Strategic Sourcing - Industry vs. Government - Explained
Updated: Dec 16, 2020
This is Part 1 of a summary (working draft) describing the origins of two supply-chain initiatives that were introduced in the federal government: Strategic Sourcing and Category Management. This first post will covers the former while the next will cover the later. I will explain what each is, how it became introduced in government, how the government has applied (or mis-applied) them into the public sector and why.
Strategic Sourcing — Origins and Definition
Strategic sourcing began in the 1980’s as a supply-chain initiative that helped drive down the cost of doing business. Although there is variations as to how it is defined, as well as variations as to how it is applied, there are common attributes that can help clarity the term.
Strategic sourcing is a private sector supply chain management activity that began in the mid to late 1980’s and served as a means to helps drive down costs. It is an activity employed by private sector entities in various industries. Examples include Wal-Mart, Rolls Royce, Proctor & Gamble, Bethlehem Steel, Gillet, DuPont, Boeing, General Electric, and Honeywell. Definitions of strategic sourcing vary; however, each views the concept’s purpose and core function as driving outsourcing as a method of reducing cost, and thereby maximizing company profits.
For example, some see it as a framework that exploits opportunities to leverage corporate purchasing, optimize the supply base, minimize linked costs in a supply base, and maximize the values of goods and services for the user. Some view it as a by-product of strategic management that focuses on a firm’s problems of establishing and maintaining a competitive advantage in its product markets. Others frame it as a way of more efficiently managing the supply base through partnership identification, partnership stewardship, and metric-based assessment for feedback purposes to support long-term contractual arrangements, while “pruning” supplier activities that do not meet the firm’s supplier goals. Finally, still others see it as more than just a means to drive down costs. Other factors are required to be considered, such as company strategic considerations for make-or-buy decisions and the internal and external technological capabilities of the firm and the firm’s supply chain partner.
The literature appears to recognize that strategic sourcing was a very subjective endeavor early in its inception. As experiences grew a more definitive and comprehensive outline of strategic sourcing emerged that not only accounts for the objectives of reducing costs, but also clearly establishes the means by which firms are capable of doing so. Strategic sourcing can be seen as a blend of seven distinct activities (Figure 1) that are meant to affect a company’s bottom line through financial ratios, like return on assets (ROA), return on investments (ROI), and decreasing employee headcount, thereby increasing revenue per employee.
Strategic Sourcing — Commercial Model (Table 1) — Rossetti & Choi
These components, working in concert, enable companies to reduce costs and reduce the
amount of in-house labor needed to conduct business, thereby increasing profits. This is now a common activity that is no longer specific to manufacturing, but has become a standard business practice and consideration for product or service companies across the globe.
The Federal Strategic Sourcing Initiative
Strategic Sourcing as a government-wide initiative began in 2005. A definition was developed that changed the meaning and purpose of the term when compared to its application in the private sector (assigning the term rather than applying the term as it was defined). The fatal flaw was the mistaken belief that Strategic Sourcing was a contract that you buy from rather than an activity that you engage in.
The Department of the Treasury and the General Services Administration (GSA), with support from the Office of Federal Procurement Policy (OFPP), partnered to launch the Federal Strategic Sourcing Initiative (FSSI) on November 16, 2005. Although this is marked as the beginning of strategic sourcing in the federal government (heretofore referred to simply as “the government”), entities like the U.S. Air Force considered this type of supply-chain initiative as early as the late 1990’s. Further, strategic sourcing in government is not exclusive to the federal government. Initiatives in Pennsylvania, California, Texas, and New York have all been attempted, with no noticeable impact. Some, like Pennsylvania, have ceased operations because of the detrimental impact on their supply base.
In 2010, the federal government defined strategic sourcing as “a fact-based analytical process used to reduce direct spend and Total Cost of Ownership (TCO), while improving mission delivery.” It was established to “improve the federal government acquisition value chain, increase socio-economic participation and ultimately lower total cost of operations and/or ownership for strategic sourcing vehicles.”
Strategic Sourcing — US Government Federal Model (Table 2)
As indicated above in Table 2, the government’s objectives for the FSSI program were to develop commodity expertise and use of best practices: aggregate requirements, streamline processes, and coordinate purchasing; increase total cost savings, value, socio-economic participation, and sustainability; create commodity teams and share knowledge with all government purchasers; and collaborate with industry to develop optimal solutions.
Further, strategic sourcing is characterized as a multi-step process whereby agencies engage in a variety of activities such as spend analysis to develop insight into cost drivers and requirements; identification of best practices (in government and in the commercial sector) which have been successful in minimizing cost and improving value; analysis of the supplier market to identify trends and economic factors that can be leveraged to optimize the government’s acquisition; development of a strategy to lower the government’s total cost of ownership; develop a business case to ensure good stewardship of taxpayer dollars; acquisition execution; and ongoing performance management including the collection of detail data from vendors to ensure value is achieved.
