Haroon Sheikh, Dr. Walid Tohme, Ashish Labroo, Anna Germanos
December 2, 2015
Many large group organizations have not yet mastered the art of group-wide collaborative sourcing. These organizations may be family conglomerates, multi-business-unit corporations, investment portfolio companies, or government bodies with multiple departments. If this shortcoming in procurement could be addressed, a significant amount of value could be captured through various factors: product standardization, economies of scale, reduction in supply chain complexity, strengthened negotiating power with suppliers, and improved sourcing capabilities. With mounting cost pressure resulting from increased competition and the macroeconomic environment, these group organizations need a more comprehensive approach to collaborative sourcing.
Various units of a large government department, with an annual spend of several billion dollars, were sourcing common categories with minimal coordination or collaboration at the group level. There were multiple suppliers for common items and equipment, and they offered different prices and terms to various buyers from the department. Sourcing was inefficient, and resulted in increased complexity for asset management and the supply chain.
The organization embarked on a multi-year transformation program to institute a centralized option. It created joint sourcing centers of excellence at the group level to specialize in specific spend categories. These centers of excellence were responsible for all end-to-end sourcing activities for the group, with their level of service monitored via well-structured service-level agreements.
Today, the centers of excellence are the single point of contact within the group for their assigned spend category. They create and monitor the spend budget, maintain contracts and supplier relationships, execute day-to-day actions related to procurement, and push consistently for cost improvements. Such a transformation has enabled the organization to standardize (and reduce) prices, take advantage of economies of scale, reduce supply chain complexity, and build strong sourcing capabilities. The procurement lead time and manpower requirements have both been reduced by around 50 percent.
A group of hospitals with many spend categories and suppliers in common wanted to achieve standardization and sourcing savings by adopting a collaborative sourcing model. Each hospital was using a different item codification system, and procuring several common categories at different prices and terms. The group as a whole was not fully utilizing its combined economy of scale.
As a first step, the group conducted a detailed spend analysis together with an item standardization exercise, using the United Nations Standard Products and Services Code (UNSPSC) system. When designing the target operating model, the group selected different collaboration options for different spend categories. For instance, a centralized option, where a central team would conduct all procurement activities on behalf of the group, was chosen for non-clinical categories. However, a group-level collaboration option was chosen for clinical and pharmaceutical categories. For this option, operational control of procurement was left with the individual hospitals, which were then supported by a group-level lean team that set up and monitored master agreements.
An estimation of the benefits for key clinical and pharmaceutical categories revealed potential annual savings of 8 to 10 percent from collaborative sourcing, mainly through group-wide volume consolidation, supplier negotiations, and product rationalization.
Many group organizations have not developed an effective collaborative sourcing strategy and so are unnecessarily disadvantaged. By selecting and implementing the model most suited to their specific circumstances, such organizations can exploit an important but often overlooked opportunity to capture major benefits, such as greater standardization and cost savings, thereby securing competitive advantage.