Last week, the Wall Street Journal and USA Today featured terrifying reports about the state of medical records today. WSJ highlighted the incompetence and abuse by insurance companies, hospitals and the federal government, who have exposed private information about hundreds of thousands of patients in recent months. The incidents ranged from inadvertent posting of records on the web to a New York hospital admissions specialist caught selling 2,000 patient ID records (we still don’t know why, to whom and for how much $).

USA Today examined the other side of the coin, with a gut wrenching story of the challenges a mother went through trying to gain access to her deceased son’s medical records. Records, which had they been given to her before the statute of limitations run out, would have helped her malpractice case.

There’s another layer of potential complications that need to be factored into the equation; the outsourcing of records and services to offshore providers. The underlying question is a scary one at a time of identity theft and denied insurance coverage. Who owns and protects patient records - the patient OR the medical facility that pays the bills?

Low cost country sourcing has become standard practice in most any corporation, global or otherwise. And it seems that the medical services arena is looking to take advantage of these ‘perceived’ cost savings as well. The problem is, there’s much more at stake for the doctors and patients. This cannot simply be a question of cost savings and sourcing efficiency - patient identity, the ability to receive medical coverage and many other factors are at risk. And right now, there is little clarity on the accountability and enforcement of stateside regulations to allay these concerns.

For example, there have been a handful of stories in the past few years about the outsourcing of radiologists’ jobs to India. The idea is simple enough: x-rays, MRIs and such can be easily sent electronically overseas and analyzed by individuals ‘qualified’ to conduct such analysis for less cost (although The Economist’s recent report on the ~50% of India’s “doctors” who are actually quacks with no medical training or credentials does not inspire confidence). A few questions would then be: Who determines qualification standards, how are they enforced, who’s accountable for accurate analysis, particularly if medical procedures are conducted based on these analyses (think breast cancer diagnosis, blood clots, etc.)?

Perhaps this is a legitimate alternative to drive down costs, if certain safeguards are firmly in place. But in a time of identity theft, data leaks and the like, is it worth the risk? In other words, will this upfront savings end up costing more in the end in the form of legal disputes, public relations issues, breaches in patient-doctor confidentiality, and possible decline in patient care? The simple fact is, the more often data is passed from one entity to the next, the higher the likelihood of leaks or miscommunication. With the potential for providers to save on short term costs are we (the patients) giving up too much? Would regulators step in to protect records sent offshore? Even if they do, how much power can they exert abroad, where the work and records may actually reside? What recourse do patients have in attempting to obtain their medical records from these offshore companies that they likely don’t even know played a critical role in their care in the first place?

These are not easy questions to answer. But, it does serve as an example of the many implications that can stem from a seemingly simple cost-cutting measure. In the end, the decision to outsource has to make sense from the perspective of all stakeholders that receive or administer the service. Otherwise, the diagnosis, prescriptions and even amputations could be all wrong.

Crystal Liles is a Senior Consultant for Sourcing Strategy in Ariba’s Spend Management Services group. Prior to joining Ariba, Crystal served as Director of Strategic Analysis for ChoicePoint.

As Supply Excellence’s Managing Editor (which is a euphemism for “Principal Cat Herder”), I would be a remiss if I didn’t point out that the blogging efforts by many of our contributors are a byproduct of their ‘day jobs.’ These folks spend their days digging deep into their respective categories to uncover the opportunities and risks that impact buying decisions, global markets and supply chains. Their findings are published quarterly in SupplyWatch, a collection of category/commodity analyses, LCCS country spotlights and supplier profiles.

