Strategic Commodity Management: Lessons From A Major Implementation
Robert H. Buckenmayer
Robert H. Buckenmayer, Managing Partner QPA L.L.C., Montville, NJ 07045, 973/335-2725, email@example.com.
Charles R. Noland
Charles R. Noland, Director of Operations and IT Kaiser Permanente, Oakland, CA 94612, 510/267-2501, Charles.Noland@kp.org
83rd Annual International Conference Proceedings - 1998
Abstract. Two and a half years ago Kaiser Permanente decided to leverage its $1.5 billion goods and services spend on a national level for the first time in its 50-year history. A new central purchasing organization, a commodity management process, new tools and a common language, and a challenging set of objectives were all put into place to support the changes. The goal was a 10% reduction in spend over the first two years, without impacting the quality of goods and services. This presentation will share with you the valuable lessons learned while achieving that goal.
Kaiser Permanente. Kaiser Permanente is the nation's largest HMO with $15 billion in revenue and 8.9 million covered lives. Kaiser Permanente is a complex organization consisting of the Health Plan, Hospitals and Group Health professionals. Kaiser Permanente has historically forged its success on independent, local decision making. This local focus traditionally included supply decisions; and it is that which represents both the opportunity and the challenge. Purchasing became recognized as an opportunity and a national strategic business issue in 1995. A team of senior managers developed a way to extend supply decisions and negotiations to the national level and to all of the supplies it could practically "nationalize". The challenge would be to get the traditional local decision-makers to comply.
The National Purchasing Organization. By February of 1996 Kaiser had appointed a Vice President to lead the newly established National Purchasing Organization (NPO), along with a governance structure for national supply decisions. At the head of the governance structure, the National Products Council is made up of Materials Managers, Physicians, and nurses, and the Vice President, NPO. Over the course of months, the NPO was staffed with 24 purchasing professionals and supporting analysts. The NPO accepted the objective of saving $100 million of its $1.4 billion spend and accepted responsibility across a broad and complex group of commodities ranging from office paper to pace makers to endoscopes, and from PCs to long distance telephone carriers to software. The complexity of the Kaiser Permanente spend brought with it a complexity of internal customers, from administrative assistants to chiefs of surgical specialties and from nurses to Information Technology (IT) Professionals. Because of the variety of needs and the history of decentralized decision making, the National Products Council set up teams in 40 commodity areas, with NPO commodity manager and specialists serving as team leaders or facilitators. The idea was to put the creation of national standards into the hands of the internal customers and their representatives. By doing so the hope was that the best decisions would be made and that compliance would follow.
The Process and Tools. In order to get teams made up of decision makers from various regions across the country to address the opportunity to create and utilize new national standards, the NPO adopted and put into action a common process, common purchasing and team tools and a common language. Then, in order to get these practices launched across 40 teams as well as within Region Materials departments, Kaiser Permanente invested in an ambitious education program. Firstly, NPO members were exposed to a total of 9 days of commodity management process, team leadership and facilitation skills. The National Products Council members then decided to invest 2 1/2 days themselves so that they could better sponsor and direct the work being done under their leadership. And then, as each team began its work, the team kick-off included two days of training in process and tools. From that point, the NPO leader/facilitator took over the role of managing the team through the process.
The process used for each commodity is a combination of traditional purchasing practice, formal strategy development, and project management. The steps in the process follow the outline:
- Analyze the opportunity
- Establish the project
- Gather information
- Do strategic analysis
- Develop strategy
- Plan implementation
- Implement contract
- Manage suppliers
Many of the tools put into use in this process you will be familiar with, such as cost modeling and supply market analysis. However some tools are not in the traditional Purchasing toolbox. They include, for example:
- Portfolio Analysis, the analysis of the strategic balance of power with the supply base and the implication for strategy.
- Business Requirements Analysis, the thorough analysis and expression of the needs of the business, and the use of those business requirements as decision criteria.
- A variety of team tools, from conflict management to team decision making.
The Results. All in all the first two years have been a great success, out-stripping the original targets by $20 million in savings. And this was accomplished under less than ideal conditions: during the first four months of the challenge there were virtually no people in place; and team training did not occur until 5 months later.
Some things went as planned. Some teams and individuals did a good job of getting buy-in, making decisions, and saving money on target. Some things went better than planned. There was success in leveraging the supply base for quick-win savings, saving the first $50 million with almost no change in suppliers.
Some things however did not go totally as planned. What follows are the observations and bits of wisdom that those of us involved have obtained along the way, both from the successes and the problems that needed to be solved along the way.
