Strategic sourcing and corporate social responsibility: Aligning a healthcare organization's strategic objectives

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Highlights

  • A spend analysis framework that aligns corporate social responsibility initiatives with strategic sourcing initiatives is proposed.

  • A data driven spend analysis targets ideal strategic sourcing opportunities that also allow an organization to realize sustainability objectives.

  • The framework was tested using acquisition data from eight medical centers.

Abstract

Strategic sourcing has long been utilized by organizations to maximize budget efficiency. The process includes a spend analysis, which historically has been performed by identifying the commodities and services purchased that resulted in the greatest spend, and establishing contracts with suppliers for these items in an effort to decrease the overall price through quantity discounts. This process restricts the data used in the spend analysis process to basic transactional information, and has not considered corporate social responsibility objectives as part of the strategic sourcing process. This paper modifies an existing spend analysis process framework, and applies the framework in a case study that uses additional data points to identify opportunities that allow an organization to simultaneously achieve both strategic purchasing and social responsibility objectives. The case study uses healthcare purchasing data from eight Department of Veterans Affairs medical centers. The goal of the model generated using regression analysis in the case study is to determine the buy characteristics that are most likely to generate mandated savings within the medical centers, in conjunction with achieving sustainability goals. The extensions of the regression model were examined to determine how collaborative buyer/supplier relationships can achieve organizational strategic objectives.

Introduction

Purchasing practices are a crucial component of an organization's success, yet in the healthcare industry, practices are immature and often overlooked in a healthcare organization's strategic vision (Nachtmann and Pohl, 2009). In 2014, total healthcare expenditures in the United States exceeded $3.0 trillion (Centers for Medicare & Medicaid Services, 2015) and since 1940, the annual increase in healthcare expenditures has remained at roughly 4% per year with no indication that the rate will decrease in the future (Gibson, 1980, Newhouse, 1993, Sampson et al., 2015). Many healthcare facilities do not employ proven purchasing practices used in other industries to increase efficiency while decreasing total expenditures (Schneller and Smeltzer, 2006). One aspect of purchasing is strategic sourcing, where buyers form relationships with suppliers that result in cost savings through logistical and purchasing efficiencies. Due in part to the large number of hospitals that outsource some or all of the purchasing function (Burns and Lee, 2008, Carey and Dor, 2007, Makowski and Clauß, 2011), there is a lack of research focusing on the role of strategic sourcing of commodities in healthcare. Very few studies examine the role of acquisition in a healthcare facility's strategic vision or the use of strategic sourcing as a method to expand sustainable purchasing practices. Current healthcare literature explores sustainable practices as they relate to patient treatment, a healthcare facility's primary function (Brandão et al., 2012, Russo, 2014). Sustainability studies of efforts in industries outside of healthcare examine the effects of sustainable practices, but do not propose strategies to effectively target suppliers that allow the organization to meet sustainability initiatives, either environmental or social.

The strategic sourcing process begins by analyzing historical spend. The spend analysis is a critical tool used to identify items appropriate for strategic purchasing or leveraged purchasing, and has been used to generate cost savings for organizations of up to 25% (Pandit and Marmanis, 2008). The process begins with collecting historical spend data, sometimes from multiple sources. The data is scrubbed, classified, and analyzed to select items or services that are best suited to meet an organization's strategic purchasing goals (Limberakis, 2012). A spend analysis allows the organization to classify the types of spending and prioritize sourcing initiatives; however, even when an organization is using a framework, oftentimes organizations will ignore spend analysis data and begin strategically sourcing items based on preference (Cox, 2015).

The spend analysis process was described in detail in an Aberdeen Group whitepaper in 2004 (Aberdeen Group, 2004). Early applications of strategic sourcing encouraged companies to use the spend analysis process to identify immediate opportunities, instances where a single supplier was utilized for multiple purchases, and the potential for purchase consolidation existed (Greenfield, 2005). Some spend analyses evolved to include a compliance metric to ensure purchases were made in accordance with existing organization purchasing edicts, such as using specified contracts or suppliers (Saha, 2007). Expanding on this concept, authors from IBM described how cluster analysis could be used to not only identify non-compliance within a purchasing department, but allow managers to identify which departments and purchasing categories would provide the greatest return on investment if total compliance was observed (Chowdhary et al., 2011). In 2012, Limberakis published a trade article that provided a slightly modified version of the process described by the Aberdeen Group (2004), adding a first and last step to define the scope of the analysis and a path forward using the results of the analysis. Providers of commercial spend analysis solutions have embraced the need to measure compliance, but generally have not changed the process of analyzing spend described by the Aberdeen Group in 2004 (Maurides, 2015, ProcurePort eSourcing OnDemand, 2014).

Academic literature has not extensively examined how to optimize spend analysis, or determined if existing spend analysis processes could be changed to better accomplish organizational goals. This paper will propose a modified strategic sourcing spend analysis framework that allows an organization to align its strategic purchasing and sustainability goals. A case study utilizing the framework will be presented that uses spend data from an eight-hospital system. The purchasing data used was restricted to healthcare commodities available from multiple suppliers. The authors believe that establishing collaborative relationships with suppliers to realize strategic sourcing and sustainability goals could decrease overall spend within the logistics department while decreasing supplier risk. The research questions that this paper seeks to answer are:

  • 1.

    Can historical healthcare purchasing data be used to optimize strategic sourcing efforts and allow a facility to determine the best avenues to achieve its sustainability goals?

  • 2.

    Can the methods utilized above be used in industries other than health care?

