getting approval to add staff in the current environment is not easy. However, the potential return on investment is impressive. The greatest obstacle will likely be building a believable business case. Getting some references from others who have been successful is one way to help build that case.

A way to approach this without relying on a complete leap of faith from the executive team is to propose a phased implementation. Review your spend categories and rank them according to ease of implementation and potential savings. Estimate the savings you might get from each and outline a plan to attack a selection from the list. Include many with reasonably easy/reasonably high savings and a couple with harder but larger savings. Initially only ask for the resources needed to begin the process with this group. Once you are up and running and have some successes to share, you may be able to expand the resource pool and accelerate the savings.

A robust strategic sourcing program will provide many benefits. Being in charge of your own destiny you can determine when and how to approach the different spend categories and concentrate on those most important to you. You can use true commitment and standardization to your favor. You will enhance the status of the supply chain within the organization as you drive value through collaboration with key stakeholders. And, of course, you will be responsible for significant savings through better pricing and reduced total delivered cost.