If you’ve found the posts from our contributors insightful, I invite you to take a look at some of their latest SupplyWatch articles:

• Rachel Rutkoski - Transportation & Logistics: Hot on the heels of her Truckload and Less-Than-Truckload posts (which pointed out opportunities for savings and improved contract terms for shippers), Rachel’s Transportation & Logistics Core Category Detail dives further into the excess capacity brought on by the soft economy. The most important point, which she touched on briefly in the blog, is that it’s wise to look at freight contracts more holistically, rather than simply trying to cut short terms rates. If you can lock in better terms for accessorial charges (which have risen a staggering 900% in the last 10 years!), the savings over the life of the contract could be substantial.
• Mike Petro - Metals: In a 2 part post, Mike broke down the real root causes of the steel price surge (Part 1 & Part 2). Taking that analysis quite a bit further, he and the rest of the metals team discuss strategies for dealing with the challenging market. The case study of a medical instruments manufacturer saving 33% on syringe manufacturing by outsourcing it to a specialized partnership of suppliers is a great example of spend management savings in spite of rising raw material costs.
• Bob Zieger - Plastics, Rubber & Raw Materials: Recently Bob explained the diminishing dollar’s impact on oil prices…and why that means high prices for some time to come. Now he and the Plastics, Rubber & Raw Materials team dig further into how decreasing demand in some categories and the credit crunch further complicate the pricing equation.

Let’s also do a quick community poll: Which article in this quarter’s SupplyWatch best helps you address a current challenge in your supply chain? Leave your answers, questions or observations in the Comment section of this post and I’ll make sure they find their way to the right Category Manager’s desk.

Justin Fogarty is Managing Editor of Ariba’s Supply Excellence blog. He can be reached for story ideas, feedback or questions at jfogarty[at]ariba[dot]com.

In the Cinco De Mayo issue of Fortune, the magazine presents this year’s Fortune 500, their annual list of the 500 largest United States based corporations. As you might expect, it’s a treasure trove of interesting facts and highlights some very different approaches to the challenges and opportunities of globalization.

Page 225 has a great chart showing how globalization has impacted the revenue of US companies. Looking at 32 companies with greater than $50 billion in revenue that report non-US revenue, Fortune showed that 9, Exxon, HP, Dow, Chevron, IBM, Proctor & Gamble, American International Group, Ford Motor and United Technologies get more than 50% of their revenue outside the US. ExxonMobile tops the list with 72.2% of revenue coming from outside the 50 states. General Electric is on the brink of tipping the scales with 49% of revenue coming from outside the US.

The issue also highlighted 3 supply management and market strategies to respond to globalization:

• Boeing takes us inside the factories around the globe to show how suppliers are working together to produce systems that will ultimately allow the company to assemble a carbon-fiber 787 Dreamliner in just 3 days versus the 4 months they require to manufacture a typical aircraft. Good thing too, with a backlog of 892 planes, the Dreamliner is more than a year behind schedule because of some of the trials Boeing and its suppliers have suffered in perfecting the system (our friend Jason Busch at SpendMatters has been keeping us up to date on this).
• Ford is working to standardize its design for the Fiesta, their 3rd attempt to produce a “global” car. In perhaps its most notorious attempt to produce a global product, the 1981 Ford Escort, the US and European versions ended up with exactly 2 parts in common. While cost plays a significant role in this effort - they’ve reduced the number of seat structures from 28 to 2 - the effort seems to be driven as much by a desire to further define the Ford brand and follow in the footsteps of companies like Toyota and BMW, who are able to offer extremely similar autos in every corner of the globe.
• While Ford is focused on standardization, McDonald’s is taking a very different approach. Outside of the US, they’re localizing the menu, packaging and even store decor. Some of the best ideas are then shipped back to the US - most notably it’s Consumer Reports topping coffee. This approach has made Australia the company’s global coffee lab and led to products that you won’t find on any US menu, including the Big Tasty (a burger cooked up in a German test kitchen which is too large for the US drive-thru-centric market), the Croque McDo (a French toasted ham and swiss) and the Maharaja Mac in India.

While the jury is still out on the ultimate success of these efforts, they show that there is no one size fits all approach to taking advantage of global opportunity.

Justin Sullivan is a Senior Manager in Ariba’s Spend Management Services Group. In addition to his strategic sourcing and technology expertise, Justin worked for a number of years in the While House Office of Management and Budget (OMB), where he analyzed the fiscal implications of Federal policy.

