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Tuesday, September 2, 2014

Transformed Procurement, Supply Chain Management Help Cigna Increase Value

As healthcare provider Cigna Corp. expanded its operations to 31 countries, its procurement team realized that fundamental changes were needed in the organization’s supply chain management (SCM) to achieve strategic goals.

Those changes included reducing its number of suppliers, mandating that its U.S. best practices be adopted across its global network, and recruiting talented people, who often had non-traditional backgrounds in such areas as operations and finance, sales and consulting, legal, and IT.

Among the hires of Cigna’s vice president and chief procurement officer, Tony Abate, were a bartender from an upscale establishment and a bagel shop server. Both of these occupations are people-centric, Abate explained at last week’s Chief Procurement Officer Summit, presented in Boston by Aberdeen Group, and both of his hires demonstrated commitment to customer service. They had college degrees, to be sure, but just as important were their enthusiasm, ability to engage customers, and dedication to meeting customer needs, which Abate noted were prime qualifications for working effectively with suppliers.

Abate’s presentation summarized many points that define procurement transformation. The growth of the global middle class, and with it a rise in standards of living for consumers, is creating opportunities for Cigna around the world. To exploit them, the company recast its supply chain operations with an eye toward greater efficiency, standardized procedures, consistent quality, and value.

One important area for Abate and his team is minimizing supplier risk. They concentrate on Cigna’s top 200 suppliers and, in monthly and quarterly business meetings, discuss areas of concern and how they can improve.

Abate eliminated the bottom 10 percent of the supplier-spend portfolio to generate higher-value relationships between Cigna and the remaining vendors. He also instituted a rule that all small-spend suppliers get reviews. It was through this that procurement discovered one offshore data processor did work from his home with no data protection or backup. The vendor was quickly dismissed and work moved to a secure company.

Credit: sattva at FreeDigitalPhotos.net

Credit: sattva at FreeDigitalPhotos.net

Changing the way its SCM works has had a positive impact on Cigna’s business. Transactional relationships are now strategic relationships, intuitive decisions are now data-driven ones, and silo engagements are now holistic undertakings. Abate mandates that all supply deals be comprehensively negotiated, that his team understands Cigna’s entire business as well as its procurement needs, that every deal follows a standard process, and that, most important, mediocrity is unacceptable. Excellence is expected.

One way of achieving these transformative goals is working closely with other departments. “We convinced the IT department of the advantages of competitive bidding for equipment. As a result, they now do more for less,” Abate said.

He regularly enlists Cigna’s legal department in developing data for negotiations with suppliers, though creating this collaboration wasn’t easy. “Legal departments don’t always understand that they are dealing with businesses, not law firms,” when it comes to SCM, Abate noted.

Responding to an audience question about how to best gain access to the legal department, Abate said it’s a matter of relationships. “We paired a lawyer on our staff with the legal department,” he said, but admitted that it took time to build a working relationship. But slow progress is still progress. In this environment, “the turtle wins the race,” he said.

During his presentation, Abate asked audience members how many knew what their companies’ corporate strategy is, and only half of them raised their hands.

Abate insists that everyone on his team know and understand Cigna’s corporate strategy, which is “go deep, go global, go individual.” He insists on them to be in tune with the company’s objectives and aligning the operations of all departments toward common goals.

Abate places a premium on training. He displayed a slide that read: “We only do two things in Cigna SCM. We train and we execute.”

As a result of all of these efforts, Abate said that from early 2009 to early 2013, Cigna’s stock price achieved a 39 percent compound annual growth rate (CAGR). From 2010-12, SCM’s financial value yielded a 59 percent CAGR, rising to $93 million from $23 million. Moreover, the value for 2013 is trending higher.

Abate, a recreational sailor, concluded his presentation with a relevant slide: “To navigate global change, set the course, commit to weather the storms, and arrive safely with the right perspective, the right plan, and the right people.”

 

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