A procurement strategy is essential to maintain a business’s operational success and properly manage spending. In today’s world, growing companies strive to build successful procurement strategies to help them achieve success and optimize their productivity.
In order to stay on track with your company’s objectives, an effective procurement strategy offers a financial plan for managing your budget, workflow, and production deadlines. Procurement strategies must be tailored to the specific needs and financial policies of each company.
Without a defined procurement strategy, it can be challenging to keep funds flowing smoothly and evenly. If you notice that money is disappearing from mysterious sources (referred to as maverick spend) and your business has trouble staying within budget, you may need to overhaul your strategic procurement strategy.
In this guide, we’ll discuss what a procurement strategy is and how your business can create an effective one.
What Is a Procurement Strategy?
Procurement is a business management process used to find and manage external resources within an organization. It allows an organization to identify and assess potential suppliers, select the most appropriate supplier, and streamline approvals.
Once a business understands its needs and has a plan in place for meeting those needs, it can develop a procurement strategy. The goal of a procurement strategy is to ensure that the right goods and services are procured at the right price from the right supplier. If the procurement process can be automated and expedited, that’s even better.
A well-executed procurement strategy will improve an organization’s competitive advantage by reducing procurement costs and improving efficiency. Without a procurement strategy in place, however, an organization risks spending more time and money than necessary on acquiring goods and services.
Procurement strategies generally fall into one of three categories:
1. Low-cost procurement.
This strategy focuses on finding the lowest-cost supplier for a given good or service. Low-cost procurement can be an effective way to reduce expenses, but it can also lead to quality compromises and missed opportunities for cost savings. It generally doesn’t lend itself to forming longer-term trustworthy vendor or supplier relationships.
2. Value-based procurement.
Rather than focusing exclusively on price, this strategy considers the total cost of ownership for a good or service. This includes factors such as purchase price, installation and setup costs, delivery time, maintenance and repair costs, and disposal costs. Value-based procurement can lead to significant savings when the right supplier is chosen.
3. Strategic sourcing.
Finally, strategic sourcing is a procurement strategy that focuses on the long-term relationships between an organization and its suppliers. This approach takes into account the specific needs of an organization and uses supplier selection and management to improve performance, reduce costs, and mitigate risk.
The Goals of Strategic Procurement
While cost savings are likely to be one of the strategic procurement objectives, it is not the only factor to consider. Companies are more likely to adopt strategic procurement initiatives for a variety of reasons by focusing on the company’s long-term goals, such as:
- Purchasing higher-quality products
- Collaboration with suppliers in areas such as research and development
- Reducing the number of suppliers to focus on key connections and take advantage of economies of scale
- Developing strong supplier partnerships
- Selecting suppliers who are most compatible with the company’s objectives
Without a strategic procurement approach, the company may lack transparency into its purchasing activities, which might impede negotiations with suppliers. The process of obtaining and selecting suppliers may be excessively time-consuming and inefficient.
Types of Procurement Strategies
Organizations develop different strategies that work the best to achieve their objectives.
There are a few main categories of procurement strategies from which a business can choose based on its size, goals, and vision. Though cost reduction is undoubtedly the most popular, let’s take a brief look at each one.
The complete production process, including terms negotiation, administrative and operational costs, automation tools, and efficient information usage, contributes to the plan of reducing costs.
Risk and Supply Chain Management
Business and environmental concerns are both possible sources of risk. The organization’s goal with this strategy is to provide goods and services at a reasonable price that can be justified.
The number of risks in procurement seems limitless, ranging from faulty analysis, delays, data inaccuracies, non-compliance, and poor supplier management in terms of aspects like quality and capacity constraints.
Fortunately, with some consideration, attention, and technology, you can navigate these concerns and prevent them from becoming a more significant issue.
Consumers want businesses to keep a watchful eye on unethical behavior and take appropriate action against hazards in the current climate. If a company fails to deliver these sustainability goals, confidence will be eroded, which will then harm the company’s overall value.
Going green is a must, especially if your competitors already use an environmentally-friendly procurement strategy.
Global sourcing is a method of acquiring goods and services that may be produced in a specific country.
