September 28, 2005 By Wayne Hanson
Q: How does strategic sourcing fit into the context of various trends in procurement -- things like low price or best value?
Mendonsa: Strategic sourcing can be summed up as more aggressively pursuing the original intent of procurement departments. When you look at the functions of a procurement department, its job is to look at what the state needs as a government to function and develop contracts for those products and services through fair and open competition so that various agencies can conveniently purchase those items. Strategic sourcing is procurement.
What has changed is that with all the fiscal issues over the last few years, states are more aggressively pursuing and empowering the procurement departments to do their jobs in the best way possible. Some of the states are doing that independently and many are working with a consultant to identify which contracts should be renegotiated and will provide the highest return in savings.
I think its net effect is to move more of the state's procurement activity back into a centralized agency, and is empowering those individuals with the authority and ability to best leverage the state's purchasing power. You have a pendulum swinging in government from conservative to liberal. In good times, agencies tend to be empowered to do things independently. We've seen the same with CIOs, centralized vs. decentralized. And the pendulum is now swinging with procurement. Now that we're in more fiscally conservative times, we're back to centralizing procurement to try and get the most bang for the buck.
Q: What is strategic sourcing exactly? How does it differ from lowest price?
Mendonsa: Ultimately it is looking for the lowest price for the best product. You tend to get what you pay for, and don't necessarily want to go with the lowest bidder. You want the product that meets your needs for the best price. To me strategic sourcing breaks out into two areas.
First, it is consolidating the number of contracts through re-bidding, limiting the number of vendors on those contracts to a reasonable amount and obtaining the best price possible for those products and services. In some cases, existing contracts are renegotiated directly with the current supplier holding a contract for lower pricing based on current market barometers. It also includes compliance -- ensuring that agencies are using mandatory statewide contracts and not engaging in maverick buying -- buying contracted items from non-contracted vendors.
Right now, if you were to look at a state that has no strategic sourcing initiative, you may find 10 or 15 vendors on a contract, and really, only one or two are getting a significant amount of business, while the others are getting very little. The state's spending is dispersed across multiple suppliers and in addition the state is expending resources toward maintaining contracts with suppliers who get little to no business. Strategic sourcing leverages the state's buying power by channeling its spend through less vendors who are now guaranteed more business and therefore will be more willing to negotiate lower pricing.
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