When we last left our daring trio of Spend Management Town Hall panelists, they were debating the best ways to get a handle on services spend in the ever tightening global economy. The esteemed panel, which included the CPOs from both Kellogg’s and Whirlpool, had turned their sites on services spending to counter the double-digit inflation striking the core commodities their teams buy.

Another key strategy on the panelists minds: global trade. As is often the case these days when discussing low-cost country sourcing (LCCS) or global trade, the panelists spent most of the time discussing their China strategy. While the debate ranged all over the map — from rising labor prices to the emerging consumer class — three core themes emerged for Supply Excellence readers to consider when crafting a global sourcing plan.

Buy where you make - With the dollar’s demise and oil and transportation costs skyrocketing, Kellogg’s and Whirlpool are both re-evaluating their global sourcing strategies. And nearshoring is once-again becoming more prevalent. Factor in an increasingly skilled workforce in our neighbors to the South and Whirlpool SVP of Global Strategic Sourcing, Mark Brown said, “it’s kind of a jump ball between Mexico [and China] to service the US market.”

Alistair Hirst, Kellogg’s VP of Global Procurement, stressed the importance of sourcing “as locally as we can,” albeit for different reasons: to hold down transportation and tariff costs, satisfy local content needs, and get products to market faster. After all, consumers like their Corn Flakes as fresh as possible.

Michigan State University Professor Joe Sandor noted that the cereal king was following up the ”buy where you make” philosophy that has been so successful for leading Japanese automotive manufacturers, such as Honda or Toyota.

The panelists noted a number of new dynamics when sourcing South of the Border, including banditos and local government corruption. But, when weighted against the rising costs of doing business in China, the lower transport and border crossing cost, Mexican truckers newfound ability to transport deep in the US, and a host of other factors are making nearshoring a more attractive proposition for many companies.

You can’t turn back the clock - No great shock that our panel weighed in on the side of free trade. In the words of Alistair Hirst, “we certainly encourage free trade” and “think [renegotiating NAFTA] would be a huge mistake.” Professor Sandor seemed to agree, yet took a more human angle in admitting “clearly global trade hurts some people, but the fact is it helps more than it hurts.”

In an election year at a time of economic uncertainty and populist (sometimes borderline jingoistic) rhetoric coming from both sides of the aisle, how the US deals with labor and trade issues is somewhat up in the air. So, Mark Brown’s advice that “maybe the strategy is, you better be flexible and you better be able to react quickly because our ability to predict is somewhat limited” was the smartest tip the audience heard that night.

Predicting the future - And speaking of looking ahead, all three panelists were eager to point out that anticipating what’s next is the multi-million dollar question for supply chain professionals.

So, where is the next China? For Whirlpool, the answer is currently Vietnam, where a lot of their supply chain has moved. But Mark Brown wasn’t quite willing to say where their supply chain may shift after that.

On the other side of the coin is emerging markets. Again, China is strong possibility, which as Professor Sandor said is “not just a place for cheap labor, it’s the fastest growing market for end products.” No real shock there. But luckily, Kellogg’s Alistair projected that “Russia’s going to be a huge developing market for the future.” (Although Mr. Hirst may want to check his long-term demographic trends. Russia’s population continues to decline. So the consumer boom there may be short live. Literally.)

Still more Town Hall recaps to come as we look at the panel’s discussions of Environmental & Social Responsibility and Risk Management next week. In the mean time, listen to the full podcast of the Global Trade discussion. And download 10 Tips for dealing with these trends in Global Trade so you can start taking action today.

Business Week’s Bangalore Tigers blog had a very interesting post this week on how one Indian BPO firm is using sophisticated algorithms to measure what they call a “confusion index”, which identifies customer support callers who are likely to be converted to buyers. Those hot prospects are then routed to highly skilled reps who are trained to upsell them on the spot. It’s a twist on an interesting trend we’ve seen more and more of lately - hybrid support routing processes.

