Right now many states are tackling budget issues and trying to figure out what to do about those pesky deficits. The news has covered this issue most predominantly in Wisconsin, where the current Governor, Scott Walker, is taking the “slash and burn” approach to cost reduction. If other states decide to emulate Wisconsin, you can expect them to approach the deficit problem using a two-step methodology.

Step 1: Reduce Taxes. Cutting taxes will help stimulate the economy and create jobs through a mysterious “trickle-down effect”.

Step 2: Break the public services unions and start laying off public employees. The newly laid off employees can take advantage of all the jobs created by the private sector due to “trickle-down”. Plus, union busting is good fun!

I suggest states may want to take a different approach all together and focus on what’s really causing their budgetary nightmares - the cost to keep things running. Specifically, why not try strategic sourcing?

Yesterday, David Yarkin published a great op-ed in the New York Times titled “Saving States the Sam’s Club Way” that details his experience using strategic sourcing to reduce costs for the state of Pennsylvania. The problem in Pennsylvania was that the state and local government did not use their full purchasing power to leverage suppliers for better prices. As Mr. Yarkin states, “Rather than making a big monthly purchase at, say, Costco, Pennsylvania was effectively making tiny, hourly purchases from 7-Eleven.” That resulted in plenty of inefficiencies. By way of example Mr. Yarkin uses ketchup - purchased by the case for $23.20 in one government location and $12.66 at another, a difference of 45%!

Through the simple acts of leveraging combined volume and consolidating the supply base, Mr. Yarkin was able to reduce costs for the state by $360 million dollars. My guess this is just the tip of the iceberg for what could be accomplished in Pennsylvania and other states that seriously considered strategic sourcing along with other more complex optimization techniques. Of course, it won’t score as many political points or keep you in the national spotlight for as long as union shut down will.
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Joe Payne

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