This paper is organized as follows: A literature review will provide an overview of strategic sourcing, supplier/buyer relationships, and sustainability. The literature reviewed describes processes used outside of healthcare due to the gap that exists with respect to healthcare purchasing, strategic purchasing, or sustainable purchasing initiatives. An alternate spend analysis framework will be proposed that incorporates these two concepts, and the framework will be applied to a case study using healthcare purchasing data obtained from a group of eight medical centers.

Section snippets

Strategic purchasing defined

Strategic purchasing was introduced as a practice used to secure items crucial to an organization's daily operations where, due to the abundance of the items and the likelihood of a continued requirement, would benefit from the establishment of a centralized contract to purchase the item for an organization (Kraljic, 1983). Strategic purchasing differs from leveraged buying because price considerations may not be the primary focus of negotiators, even when large quantities of products are

Proposed framework

Much of the current strategic sourcing literature focuses on supplier selection which occurs at the end of the strategic sourcing process, and a common research goal is the design of models that will result in efficient supplier selection (Anderson and Woolley, 2002, Degraeve et al., 2000, Rosenthal et al., 1995, Sandholm et al., 2006, Zhang and Chen, 2013). Supplier evaluation models have been used to achieve cost savings while also streamlining the purchasing process (Weber et al., 1991). The

Case study

The Department of Veterans Affairs treats almost 9 million Veterans each year in more than 1700 medical treatment facilities located in the United States and its territories (Veterans Health Administration, 2014). In Fiscal Year 2013, the largest spend category attributed to the Department of Veterans Affairs was Medical, Dental, and Veterinary Equipment and Supplies, representing more than 75% of award actions in that fiscal year, with a total spend of more than $7B (General Services

Theoretical contribution

Spend analysis procedures and strategic sourcing methodologies have not changed significantly; what has changed is the type of supply or service being purchased (Hesping and Schiele, 2015). Industry is moving towards buyer/supplier relationships that provide more than transactional cost savings (Nollet et al., 2005), true partnerships that seek solutions outside of purchasing (Gelderman and Van Weele, 2003). Incorporating sustainable practices into corporate strategy is an accepted practice and

Conclusions and future research

The scope of this study was limited to identifying potential strategic purchasing opportunities that could result in collaborative relationships that enhance purchasing processes within the organization, while also allowing it to realize sustainability goals. Purchasing departments play a critical role in an organization's ability to accomplish its strategic goals, since requirements are obtained through negotiations with outside suppliers (Cooper and Ellram, 1993). Strong supplier

Amy K. Knight, Ph.D., The George Washington University. Amy Knight has 8 years of contracting experience in contracting, in both government and industry settings. She is a graduate of UNC-Chapel Hill (Biology, BA) and holds an MS in Ocean, Earth, and Atmospheric Sciences (Old Dominion University). She holds a Level III DAWIA Contracting Certification and FAC-C Level I, II, and III Contracting Certifications.

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  • Cited by (0)

    Amy K. Knight, Ph.D., The George Washington University. Amy Knight has 8 years of contracting experience in contracting, in both government and industry settings. She is a graduate of UNC-Chapel Hill (Biology, BA) and holds an MS in Ocean, Earth, and Atmospheric Sciences (Old Dominion University). She holds a Level III DAWIA Contracting Certification and FAC-C Level I, II, and III Contracting Certifications.

    Paul Blessner, Ph.D. Professorial Lecturer, The George Washington University. Paul Blessner has 30+ years of experience in Manufacturing/Test/Quality/Reliability Engineering within the computer, aerospace and defense industries. His educational background includes Electrical Engineering (B.S., University of Nebraska), Business Administration (MBA, University of Colorado-Colorado Springs), Applied Statistics (M.S., Rochester Institute of Technology), and Systems Engineering (Ph.D., George Washington University). As a certified Six Sigma Master Black Belt, he has been actively engaged as a Six Sigma practitioner, trainer, leader and implementer. He has achieved certifications as a Quality Engineer, Reliability Engineer, and Quality Manager. Currently, he is a Professorial Lecturer of Engineering Management and Systems Engineering at George Washington University.

    Bill A. Olson Ph.D. CSEP-Acq. Professorial Lecturer, The George Washington University. Bill Olson is the Leading Risk Manager for all special projects, in Huntington Ingalls Newport News Shipbuilding. He is a Certified Systems Engineering Professional and Acquisition Specialist. He earned a Bachelor's in Electronics from Chapman University (1984), a Masters in Program Management from Florida Institute of Technology (2004) and Ph.D. Systems Engineering at The George Washington University (2012). He is a Professorial Lecturer of Engineering Management and Systems Engineering, The George Washington University. Bill Olson retired from the U.S. Navy as a Master Chief Petty Officer after proudly completing 25 years of active duty service.

    Timothy D. Blackburn, Ph.D., P.E. Professorial Lecturer, The George Washington University. Tim Blackburn is a Summa Cum Laude graduate from the William States Lee College of Engineering (UNC-Charlotte) and also holds an MBA from the Kenan-Flagler School of Business (UNC-Chapel Hill). He also received a Ph.D. in Systems Engineering from The George Washington University (GWU). He is a licensed Professional Engineer, and holds a Blackbelt in Six Sigma. Currently, he is a Professorial Lecturer in Engineering Management and Systems Engineering (EMSE) at GWU, and is the North America Lead for Technical Learning and Capability at Pfizer.

    This research article is in partial fulfillment of the requirements for the Doctor of Philosophy degree at The George Washington University.

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