Taking this approach will reduce your risks and help to consider your business as an open and global market.
Total Quality Management
The Quality Management strategy is directed at managing the business as well as its counterparts, such as vendors and suppliers, who provide high-quality service with no room for error.
Applications of Procurement Strategies
A procurement strategy isn’t just a collection of facts; rather, several factors highlight the importance of strategy in any business and how it benefits a company.
Procurement strategy has a wide range of applications in a business, several of which include:
Examine the environment’s performance
Procurement strategy aids in a full assessment of the business and its environment. An organization’s measurable and achievable strategy is based on a thorough examination of the situation.
The process recognizes many teams and roles involved with the business, such as production, procurement, and consumers, which help in the company’s management.
It also includes an optimization process that entails analyzing its cost structure.
Set well-defined goals and priorities
The procurement strategy establishes the foundation for the organization’s objectives and priorities in relation to its mission, vision, and policy. Supplier relationship management, cost reduction, and other goals are part of an organization’s primary objectives.
All of this is only attainable if your business has a suitable long-term strategy that is tailored to your goals. The objectives of procurement strategy are a collection of initiatives rather than a single plan.
The priorities for sustaining the business, in the long run, are reflected in the strategies.
Put Your Plans Into Action
After you’ve decided on your objectives, the following step is to put your plans into action. All parties involved in the procurement process must be assessed and assigned duties. It also includes the terms and conditions that go along with them to improve the process’s responsiveness and efficiency.
This process allows them to manage their time and focus strategically.
Analyze and Define Key Indicators
Regular monitoring of operations is directly related to the effectiveness of the strategy in the organization. Following the analysis, objectives, and activities, it’s critical to keep track of the strategy’s progress to ensure everything is going according to plan.
KPIs (Key Performance Indicators) are used by businesses to assess the success of operations in terms of costs, processing time, stock management, and other factors.
You can discover more about your performance, analyze the discrepancies, and take the appropriate action to overcome them using these key indicators.
The Procurement Strategy Framework
Before we begin developing a procurement strategy, we must first understand what a strategy is.
The procurement strategy comprises the following:
- A strategy statement – what are the goals and objectives of the strategy? This should be a clear, concise outline that pinpoints the specific issues you are trying to address.
- The desired results – think about what you want to achieve as a result of the current procurement process.
- A time frame – how long will the strategy be in place? Remember, it should be long enough to achieve the desired results, but also flexible enough to adapt as the business evolves and scales.
- A tactical plan – this is a step-by-step guide on how you plan to achieve the desired results. Factor in all aspects of the procurement process, from planning, budgeting,and sourcing to contract management and supplier performance.
- Key performance indicators (KPIs) – these are the measures you will use to accurately track and report on the success of the strategy.
- Dedicated tools and resources – you will need the necessary tools and resources to put the strategy into action. This might include staff, improved internal processes, automated systems, funding, and so on.
Developing a procurement strategy can be a complex process, but it’s important to have one in place in order to get the most out of your purchasing process.
How to Create an Effective Procurement Strategy
A successful procurement strategy necessitates the alignment of business objectives as well as the smooth and efficient flow of the process.
Building a strategy is always necessary to keep the process and the business on track.
The eight-step process for developing your procurement strategy is as follows:
Analyze Your Business Expenditure
When developing an effective procurement strategy, you should first take a moment to examine your current expenditures. This will offer you an understanding of your current spending habits, allowing you to detect frequently missed areas, identify any consistent maverick spend, and determine where you can cut costs.
This data will also serve as a basis for your procurement strategy, allowing you to know exactly what to expect from your prospective suppliers.
Determine Your Company’s Needs
It is critical to have a comprehensive understanding of your company’s needs in order to build a relevant procurement strategy that continues to deliver exceptional results. This data-driven analysis will assist you in aligning and prioritizing your procurement strategy with other company operations and objectives.
“What if” dialogues examine the obvious and challenge the current system, allowing you to discover a lot more cost-cutting opportunities. A category positioning matrix, for example, can assist businesses in identifying the essential operational requirements that they will use to create their procurement strategy.
