Strategic sourcing is a Price Based approach to supply chain management that formalizes the way information is gathered and used so that an organization can leverage its purchasing power to find the best possible values in the marketplace.

Requires analysis of what an organization buys, from whom, at what price and at what volume. Strategic sourcing differs from conventional purchasing because it places emphasis on the entire life-cycle of a product, not just its initial purchase price but the total cost of ownership or Value Analysis.

Strategic Sourcing Considerations: Baseline Commodity Council Standardization Leverage Market Analysis Increased Competition Specification Development Contract Management OR…… Give me a lever and I can move the world. Archimedes

High Low Performance The State “The lowest possible quality that I want” Suppliers “The highest possible value that you will get” Minimum High Low Performance Maximum

Performance High Low Risk High Low Best Value vs. Low Bid Contractor 1 Contractor 2 Contractor 3 Contractor 4 Contractor 1 Contractor 2 Contractor 3 Contractor 4 Performance High Low Risk High Low Best Value - PIPS Low Bid

High I. Price Based II. Value Based IV. Unstable Market III. Negotiated-Bid Specifications, standards and qualification based Management & Inspection Best Value (Performance and price measurements) Quality control Perceived Competition Performance Low High Owner selects vendor Negotiates with vendor Vendor performs Contractor minimizes risk Client minimizes risk Minimum requirements

What is Performance Based Contracting? In the performance-based approach, an agency says what problem needs to be solved and allows contractors to make offers detailing their proposed solutions. According to:.com Performance Information Procurement System (PIPS)

Oklahoma Best Value Project Information # of Best-Value Procurements17 Estimated Value of Best-Value Procurements $ 94,477,096 Protest Success Rate (# of protest won / # of protests)3/3 # of Different Services12 % Where Identified Best-Value was Lowest Cost92% Project Performance # of Completed Projects9 Average Customer Satisfaction9.4 Cost Savings $ 35,217,628 % On-time100% % On-budget100%

Performance Based - PIPS Strategic Sourcing Relies on client specifications Requires client expertise Utilizes negotiations Extensive market research Price typically heavily weighted Dependent on clear communications Low price may trump expertise Requires contract management Client minimizes risk Purchasing Process Spectrum Supplier generated specifications Client states what, supplier states how Identifies expert supplier Cost controlled by increased efficiency Research to identify expert suppliers Higher prices can be justified Minimized communications Experts can gain an advantage Supplier managed Extensive supplier pre-planning Contractor minimizes risk

13 Price Based Scope BV PIPS Scope Priced Based Scope vs. Best Value Scope

Performance Based - PIPS Price Based - Strategic Sourcing Supplier scope submittals will include a certain amount of risk (internal and external) The amount of risk will generally be estimated on the high side Risk equals cost Negotiations utilized to reduce the cost of risk within proposal Experts have no internal risk Experts can identify external risk (outside of supplier control) Scope is priced assuming no risk Should external risk occur it is the clients responsibility Risk is tracked within the Weekly Risk Report High Risk AssumedNo Risk Assumed

15 Price Based Scope PIPS Scope Price Based Proposals Include Risks:

What does the PIPS approach offer? Identifies Suppliers who can see the entire project through completion Focus on what is needed rather than how it will be accomplished Process efficiencies provide win/win environment Allows identification of all associated risks and provides for a comprehensive mitigation plan to address each risk Suppliers with superior expertise can differentiate themselves Shifts contract management supplier to enable profit maximization Relies on dominant information to minimize decision making

It is simple It is accurate It is measurable It stands out It minimizes decision making It predicts the future outcome It is clearly understandable among all parties

Roof material is high performing: – Tensile strength is 800 PSI – Elongation is 300% – Tear strength is 400 lbs – Xenon testing: 10,000 hrs Roof material has been installed and is performing: – 65 Customer Responses – Average Roof Age: 25 years – Percent Not Leaking: 99% – Customer Satisfaction: 9.8 / 10 Non-Dominant Dominant Non-Dominant Non-Dominant Dominant information is easily understood by everyone and minimizes decision making!

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Project Capability (PC) – Claims and verifiable performance metrics Risk Assessment (RA) – Risks and Mitigation plan Value Added (VA) – Claims and verifiable performance metrics Two Pages The 6 page responses to PIPS projects can be quickly created and evaluated!

Sample Project Requirements New laboratory construction Intensive Mechanical systems, clean room environment Fast track project University campus

Project Capability Submittal Claim: Best project manager in company, does only clean room projects, best in the Midwest area Verifiable performance metrics: 1.Performance history for last 10 years 2.20 clean room projects completed 3.Average scope $50M 4.Customer satisfaction 9.5 / 10 5.Cost deviation.1% 6.Time deviation 1%

Sample Risk Assessment Risk: Concrete Escalation RA Plan 2 The cost of concrete has been rising drastically. Since this project requires a substantial amount concrete, cost is a risk. To minimize this risk, we have and signed a contract with a local concrete manufacturer to prevent any increase in cost during the duration of this project. RA Plan 1 The owner can be assured all risks associated with material escalations will be eliminated because we offer the benefit of an experienced project team that includes the most detailed, prequalified and extensive list of subcontractors and suppliers, from around the world. MARKETING

Claim: Vendor will track all building major components for the first year including energy consumption, and give client recommendations to extend life of the building Verifiable performance metrics: 1.Last five buildings, vendor has done this. 2.Performance metrics: – 9.5 customer satisfaction – $40M scope – Customer satisfaction rating of 10 – Cost deviation rate 1%

2 Performance Information Procurement System Vendor is an Expert Vendor expertise is validated Filter 1 PPI Filter 2 P.C. R.A. V.A. Cost Filter 3 Interview Filter 4 Prioritize BV Filter 5 Dominance Check CLARIFICATION -Vendor clarifies proposal -Client concerns addressed -Detailed schedule -Risk activities -Risk Mitigation Plan -Performance Metrics -Weekly Risk Report Developed AWARD Risk Management Plan Quality Control Usage Reports Weekly Risk Report Quality Assurance

Are we getting what we expected? Are customers pleased with product or service? Are established milestones being met? Are prices consistent with submitted bid? Is quality delivered as promised? Are delivery requirements being met? Is supplier reporting performance? Price Based - Strategic Sourcing Performance Based - PIPS Determined by: Pre-determined metrics monitored by suppler Contract management monitored by client

Strategic Sourcing Performance Based - PIPS Contract management:* Requires contract manager Relies on written contract Physical audits Weekly Risk Reports: Supplier managed Relies on performance metrics Transparency drives accountability Risk Management Plan (RPM) *Any activity after award is considered a contract management function. i.e.: Termination for default if a contract management function.

So…when do I use one or the other??? Strategic Sourcing Performance Based - PIPS Commodity based products or services Simple specifications easily communicated Extensive staff expertise Small risk of protest Little perceived supplier expertise Small dollar amount High degree of complexity Historically prone to protest Little staff expertise Politically sensitive