Multiple strategic sourcing acquisition vehicles have been established. An acquisition vehicle is a government-wide indefinite delivery-indefinite quantity contract, a government-wide acquisition contact, a multiple award contract, or a government-wide blanket purchase agreement, all of which are defined either in Federal Acquisition Regulations (FAR) Part 2 (Definitions), FAR Part 8 (Required Sources of Supplies or Services), or FAR Part 16 (Types of Contracts). The commodity vehicles for supplies and services that have been established include Office Supplies; Information Services (journals and periodicals); Janitorial and Sanitation Supplies; Maintenance, Repair, and Operation Supplies (for items such as hardware, cabinets, sealants, etc..); Domestic Delivery Services (FedEx and UPS); Print Management, Commercial Off-the-shelf Software, and Wireless Telecommunication Services. (StrategicSourcing.gov)
The Office of Management and Budget (OMB) continued to push this initiative further throughout President Obama’s administration. The initiative, however, has met scrutiny. Some have made clear that there exists a contradiction between the strategic sourcing principles found in the private sector and existing U.S. Government laws and priorities. The US Government Accountability Office (GAO) has looked at strategic sourcing multiple times, and it is critical of its definition as articulated by OMB, as well as how this program has been implemented. Still others view this act as a means of harming small businesses. Some were clearly concerned about the implementation and application of this initiative in the federal government, which begs the question as to whether this program achieves the results expected, and ultimately is workable in the existing framework. It also begs the question as to whether the definition and attempted application of strategic sourcing to the federal government is appropriate to begin with.
Strategic Sourcing — Summary and Considerations
How strategic sourcing is applied in industry varies as to whether you are a manufacturer (Ford, Apple), a retail (Walmart, Amazon, Trader Joes), or an enterprise (Citigroup, GEICO). It included limiting suppliers, bundling your purchases, setting out long term agreements, and engaging in sole sourcing. These are activities that are largely frowned upon within our federal structure.
When government applied the term it was changed to fit their conditions and objectives. This change of term watered down the definition as it was known and generated confusion. That is because, for all practical purposes, strategic sourcing was viewed as a “vehicle” driven initiative rather than an activity that an enterprise engages in against a vehicle. This subtlety/nuance is well known by strategic sourcing experts in government (within the DOD, US Navy, DHS, DOJ, Treasury and elsewhere). What many are unaware of is that just because an agency used a strategic sourcing vehicle does not mean that they were strategically sourcing their purchasing: they just fragmented their purchases under that vehicle and ultimately did not accomplish the objectives sought.
That being said, to make the government-wide view of strategic sourcing work hinges on accepting the premise that the government should be considered a single enterprise. Their argument falls along the lines of “The US Government is the single largest company on earth and therefore industry should treat it as they do any other large enterprise.” Unfortunately this is a completely false premise as “the government” does not operate, is not funded as, and is not technically architected as a single enterprise. As a matter of fact, federation even within federal agencies exacerbate the government-wide execution and make government-wide consolidation a practically impossible task.
A better analogy would be government as Berkshire Hathaway. It has railroads, insurance, restaurants, fast-food, real estate, furniture manufacturing, and software and hardware companies as part of their portfolio. That being said, Warren Buffet does not require the identical point-of-sale system for McDonald’s as they do Dairy Queen. He does not require the identical infrastructures between firms and trusts that the firm’s management are best to decide on their IT needs.
I will write more on the false premises that affect government-wide acquisition initiatives at another time.
The FSSI initiative is, for all practical matters, no longer relevant as a government-wide initiative for two reasons: 1) strategic sourcing is now recognized by government practitioners as an activity (NOT a vehicle) so is therefore being implemented at the agency/sub-agency (rather than government-wide level). Doing so fits the agency’s mission, needs, and conditions — and the value of government-wide coordination is the exchanges of practices; 2) It has been superseded as a government-wide initiative in the form of category management, which claims to have strategic sourcing as a component.
Strategic Sourcing activities and principles are, however, being applied at the agency/sub agency level. Agencies are consolidating their agreements, gaining more controls over their inventory and spend, and making strategic decisions for their mission through contract execution. This is sound management. Further, for any manufacturing that is government specific (for example ships and vehicles for defense and security) some of these strategies and tactics are being applied either by government or industry partners.
Bottom line — Strategic Sourcing is not a government-wide contract. It is an activity executed by an agency or enterprise through, not because of, a master agreement. Sources
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Rossetti, C., & Choi, T. Y. (2005). On the dark side of strategic sourcing: experiences from the aerospace industry. The Academy of Management Executive, 19(1), 46–60.
StrategicSourcing.gov. “A fact-based and analytical process for optimizing the government’s supply base while reducing Total Cost of Ownership and improving mission delivery”. General Services Administration (GSA). Retrieved from: https://strategicsourcing.gov/, Accessed 3/08/2015
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General Accounting Office, 2002. Best Practices: Taking a Strategic Approach Could Improve DOD’s Acquisition of Services. Report to the Chairman and Ranking Minority Member, Subcommittee on Readiness and Management Support, Committee on Armed Services, U.S. Senate. GAO-02–230. GAO, Washington, DC. Retrieved from: http://www.gao.gov/new.items/d02230.pdf
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