Examine the Supply Market
After you’ve determined your needs, you’ll need to do an external analysis to understand current market conditions better.
Here are some strategies to choose from if you want to evaluate the industry effectively:
- Porter’s five forces might help you determine how competitive your industry is and how profitable your strategy could be.
- PESTEL analysis aids in the identification of your market’s significant external opportunities and threats.
- SWOT analysis summarizes your Strengths, Weaknesses, Opportunities, and Threats by combining external and internal assessment.
However, depending on the industry you’re in, market conditions may shift unexpectedly – so it’s a good idea to ensure that the data you collect is updated frequently and remains current over time.
Set and Define Business Objectives
After you’ve determined your needs and performed an external market analysis, it is now time to set your goals.
The information gathered in the preceding steps will assist in determining the procurement strategy’s demands, which your company can then prioritize based on importance.
Establish Procurement Guidelines
The most crucial stage is to compile a list of the optimal procurement practices. The strategy should match the organizational needs, whether to modify the previous strategy or build a new one.
If you develop a new procurement guideline from the scratch, there’s a chance you’ll overlook some important details. For this reason, all stakeholders involved in the procurement process should adopt procurement guidelines, as these will offer answers to potential issues.
Invest in Digital Tools and Applications
For procurement processes to reach their full potential, businesses require digital tools to aid their strategic work. Additionally, the relevant tools can help in eliminating manual data entry errors and increasing your staff’s productivity.
It’s ideal to examine every phase of the procurement process. From sourcing to payment, determine where digital technologies are most needed and prioritize their deployment. A spend under management (SUM) analysis tool can drastically boost efficiency and value for businesses in this situation.
Develop and Implement a Procurement Strategy
The next step is to determine your procurement strategy’s targeted goals and the techniques that will be used to attain them.
When planning your procurement strategy, it’s a good idea to employ SMART goals:
Delivery, quality, time, rule and regulation compliance, goals, vendor, and supplier lists should all be included in the strategy.
After you’ve established your procurement strategy, you’ll likely spend more time focused on how to strengthen supplier relationships and the strategic side of procurement rather than on time-consuming administrative duties.
Execute, Monitor, and Improve Your Strategy
After the strategy has been presented, the next and final step is to guarantee that the procurement process is carried out following the strategy. Businesses should develop measures for assessing progress and adapt as needed to improve efficiency.
Business objectives such as cost reduction, efficient delivery schedules, error reduction, and contractual terms can all be used to determine the KPIs.
Importance of Procurement Strategies
Numerous benefits come with having an effective procurement function. The main benefit is that it can help reduce a company’s overall costs. Businesses can accomplish this by taking advantage of opportunities to purchase goods and services at a lower price and streamlining the purchasing process.
Additionally, strategic procurement can help improve a company’s supply chain efficiency. By collaborating with suppliers and ensuring that goods are delivered on time and in the correct quantities, businesses can ensure that their operations run smoothly.
Another benefit of a well-developed procurement strategy is that it can help a company improve its cash flow. An organization can accomplish this by taking advantage of early payment discounts from suppliers and negotiating more favorable terms.
Finally, a strong procurement team can help a company become more agile and responsive to changes in the marketplace. By being able to quickly purchase the necessary goods and services, businesses can avoid delays that could impact their ability to meet customer demand.
While there are many benefits to having a well-developed procurement strategy, it is essential to note that there are also some potential risks. One risk is that a company may not find suitable suppliers or may not have the necessary resources to negotiate favorable terms.
Additionally, if a company’s procurement strategy is not well-executed, it could lead to higher costs and decreased efficiency.
Overall, having a solid procurement function is essential for any business looking to streamline their purchasing process, expedite purchase approvals, and control organizational spend. By taking advantage of the numerous benefits that come with this approach, companies can improve their competitiveness and ensure that they are well-positioned for success.
Start Developing Your Procurement Strategy
Now that you understand what a procurement strategy is and how to establish one in operation, you can choose the type that best suits your company’s needs. Take your time and make a list of all the specifics you need to incorporate in your strategy.
And after you put it into practice, you’ll start to see more controlled spend, shorter and faster approval flows, and longer lasting supplier relationships.