Strategic sourcing: A good idea but...

Strategic sourcing is a great idea. If an organization is pursuing strategic sourcing, it means that it is looking to improve its buying process. It is analyzing where money is being spent and with whom, and it is maximizing its resources.

The General Services Administration was founded in 1949 under the premise of strategic sourcing — to help government improve its buying processes and get more value from suppliers.

In 2005, GSA and the Treasury Department launched the Federal Strategic Sourcing Initiative in response to a memo from the Office of Management and Budget that requires all agencies to identify commodities that could be "purchased more effectively and efficiently through the application of strategic sourcing."

Those are all great ideas. And agencies have been quick to comply. Most have assigned workers to oversee the initiatives, identified purchases that would fit the strategic sourcing model, and begun implementing and executing strategic sourcing relationships and purchases.

However, in the rush to comply, the ultimate goal of strategic sourcing — to analyze the process to get more value from suppliers — seems to have gotten lost. Instead, the effort seems to have become focused on getting the lowest price, regardless of value. A low price does not always mean good value. In fact, a short-term focus on price often precludes a longer-term opportunity for value.

Example: Let's say Agency X bought 700 copiers. In its price negotiations, the agency discovered that a particular model was about to be discontinued and could be bought at a very low price. Because it was in a position to resell those copiers to other agencies, Agency X got a bulk discount and a phenomenal price.

Agency X stored the copiers in its warehouse in preparation for selling them to other agencies. But technology ages quickly, and Agency X found it could not resell the copiers. The warranty had expired while they were sitting in the warehouse. Agency X never sold the copiers and instead gave them away to customers, who traded them in for a discount on newer machines.

In the commercial world, businesses don't talk about strategic sourcing. They talk about strategic supplier management, which combines the idea behind strategic sourcing with an understanding that every organization has a network of suppliers. Through strategic supplier management, an organization analyzes its buying processes from a much broader perspective to get more value from its entire network of suppliers.

That is a much more valuable concept. In part, it forces the organization to look at the buying process as a whole and discourages too much focus on the price of individual products.

What will it take for strategic sourcing to be successful in government? First, the government must be able to describe its objectives and requirements, and it must be able to define value as more than simply the best price. Agency X got the best price on the copiers in our example, but the objective is obviously more complex than that.

Step 2 is flexibility. Things change. The government must be able to tweak its strategic sourcing relationships to marry its changing needs with industry's changing services and products. If the objective of strategic sourcing is value, then the process must be fluid enough to adapt to changing priorities and market dynamics.

As I said at the start, strategic sourcing is a great idea. It should be the government's responsibility to make strategic sourcing work as a way to manage the public's money. A more strategic, comprehensive approach to buying that focuses on value could lower the overall cost of acquisition for government and industry.