Today, many aspects of the procurement process can be automated or streamlined thanks to developments in technology. This has led many procurement teams to shift away from the tactical aspects of their jobs and focus more on strategy.
Their primary goal is to ensure that their procurement processes are properly aligned with their organization’s overall business strategy, reduce costs, and increase profits.
In this post, we explore the critical elements of a procurement strategy and provide a framework for improving the efficiency, visibility, and accountability of your own procurement efforts.
What is a procurement strategy?
Procurement is a strategic process that deals with acquiring company goods and/or services required to meet business objectives or goals via the 5 Rights: obtaining the right quantity of products from the right place, at the right price, with the right quality, and delivered at the right time.
A procurement strategy, or purchasing strategy, is a long-term plan that highlights key areas of spend in order to identify ways to improve the procurement process and generate more value for the business.
By optimizing the procurement process with a procurement strategy, businesses are better equipped to source the best suppliers and product/services. Plus, a strategy provides a roadmap for improving immediate process procedures and communication with suppliers that can lead to additional long-term cost savings and process efficiency.
What is an indirect procurement strategy?
Indirect procurement is the purchasing of services or products essential for day-to-day business operations. These purchases don’t necessarily provide direct value to customers or generate revenue.
An indirect procurement strategy aims to improve cost and time savings without compromising product quality or supplier reliability. Unlike a procurement strategy, which ladders up to overall business goals and strategy, indirect procurement deals with day-to-day operations, like buying office supplies or facilities management.
Types of procurement strategy
Depending on what a company wants to achieve – reducing risk, reducing corporate carbon footprints, improving supply chains, or increasing cost savings – there are many procurement strategies that can be used. Below are examples of four procurement strategies:
A global sourcing strategy aims to source goods and services in a more efficient manner by tapping into specific countries or global regions to discover more cost-efficient sourcing choices. By locating new source markets, companies are able to maximize profits and lower costs, essentially getting more for the cost of less.
A green purchasing strategy is rooted in making purchases with a low environmental impact and sourcing materials or producing products in a more sustainable way. The goal is to improve environmental, social, and financial performance. This strategy is relatively new but is predicted to continue growing in use as consumers and companies show growing interest in prioritizing the environmental impact of purchases and production.
A risk management strategy seeks to minimize the impact of supply chain risks on the procurement process, in addition to developing appropriate responses to potential risks.
A vendor development strategy, as the name implies, focuses on improving relationships with vendors. This strategy is especially relevant to purchases that have a limited supplier selection or that are unique or difficult to source.
Why do you need a procurement strategy?
Procurement is essential to just about any organization. Procurement managers and their teams are responsible for improving process efficiencies, solving complex business problems, minimizing risks to sourcing and production processes, and ensuring compliance. That makes procurement strategy relevant for practically every industry and sector.
That’s because a purchasing strategy helps align the procurement team with the company’s vision, goals, and objectives. With a strategy in place, the procurement teams maximize company value, minimize resource costs, and improve process efficiency.
What are the best procurement strategies?
While this will vary based on company procedures and needs, the best procurement strategies will prioritize and meet procurement needs related to:
- Improving the procurement process and workflow efficiency.
- Aligning procurement with company goals or objectives.
- The selection and cost of goods or services.
- The selection of suppliers, risk management, and diversifying the existing supplier database to reduce costs and/or meet company objectives or goals.
- Identify risks and opportunities based on market or supply chain changes.
Procurement strategy framework
Regardless of an organization’s size or industry, every procurement strategy is based on a common framework. Through the use of this framework, as well as best practices, a procurement professional can address an organization’s goals and objectives while steering it toward success. Here are the elements of that framework:
Your purchasing strategy statement clearly outlines your main objectives and is the rationale for your strategy. It can help guide decision-making and define goals.
The Kraljic Matrix
A good starting point for developing your procurement strategy is the Kraljic Matrix. Named after economist Peter Kraljic, the matrix is used to classify and analyze a company’s purchasing portfolio based on two key factors — strategic importance or value and complexity of the supply market or risk— and four item categories — non-critical items, leverage items, bottleneck items, and strategic items.
