Today, many aspects of the procurement process can be automated or streamlined thanks to developments in technology. This has led many chief procurement officers (CPOs) 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 corporate strategy. Chief Procurement Officers strive to make smart decisions that ultimately reduce costs and increase profits.
In this article, we explore the critical elements of a procurement (or purchasing) strategy, and provide a framework for CPOs (or anyone else!) who wants to improve the efficiency, visibility, and accountability of their own procurement efforts.
What is a procurement strategy?
Procurement strategy (also known as strategic sourcing or purchasing strategy) refers to a long-term plan that allows an organization to source or obtain the goods or services it needs to operate.
Procurement strategy includes market analysis, supplier selection, cost negotiation, and other functions. (More on those below).
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Why do you need a procurement strategy?
Although procurement may sound like a boring business function, it 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.
Jobs growth data also illustrates the importance of a procurement strategy. According to LinkedIn Economic Graph Research, the Chief Procurement Officer (CPO) position ranks number 11 on its list of the fastest growing C-suite titles of 2020. CPOs experienced 15% growth as a proportion of total C-suite hires in the last year.
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 procurement strategy statement clearly outlines your main objectives, and is the rationale for your strategy. It can help guide decision-making and define goals.
“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 procurement 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 procurement 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
Your finance team can use Pipefy to automate repetitive, time-consuming tasks and optimize your procurement strategy and processes. You can think of it as a trusted partner that will help you take control of your finance department and strategic procurement process while keeping the big picture top of mind. Try Pipefy for free today.