In a hybrid model, the easy calls (“Is the computer plugged in?”) are handled by a Level 1 or 2 group, while more complex questions are escalated to more highly skilled Level 3 reps. Often times, the Level 1 and 2 employees are located in low cost countries, where highly scripted calls can be handled with ease and far less expense. On the other hand, the Level 3 folks might be located on US shores, where their higher costs are justified by their experience, customer service skills and efficiency at solving support issues. In theory, it sounds like a great process, but there are still issues to consider before jumping into the hybrid model with both feet.

The most important question to ask yourself is, who are your customers. If they are sophisticated, tech savvy users the risk may not outweigh the cost savings.

We all know the MTV generations despise waiting. So although their escalation time to Level 3 support for say a wireless router that’s not working properly may not be a great deal of time, when that Level 3 expert can diagnose the issue quickly, the customer comes away angry that she had to answer a scripted laundry list of silly questions. In other words, if your customer feels they know more about the products you’re selling than your first x layers of customer service reps did…you have a problem.

Crystal Liles is a Senior Consultant for Sourcing Strategy in Ariba’s Spend Management Services group. Prior to joining Ariba, Crystal served as Director of Strategic Analysis for ChoicePoint.

The American Chamber of Commerce in China released it’s annual white paper on the state of American business in China and it seems to back up a lot of what we’ve all been hearing lately; the cost of doing business in China is increasing. With 2/3 of US businesses claiming rising labor costs and other inputs are chipping away at China’s competitiveness, it’s no wonder so many companies are reevaluating their low cost country sourcing (LCCS) strategies. For example at the recent Spend Management Town Hall, Whirlpool’s SVP of Global Strategic Sourcing, Mark Brown, said “it’s a jump ball between Mexico [and China] to service the US market” (mp3 available here).

Lower labor costs, followed by access to alternative suppliers and localization strategies for local overseas manufacturing, are the main sources of motivation behind LCCS strategies. However currency fluctuations, extended supply chains, supplier capacity and product quality concerns are critical risk factors that must be managed in any LCCS strategy.

Best in class companies are approaching up to 40% of their direct material spend being sourced in LCCs with an average cost savings near 20%. So there’s certainly still savings to be had, but not without clearly defined goals and strategies. In my experience, these 10 components are critical to ensure your LCCS strategy keeps both your costs and risk low:

• Have a LCCS strategy - Seems obvious…but you’d be surprised. Invest in an analysis of your spend to determine the best country fit by category, realistic cost savings targets and organization requirements to manage your program.
• Total Cost of Ownership - Thoroughly test your savings assumptions based on a TCO framework that includes currency changes, all logistics costs including emergency freight requirements, extended working capital requirements, etc.
• Supplier qualification - Thoroughly prequalify new LCC suppliers, including site visits, and ask yourself what type of supplier you are willing to work with.
• Invest in supplier implementation resources - On the ground, technical sourcing teams will work with suppliers to make sure your identified sourcing savings really stick to your bottom line.
• Low cost may be close to home - Not all categories should be sourced overseas - think near shore (Mexico, CEE)
• Supplier development programs - Work with your suppliers overseas to explore mutually beneficial ways tot take waste out of their production process. These suppliers are typically very receptive to your expertise.
• In country audit and testing - Don’t discover quality surprises at your loading dock. Test your shipments in the LCC country of origin.
• Leverage 3rd parties overseas - Don’t try this all yourself. 3rd party specialists exist to assist you with LCC strategies as well as supplier research, qualification, implementation and development.
• IP - Protect your intellectual property by sourcing sensitive components and assemblies from different suppliers. Don’t rely on the rule of law to protect against potential IP theft.
• Be realistic - LCCS is a journey and it takes time to do it right. There are few quick wins that truly stick to the bottom line, however a diligent approach will permanently restructure your cost base.

David Morgenstern is a Managing Director in Ariba’s Spend Management Services group with extensive experience in establishing strategic sourcing and low cost country sourcing programs. Since joining the company in 1999, David has developed Ariba’s global sourcing practices in Europe, Asia and Canada, and has served the private equity, manufacturing, automotive, consumer and public sectors. David has spent over 11 years working overseas, primarily in Asia, and holds a MBA from INSEAD. David currently leads Ariba’s global private equity and diversified manufacturing practices.