“Deliverables” refer to what you need to deliver or improve to meet your objectives. They should be as specific as possible.
Without a defined deadline, there will always be a reason to delay implementation. Hence, it’s important to set realistic timelines (and deadlines) for your deliverables.
A tactical plan focuses on how your organization will implement the strategy. It needs to include details such as what teams will be involved and what each team member will do.
KPIs or metrics
KPIs are the concrete ways in which success is measured. Examples include supplier lead time, vendor availability, compliance rate, rate of emergency purchases, and supplier defect rate.
Your team may employ a SWOT analysis, a SCOPE analysis, a category positioning matrix, or other tools/methods to build out your procurement strategy. These tools can help you ensure your procurement approach supports your corporate mission and vision.
Once a framework is in place, it’s time to begin building out your purchasing strategy by drawing upon the insights and experiences of your procurement team. Below is an 8-point guide to developing your own purchasing strategy based on that framework.
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How to develop a procurement strategy
Now that you’ve reviewed the framework, it’s time to dig into each area of your procurement strategy. In doing so, you’ll reduce the risk of errors, save money, improve efficiencies, uncover or anticipate disruptions, and remain compliant. The eight key elements of an effective purchasing strategy include:
Step 1: Analyze expenditure
Analyze the way your organization spends money before creating a procurement strategy. This may require you to collect data from suppliers, stakeholders, and other important parties involved in procurement. Once you gain a solid understanding of your spend culture, you’ll find it easier to identify the overlooked expenses of various products and services. You’ll be able to use this information to increase efficiencies and meet your bottom line.
Step 2: Identify needs
Next, you’ll need to focus on, and really understand, your organization’s particular needs. Meet with the management team to learn how the company is doing and where it is headed in the future. Don’t be afraid to bring up “what if?” scenarios and question what they may consider obvious. This way, you can uncover new opportunities that support your strategy.
Step 3: Evaluate the market
Once you complete your internal analysis, focus on external factors such as market conditions, by reaching out to your current and prospective suppliers. Just remember to keep your data current at all times or it won’t help you. Methodologies like Porter’s five forces, which analyze your competition, can be a great way to do so.
Step 4: Create objectives
Use your data and research to establish objectives that clearly convey what you hope to achieve with your procurement strategy. Once you’ve set them, make sure that procurement and business leaders are aware so that there’s no confusion and everyone is on the same page.
Step 5: Develop a procurement policy
Jot down the best practices that will help you get rid of any inefficiencies that exist. Take a look at your SWOT analysis to get an idea of what these inefficiencies may be. Then, modify your current procurement policy to meet your organization’s needs. Don’t forget to make sure it is fair and considers all of the key players in the process.
Step 6: Add procurement software
While you can tackle your procurement process manually, doing so can lead to issues such as human error, late payments, and delays that cost you time and money. With workflow automation, you can forgo manual data entry. Find a software that works to find gaps and automatically stops activities that may hinder rather than help your process.
Step 7: Outline your procurement strategy
The data and information you’ve gathered will help you draft a detailed procurement strategy. Make sure it includes every tactic you plan to implement. It should also incorporate SMART goals: goals that are specific, measurable, achievable, relevant, and time-bound. In addition, automating parts of your strategy will allow your organization to focus more on supplier relationships and strategy rather than repetitive tasks.
Step 8: Execute, manage, and refine
Following execution, measure, and track your strategy’s progress. Remember that you’ll likely need to adjust it to improve your results over time.
With these steps, you can provide your organization with a strong procurement strategy that allows them to succeed today, tomorrow, and years down the road.
Take control of your procurement strategy with Pipefy
Pipefy is a low-code business process automation platform that helps procurement teams automate repetitive, time-consuming tasks and optimize their procurement strategy. Pipefy’s low-code automation platform centralizes operations by easily integrating with your favorite software to easily develop and build a procurement process strategy — all from a single, easy-to-use visual platform.
With key features like real-time process dashboard data and automated communication and notifications, Pipefy makes it easy for teams to manage supplier relationships, inform and align key stakeholders in strategy changes, and pull key insights to inform procurement strategies.