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.

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.

If you paid $300 million to a company run by a 22 year old CEO and his certified massage therapist VP, would you double check to make sure you got what you paid for? Heck if I ordered a pizza from a couple of characters like that I would look inside the box before ever leaving the counter to make sure they got the toppings right! But in the fox guarding the hen house world of outsourced Department of Defense procurement, skeptics like us need not apply.

News of the US military buying $300 million worth of bad ammunition from a sketchy company is only the latest in a long history of questionable DoD purchasing oversight. As a former employee of the DoD’s Defense Contract Management Command (now DCMA) - who was tasked with making sure the output of what we were spending was actually being fulfilled - I have to say that this case is outrageous by any standards.

There would have to be a complete lack of performance management, QA and other processes to ensure that taxpayers were getting what they paid for. On an individual basis, bullets are a low budget item, which may have contributed to an atmosphere of not needing to monitor compliance with the contract. But when those bullets add up to $300 million, you have to wonder why nobody’s checking up on what they’re getting. And more directly to the point, where was the due diligence in vetting this supplier? Sourcing professionals today know that you have to award by more than price to get the best VALUE. What price have we put on the lives of the people are endangered by being given 50 year old ammunition?

Obviously in the era of Halliburton, no-bid contracts and government incompetence, much will be made of the fact that this happened in a department where 42% of staff are contractors rather than a vetted civilian career workforce. Without the full details it’s hard to tell if this is a case of contractors run amok, or a lack of effective management by the group who hired them. After all, these contractors, like the ammunition company, should be subject to a level of oversight to ensure taxpayer money is being used appropriately. It’s not that contractors have some inherent inability to do the work of the Army’s Contracting Center for Excellence (undoubtedly named without a hint of irony). But in this case, which is certainly bound for Congressional testimony under the Capital Hill kleig lights, someone will be proven corrupt, incompetent or lacking in even the most basic procedural safeguards.

Technology and best practices in this day and age leave no excuse for this type of abuse. Obviously $300 million worth of bad bullets is an extreme case. But the fact that procurement/sourcing abuse occurs among government, contractor or private employees who operate with too little oversight, process or technology should not surprise anyone.

Andy Rubinson is Ariba’s Marketing Manager for Sourcing Solutions. As part of his strategic sourcing and supply chain experience, Andy worked for several years with the DoD as an Acquisition Professional, as well as in the Supply Chain practice of a Big 4 consulting firm.

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.

Just weeks after the Big Three shocked the industry by announcing plans to move some assembly back inhouse, a labor strike at a major auto supplier is making the automakers appear clairvoyant. Adding to pricing pressures, volume cuts, and rising material costs, the United Autoworkers (UAW) strike at American Axle is shuttering production across the industry.

American Axle is a supplier of parts to leading Tier One assemblers Lear and Delphi Corporation. According to a Purchasing Magazine article earlier this week, American Axle had stockpiled a week’s worth of inventory to maintain supplies to its key customers. As the strike stretched into its second week, depleted inventories have sent shock waves throughout the industry.

According to the Detroit Free Press, part shortages stemming from the strike have forced Lear and Delphi to layoff workers and curb production. The outages have also caused General Motors to shut down six pickup and SUV plants as well as its transmission plant in Toledo, Ohio. The paper reports that American Axle is also a sub-tier supplier to Chrysler and Toyota, although neither company has reported that the strike has caused them to curb production just yet.

However, industry watchers warn that, unless resolved quickly, the strike could have a far more negative impact on U.S. auto manufacturing. The issue? Cash flow. Already pinched by the sagging economy, many auto-suppliers have borrowed against future sales. Production halts could cause them to default on these loans, forcing more auto-suppliers to file for bankruptcy. And that’s not good for anyone.

The events reaffirm the importance of assessing and balancing supply risks and understanding cost structures for both primary and sub-tier suppliers. (A point validated by the priority top supply execs put on supplier performance and risk management in Aberdeen Group’s latest CPO Agenda study.) It also signals a fundamental restructuring of the auto industry; one which will see automakers rethink their global sourcing strategies, bring more production back in house, and engage in more joint ventures and alliances to offset costs, balance risks, and penetrate new markets.

The love affair between LCCS (Low-Cost-Country-Sourcing) and China has taken a few hits in recent years: bad press on humanitarian issues, unfavorable VAT rebate reductions, a weakened US$, and increasing government interference. It’s made more than one company turn a speculative eye towards central and eastern Europe (CEE).

And why not? There are a number of factors that make the more stable countries (such as Poland, the Czech Republic, Slovenia and Hungary) in CEE attractive:

• Highly skilled workforce with multiple western language skills
• Good to strong infrastructure
• Access to raw materials at better prices
• Ease of business in terms of cultural differences
• Decreased lead times
• Government incentive programs
• EU membership
• Labor costs (which while still not as low as China or India, usually come in at less than half those of the US or most of Western Europe)

So should we expect to see a migration west (or east depending on your starting point)? Well… those labor costs in CEE are increasing at a concerning pace, causing doubts as to the long term total cost advantage. Additionally, a recent issue of the Economist highlighted (glowingly, really) the infrastructure improvements China has made: a highway system to rival the United States, a new airport in Beijing, new bridges, improved railways, port transit upgrades and deeper shipping lanes.