Last week, we looked at the driving forces behind rising steel prices in the US: surging raw materials, a weak dollar and global consolidation. Those are the Big 3, but there are other long term forces at work here, including greater vertical integration and steel executives with finance (rather than operations) backgrounds.

Global mills are doing a much better job at controlling the global steel price by becoming more vertically integrated. Large integrated mills (which make steel from coke, iron ore, etc in large blast furnaces) are extensively acquiring global mines to better sure up their supply chain of steel-making raw materials. And mini-mills (those smaller, more nimble mills predominantly making steel by melting down scrap steel in electric arc furnaces) are now acquiring scrap dealers in an attempt to better control their raw materials supply and pricing volatility.

This shift towards integration is no coincidence. It’s brought about largely by a new crop of executive leadership in the industry that came from finance/accounting backgrounds rather than operations (case in point - US Steel CEO John Suma). The number crunchers have worked hard to get a handle on steel’s historically rocky supply/demand. Their intentional limiting of supply has had a stabilizing effect, but it’s also contributed to relative scarcity and price hikes.

The reality is, steel suppliers are getting smarter. Market trends coupled with their consolidation, management of supply, and overall approach towards the bottom line have them in the driver’s seat right now on price. That’s not to say there aren’t opportunities to better manage your spend on steel. But, you’ll certainly have to do your homework.

Mike Petro is the Senior Category Manager for Metals in Ariba’s Global Sourcing Organization. Previously, Mike analyzed supply chain options and competitive pricing for US Steel.

A lot of ink has been spilled in attempts to diagnose the recent run up in steel prices. Purchasing.com recently put the blame squarely on the raw materials cost push and strong global demand. Certainly raw material factors are still the primary contributor to the sharp rise in steel prices (iron ore costs up 65% year over year, coking coal costs tripling, scrap prices jumping, high energy costs, transportation vessel shortages, freight fuel charges, etc.), but I have to take issue with the idea that global demand is playing such a pivotal role. Instead, I would argue that the other primary factors influencing the run in US prices are:

1. The weak dollar’s effect on steel imports
2. Global consolidation in the industry

The weak dollar and resulting drop in imported steel outweigh the impacts of global demand. In fact while demand in many US industries is high, the contraction in automotive, housing and appliance sectors is keeping the overall US demand in check. Unlike the period of 2004-2005, when steel-making costs jumped AND demand spiked, this market is marked by high steel-making costs and moderate global demand. The big difference now is that domestic steel mills have been able to charge what they want due to a lack of cheaper-priced imports. In other words, the weak dollar has put the brakes on steel imports.

Global consolidation in the industry is also playing a significant part. In the past, mills stayed within their home regions whenever acquisitions were made (Asian mills buying Asian mills, US mills buying US mills, etc.). Today, global mills are very often acquiring mills in different parts of the world.

Case in point is Mittal Arcelor’s recent success in acquiring shares in Chinese mills, which is a first for non-Chinese organizations. As other low-cost-country regions start to expand their steel production (particularly in Russia, Eastern Europe and Latin American countries like Brazil), I expect the global consolidation pace to increase. Remember, all these increases in steel prices are just building up the cash reserves for global mills to go out and acquire new capacity.

So short of a drop in raw material costs, a stronger dollar or further drop in demand (which I’m not sure many of us would wish on the US economy right now), steel buyers are at the mercy of the market forces and a consolidated supply chain for the foreseeable future. There are other strategic and process changes in the mills themselves, particularly around vertical integration, that are playing a role. But, I plan to dive into that further in a future post as well as the upcoming issue of Supply Watch.

Mike Petro is the Senior Category Manager for Metals at Ariba. Prior to that, Mike analyzed supply chain options and competitive pricing for US Steel.

With the outcome of what some are calling “the most important U.S. Presidential race ever” still uncertain, many business executives are fretting over the economic, tax, and trade policies of the eventual President No. 44.

