The power of ‘cognitive’ category management

Tim Wood is vice president and partner for the Supply Chain Management Practice, IBM Global Business Services.

The Technology CEO Council (TCC) — a group of leading IT industry CEOs, of which IBM is a member — recently released a report outlining how government can improve services and reduce costs by more than $1 trillion over 10 years, by successfully implementing commercial IT best practices. The TCC report entitled “The government we need: How proven technology solutions can save tax payers more than $1 trillion over a decade while enabling more effective government,” identified supply chain and acquisition as high priority opportunities in saving $500 billion over the next 10 years. This is the first of several posts to delve into how government can transform operations to achieve this ambitious goal.

A key practice to enable acquisition reform is category management, an approach to smart, enterprise-wide buying that can eliminate redundancies, increase efficiencies and deliver more value through acquisition programs.

Cognitive computing approaches, which provide tools and processes to help government make better decisions through real-time understanding of key information found in large, distributed and often unstructured data sets, can significantly enhance the impact of category management. Specifically, applying cognitive category management (CCM) has the potential to save $340 billion over the next 10 years by leveraging cloud-based solutions, cognitive analytics with structured/unstructured data sources, deep category expertise and commercially-proven category management techniques and strategies.

More importantly, CCM also could fundamentally improve our missions. For example, three people die every minute from HIV or malaria. The U.S. Agency for International Development’s global health supply chain is designed to deliver critical medicines and supplies to those in need worldwide. In this case, saving 1,000 lives through better pricing of these medicines is more important than the $450,000 in cost savings. Professional services is another area in which the resulting mission impact of the services is far more valuable than the cost per hour; e.g., the value of improving aircraft reliability or reducing successful cyber security attacks more than offsets the additional cost of the high-performing engineer. In short, incredible opportunities exist.

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CCM is a key enabler to this potential. We evaluated the savings potential of the top 10 spend categories across the federal government, based on proven cost-saving ranges for these categories in commercial entities. As an example, leading commercial firms generate 8 to 15 percent annual cost savings from their IT spend, which could result in $40-70 billion in savings for the U.S. government over a 10-year period.

The opportunity is real. The TCC report noted private sector experience saving billions annually through proven CCM processes, tools, skill development and governance. While key enablers from past savings have relied on deep category expertise and automation, recent efforts leverage cognitive tools to gain insights, conduct market research, improve data quality and enhance contract negotiations — all designed to make better buying decisions.

Cross-agency category management

In the past 18 months, OMB has embraced cross-agency category management as a means to significantly reduce costs and improve mission value. Ten cross-agency categories have been established with $272 billion in annual federal spend. The government-wide IT program is on track to save $3.5 billion. Notably, IT is one category in which the government has developed and aligned deep category expertise, which has resulted in some initial success. In other categories, that expertise is more limited. Governance processes have been defined and documented. An Acquisition Gateway for sharing requirements and contracts is in place and gaining use. Initial cross-agency strategies have been outlined. While the federal opportunity has been discussed for many years, the cornerstone infrastructure and momentum may finally be in place to realize this potential.

A category management model

Category management in the commercial world follows a similar model. Federal agencies could follow suit to capitalize on the cross-agency spend. In short:

  1.   requirements across agencies for each category are captured;
  2. federal-wide category councils analyze the requirements and craft category strategies that leverage the size of the federal government to improve cost and mission;
  3. these categories are socialized among the agencies and approved by a governance board;
  4. strategic contracts are put in place aligned to these strategies; and
  5. agencies order from the pre-negotiated strategic contracts.

After the contract is awarded, key federal executives work with suppliers to drive continuous improvement through a supplier relationship management program. The resulting impact is better sourcing strategies, improved buying power, streamlined ordering, and ongoing lead time, quality and delivery improvement with suppliers.

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In fact, examples of this model working within the federal environment exist. The Air Force embarked on a similar program across three air logistics centers a decade ago and saved more than $300 million. From a process standpoint, the average Air Force administrative lead time for items without a contract was 126 days, while the lead time for items released off a strategic contract was less than 14 days, representing nearly 90 percent savings when buying from a strategic contract.

In addition, the process allowed the Air Force to evaluate its own spend strategically and create new opportunities for value. For example, an initial review found that 190-plus varieties of oscilloscopes existed across the three sites, which required 190 contract vehicles and inventory for 190 items, often leading to delays and excess cost. Based on these findings, the support equipment category council talked to the engineers and agreed that only three types of oscilloscopes were necessary, leading to millions in savings.

In another example, the Air Force evaluated the potential for PMA-approved parts in engines, which resulted in unit costs savings of 80 percent on targeted items.

Federal challenges

Each of the six primary processes listed above is considerably complex in the context of the federal government and its 3,300+ acquisition offices, multiple agencies with different procurement IT systems and data standards, rotation of key individuals and related skill development, etc. In fact, the federal government must address some key challenges to achieve the same level of success that commercial companies have.

Some of these key challenges include:

Demonstrating and cultivating deep market/category knowledge and skills;
Synthesizing, normalizing, and analyzing data across agencies;
Capturing unstructured pricing, market, and supplier data;
Aligning strategic sourcing processes (pre-contract) with supplier relationship; management processes (post-contract) in a FAR-based environment;
Meeting small business goals; and
Deploying user-friendly means to order off strategic contracts.