10 Key Lessons.
- Your power in the marketplace is a function of how well you manage your "specification". Things that seem difficult to do because of "external forces" may often be a reflection our own internal dynamics. As a great cartoonist has expressed, "We have met the enemy, and he is us." Having leverage in the marketplace is largely a function of how you specify your product and how you approach the market. Suppliers know this as well we do, and continually and expertly reduce the leverage by influencing the specification for what is required. Not only do they exert influence on the technical specifications, but also through "indispensable" service, value perception, and branding. The buyer who understands this dynamic has the key to success.
- Well-facilitated cross-functional teams with good process are important to creating and implementing strategies, especially on internally difficult commodities. The benefit of such teams results from the direct involvement of the internal customer and the technical experts in the decision making process. However, the team approach has its drawbacks: it is resource intensive and it tends to be slower on the front end (though they will ultimately enhance the success of implementation). Therefore care should be taken in the scoping of opportunity to be sure that teams are not the automatic method of approaching commodity strategy. While its is often the case that procurement work falls short because of a lack of multi-functional involvement, teams are sometimes not necessary.
- Focus on the "quick wins". Because teams are slower and consume resource, they always do better when they devote extra effort to generating early returns. And in any case, team or no team, commodities which have not have had recent attention will almost always provide a good amount of cost savings if they are approached with as quick wins.
- Plan the overall attack. What will you do first? Which gets the priority for resource? Because of the impact of external and internal difficulties, and because the spend amount varies, early analysis of opportunities as a portfolio will assure the use of the right approach with the right priority. For example:
- Commodities that are easy both internally and externally should be attacked with higher priority and low "fanfare". Just do it, a quick win.
- Commodities difficult internally but easy externally are best for early team formation.
- Internally easy but externally difficult commodities require a 2-phased approach, quick win and strategic.
- Those commodities are difficult on both dimensions require high level strategic teams.
- Teams work best with strong sponsorship, but sponsors need to be personally clear on all of the business goals, and on their role as sponsor. Teams need to be accountable as a group, and there needs to be a focus of that accountability. If they are merely accountable as individuals to their own functions, then the team is really just a work group and results are likely to be sub-optimized. The sponsor is that person who can provide goals and resources, as well as be an advocate and knock down barriers.
- You can't effectively negotiate a "partnership" from a position of weakness. The management of supplier relationships must go through a certain sequence that can be seen as managing power. Leverage should be exercised before a partnership is negotiated.
- Be driven by the customer and business needs, (as opposed to the customer wants). This will result in the best combination compliance, quality, and low cost. You have to separate the needs from the wants. "Wants" can be for special circuitry, personal service, or brand "X". The "needs", however, might be for safety, ready availability, and reliable quality. The needs obviously result in a different sort of purchasing approach than the wants.
- Segment both needs and suppliers. Business and internal customer needs will best be addressed if they are carefully segmented. One "size" usually does not "fit all". Good segmentation of needs (and suppliers) will often get optimal results with relatively few "sizes". For example, the fastest or the highest quality may only be needed for a relatively small portion of the overall requirement. It is OK to buy two different types if that is what is really needed.
- Formally check for learnings as you go, and adjust accordingly. After a year into the process, we surveyed the teams for what had worked well and what still needed work. We then took the time and invested in the expense to bring the team leaders and the NPO facilitators all together to share in the results of the survey and plan the changes that the learnings would suggest.
- Let the internal customer in on your process. We found that the customers resisted what was being done until they participated in the training. Then they better understood how they were being manipulated by the suppliers and saw the resulting cost to the organization. Once they were aware they became zealous supporters of change.
Key Success Factors. Based on our experience success has had a lot to do with the following:
- Having a vision. Knowing where you want to be years hence is a powerful motivator toward making the right strategic moves, even when they seem tough in the short run.
- Expecting a breakthrough and not being risk averse. Going for small incremental results is easy and safe. But you will get what you expect, and no more. Exceptional results are no accident.
- Having fundamental data available. Unless you know what you spend, with whom, on what, and where, you will not have much of an action plan.
- Realizing that different approaches and different strategies are required, and knowing when to use which. This is the key to good Purchasing.
- Having a leverage mentality. If you are easy on the supply base you will be just that: "easy".
- Having a results focus. Get on with it.
- Expecting personal accountability. In the end, the people are what drive results. They need to care about what they are doing.
- Providing the authority to act. Don't let a team become a committee who is reduced to offering hopeful recommendations. They will only really work well if they are decision-makers.
- Customers who know that their needs are understood. When they know that you understand, you will be welcomed to provide the sourcing help.
- Sponsor expectations. Even at the project level, your success will be limited to what you expect.
Summary. To summarize, Kaiser Permanente is 2 1/2 years into the National Purchasing initiative and the savings have been rewarding. The success is largely due to taking a strategic approach, and involving the customer in the sourcing process. There continues to be learning, and plenty of benefit for the taking.
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