Yet, savvy procurement and supply management professionals aren’t waiting for the election outcome. They know that, regardless of who wins the White House, they must devise strategies and tactics to overcome the prevailing issues of the day: global economic malaise, new pressures (and opportunities) of globalization, risk management, and sustainability.

This is the premise behind the upcoming Spend Management Town Hall at Michigan State University (MSU) next Monday night. The first in a series of debates among industry thought leaders and top procurement, supply chain, and finance executives, the MSU Town Hall will showcase how leading companies are applying spend management techniques and approaches to address the leading business and socio-economic issues of the day. Featured panelists at this inaugural debate include:

• Mark Brown, Senior Vice President of Global Strategic Sourcing at Whirlpool
• Alistair Hirst, Vice President of Global Procurement at The Kellogg Company
• Professor Joe Sandor, Hoagland-Metzler Endowed Professor of Supply Management and Supply Chain Management at Michigan State University

I have the enviable honor of moderating this illustrious panel. And, unlike Tim Russert, I plan on pulling no punches. I will get right to the most pressing supply management questions:

• How has the declining U.S. dollar impacted your sourcing and supplier strategies?
• How have rising labor, commodities, and shipping costs caused you to rethink your China sourcing strategy?
• How are you assessing quality, performance, and supply risk in your global supply chain?
• Is the push for environmentally responsible supply a long-term business strategy, or just a passing fad?
• What can procurement do to hold down healthcare and other complex services costs?
• …and more.

I am pleased to extend a special invitation for Supply Excellence readers to attend what I’m certain will shape up as a lively debate. You can register or get more information on the Spend Management Town Hall here.

Can’t attend? Use the comments section of this post to submit a question you’d like me to pose to the panel. I will be sure to report back on the answers and approaches these leading supply management organizations are taking to overcome the challenges of today’s global economy.

Last week, Industry Week highlighted the fact that 2/3rds of North American organizations have limited knowledge of the operational impacts of REACH (Registration, Evaluation and Authorization of CHemicals). REACH is European Union legislation that aims to put more responsibility on industry to manage the health and environmental risks of industrial chemicals.

I can’t comment on my personal readiness for REACH. But I do know that the 1st decade of the 21st century may be remembered for a tightening regulatory environment that has increased the complexity of doing business for multi-national organizations, creating plenty of SG&A jobs, as well as opportunities for consultants, auditors and quite frankly, spend management software and service providers. Whether you believe these regulations to be altruistic or onerous, one can’t deny that keeping abreast of and compliant with the rules of play in the global economy is a major challenge.

In 2002, the United States responded to the Enron and Worldcom corporate governance scandals by enacting Sarbanes Oxley, which essentially requires companies to demonstrate that they have control over their expenditures, and holds certain corporate officers criminally liable for the accuracy of financial statements. “SOX” quickly spawned numerous copycats including Canada, Japan, France, Italy and others in just about every corner of the globe.

Accompanying SOX was the rise of electronic invoicing, which triggered mixed reactions, ranging from extensive new regulations to complete silence to complex requirements for continued physical storage of paper invoices. In the EU for example, companies must comply with a matrix of not only EU guidelines, but also country-by-country rules that frustrate procurement and finance departments.

A cynical person might suggest that even the current wave of “green” activity, including REACH, is not actually triggered by shared recognition of an impending environmental problem, but by an uneasy convergence of increased demand for “green” products to drive revenue growth, increased cost of waste due to competition for energy and raw materials, and the desire to avoid the expected cost of future regulation. And I should also mention recent food and product safety incidents, which have some calling for the government to protect us from poor sourcing decisions and lax supplier performance management.

The tightening regulatory environment looks like it will continue. Last week’s collapse of Bear Stearns and the Federal Reserve’s intervention seem to have some investment banks even clamoring for increased regulation. Both Democratic presidential candidates seem to be vaguely promising some sort of increased trade regulation (although I’m personally not sure how to reconcile both candidates’ promise to improve the stature of the US in the world while threatening to reduce trade). The bottom line is … spend management, finance and legal organizations, as well as their armies of advisers and consultants will have their hands full determining the impact of integrating their requirements into an increasingly complex global operational environment.