Needless to say, China has big plans. More importantly, they are executing on those plans at a staggering pace. Having been in the military, I can attest to the fact that an authoritarian environment does make for efficient completion of projects. Case in point: China is currently 13 years ahead of schedule on their highway system development plan. These infrastructure improvements make a convincing case for continued investment in China.

Given all of that, where in the world should you go? We haven’t even discussed India, Mexico or the early stage hopefuls such as Thailand and Vietnam (though truly it may be quite a few years before they are ready to compete with China on infrastructure, quality standards and skills). As always, the answer is… it depends.

It’s a frustrating, yet accurate answer. It depends. It depends on: what you’re looking for, where you’re shipping to, what your objectives are, whether you’re setting up an International Purchasing Office (IPO), looking for new products, building a plant, or just trying to get out of the office on an elaborate boondoggle… in which case I highly recommend Hong Kong - a beautiful city.

It also depends on whether or not you’ve done your homework. These markets are changing so quickly that you really can’t just assume that the best answer is to head to China, CEE, India… or wherever the hot spot of the moment is.

Carol Pilarski is a Consulting Manager in Ariba’s Spend Management Services group. Her current focus is on supporting customers’ LCCS (Low-Cost-Country-Sourcing) initiatives.

Mehdi Hassan, blogging for South Asia Biz, recently highlighted a Forrester report on the growing dissatisfaction with IT outsourcing in India. As Hassan points out, firms are struggling with the falling dollar, unrealistic expectations, scalability, possible tax code changes and believe it or not, scarcity of top IT talent.

I couldn’t agree more with the assertion that the correct response to this situation is to reset internal expectations. I would also add that companies should take proactive measures on what they are able to affect. While companies are not able to control or change factors such as the falling dollar and rising costs in the target country, they can do quite a bit to attract and retain top talent - one of the biggest drivers of success in an offshore initiative.

It’s interesting how many organizations overlook the significant impact the human element has on their offshore operations. If we look specifically at the establishment of an International Purchasing Office (IPO), for example, we find that many companies invest their time and efforts into building out a vision, creating a budget, and locating office space. The assumption is that they can then hire experienced professionals and the low cost story proceeds happily forward to its fairy tale ending.

The reality is that there is a lot of competition for talent in not only India, but in all of the traditional low-cost countries of the world. Therefore it’s critical that organizations develop a comprehensive plan that incorporates:

1. A well thought out recruiting framework that includes a planning phase to assess such things as the current job market, acceptable salary levels and cultural nuances (performance bonuses, benefit packages, perception of titles, etc.).
2. A strong organizational design component that provides a clear growth path for individuals and has a well established governance model. This gives new employees a sense of belonging, purpose and pride. It should also clearly outline roles, responsibilities, performance expectations and metrics - and how it all ties back to the overall mission.
3. A thorough plan on how to build out capabilities - in other words, a solid ramp-up and training plan. Most new offshore offices are comprised of >80% new hires. Additionally, a strong training plan enables an organization to hire less experienced, but talented individuals - which is a degree of flexibility that is much needed in many of the tight job markets.
4. The right tools and support network.

The real key is to ensure that you are building out a complete organization, whether it is a call center, purchasing office or something else entirely. This is something organizations can control. At the end of the day, people are people all over the world. So if you build a great organization, you’ll be able to find and, more importantly, keep great talent.

Carol Pilarski is a Consulting Manager in Ariba’s Spend Management Services group. Her current focus is on supporting customers’ LCCS (Low Cost Country Sourcing) initiatives. Carol’s unique background includes eight years with Ariba, a period in Sony Electronics’ Rotational Program, the rank of Captain in the US Army and a degree from West Point.

Our guest blogger Andrea Soltysiak is back on the case, this time profiling the comments from CPO Summit keynote speaker Michael Treacy. Although, I must admit, this long-time management guru and author (whose Discipline of Market Leaders is a must read) seems to have softened in his old(er) age. The usually controversial Treacy takes aim at the importance of productivity.
From Lou Dobbs to Gartner, a panic surrounds offshoring and outsourcing. Yes, I am all for creating new jobs. As a worker and manager, I want the comfort of knowing my job is in demand and my team’s jobs are secure. However, as a consumer I am not willing to pay more for American-made products. And, as keynote speaker and best-selling author Michael Treacy points out, I’m not alone. But it’s not offshoring and outsourcing that are causing job loss.

Treacy, author of Discipline of Market Leaders: Choose Your Customers, Narrow Your Focus, Dominate Your Market and Double-Digit Growth: How Great Companies Achieve It - No Matter What, highlights General Motors in his presentation. In the last 25 years, 67,000 jobs were lost per million cars produced at GM. Nineteen thousand jobs were lost due to onshore outsourcing; 8,000 lost due to offshore outsourcing. What happened to the remaining 40,000 jobs, Treacy asks? Productivity gains.

Productivity is the real enemy. He cites that only 300,000 jobs are offshored each year. A pretty small fraction when looking at the overall job market.

Traecy also predicts that “All work will migrate to where work gets done best”. He claims that we will compete for our jobs on a global basis, except those jobs deeply affected by location (think doctor’s office). The reality is that there are five tutoring companies today that will match your child with someone in India to help with his/her homework.

Interesting thoughts. Do you agree?