What is a Procurement Strategy?
A procurement strategy is the blueprint for implementing a procurement process. It considers everything from building a supply chain, the systems for initiating and tracking purchases, managing costs and risks, and evaluating results. The goal is to quickly match buyers with contracted suppliers, streamline transaction processing, eliminate errors, minimize risk, and effectively manage corporate expenses.
Understanding Procurement Strategy
Every company relies on goods and services as part of daily business operations. But not every company has implemented a procurement process that ensures that all purchases are made with preferred suppliers, at negotiated prices. That’s especially true for buyers outside of the procurement organization.
When that fails, these are potential consequences:
- Buying from the wrong supplier, forfeiting cost savings
- Missing quantity discounts
- Supply chain disruptions
- Poor product quality
That’s where your procurement strategy comes into play. It can turn the activity of procurement into a competitive advantage.
A procurement plan starts with a review of current spending patterns and trends. With this data, you can forecast future spending requirements by product category, and plan for them.
Next, a sourcing team researches the market to build a supply chain for key spend categories, formalizing agreements in contracts and catalogs.
Finally, systems are put into place that automate the procurement process from order to pay.
Procurement Strategy: A Closer Look
Here’s an overview of what to include in a comprehensive procurement strategy.
- Assess purchasing needs
- Prioritize categories of spend
- Research market in key spend categories
- Identify preferred suppliers for each category
- Can include marketplaces for specific items, with proper purchasing controls
- Negotiate contracts in essential spend categories based upon expected spend volume
- Establish rate cards for contingent labor and catalogs for recurring indirect spend
- Formalize statements of work and milestones for essential services
- Establish company policy and rates for travel expenses
- Onboard suppliers for electronic transaction processing
- Provide supplier portal for document exchanges and self-service
- Capture essential data such as supply category, purchase history, contract records, and inventory data to track and manage spend and supplier performance
- Make available electronic catalogs to expedite the procurement process
- Streamline procure-to-pay processing
- Automate PO requisitions, review and approval and invoice processing
- Simplify matching of invoices to purchase orders, advance ship notices, goods receipts, service entry sheets, contracts and related transaction documents
- Reliably capture data for analysis
- Examine transaction data on a regular basis
- Update vendor master file to eliminate duplicates and ensure accuracy
- Assess supplier performance
- Adjust procurement strategy as needed
Procurement Strategies for Direct – Indirect Spend
There are two basic categories of business purchases: direct spend and indirect spend.
These are the purchases of goods and services used in product manufacturing. Direct spend is typically a focus of the sourcing group. It collaborates with the procurement team and others involved with manufacturing to determine budgets and negotiate contracts based upon production forecasts and volume purchases.
Some examples of direct spend include:
- Raw materials to manufacture products for sale
- Supply and installation of manufacturing equipment and industrial machinery
- Mechanical or electrical components for a computer, appliance, or machine
- Outsourced or subcontractor services
Management of supplier relationships is essential with direct spend. That makes assembling a sourcing team vital to the procurement strategy.
Mismanagement of the supply chain for direct spend can lead to manufacturing delays and product shortages. That makes inventory management another important part of a procurement strategy. You must know the levels of key parts and materials needed for production, where to find them, how quickly stock will be consumed, and when you must order more stock to prevent production delays.
For some organizations, stocking inventory on site is a key part of direct spend strategy. For others, vendor managed inventory is the better strategy. Where to stock inventory hinges on what you consider the better option for controlling costs while ensuring consistent availability for production.
These are purchases made to operate the business. They are not the components of a product for sale. Examples of indirect spend include office supplies, furniture, IT support, and marketing expenses.
With indirect spend, cost control is more important than managing vendor relationships. These purchases are typically unplanned. Average purchase prices are much lower than direct spend. Suppliers of large categories such as office supplies often provide electronic catalogs to expedite purchasing, featuring negotiated prices specific to your organization.
A large volume of indirect spend can be one-off purchases. In those cases, purchases can be managed through an e-commerce marketplace, where products from select vendors are vetted before being linked to the procurement system.
Compared to direct spend, indirect spend is less closely monitored. The focus of strategy for this spend category is managing buyer spending behavior.
For low-cost, low-volume items called tail spend or maverick spend, procurement may not need to prepare purchase orders or approve employee purchases, to achieve cost-benefit.
Procurement Strategy in Action
Organization growing by multiple acquisitions, with no managed procurement function or centralized accounts payable group.
- Consolidate purchasing across major spend categories
- Eliminate redundant roles
- Enforce compliance to purchasing policies
- Drive higher volumes of PO invoicing
- Provide visibility into corporate purchases across all business units
- Enable a sourcing team to identify preferred suppliers and monitor corporate spending
- Provide electronic catalogs for certain spend categories, and streamline the approval flow for these orders
- Bring procurement and accounts payable into alignment
- Automate manual processes from sourcing to procurement and payment
- Enable purchase order (PO) flip to eliminate invoice errors and expedite approvals
- Move off paper checks to electronic payments
- Purchase goods and services from the right supplier at the right price
- Enable a compliant, streamlined procure-to-pay process for all stakeholders
- Provide visibility into all transactions ranging from strategic spend to individual purchases
- Simplify payments across different channels
- ·Lower costs of operations
- Improve management of working capital
Today, an important focus of a winning procurement strategy is sustainability.
Sustainable procurement is the integration of Corporate Social Responsibility (CSR) principles into your company’s procurement processes. In addition to the economic factors that influence a procurement strategy, sustainable procurement considers the environmental and social factors associated with your purchases.
Here are examples of sustainable procurement practices:
- Compliance with environmental laws and goals
- Removal of hazardous materials and waste in the supply chain
- Thorough vetting of suppliers to eliminate slave labor and ensure fair labor practices
While altruistic in nature, making sustainability an important component of a procurement strategy can improve financial performance. Sustainable procurement can be a business asset in the following ways:
- Attract and retain employees
- Differentiate your brand from competitors
- Demonstrate accountability to investors
- Improve customer engagement and retention
- Increase revenues
Importance of a Solid Procurement Strategy
A procurement strategy must be supported by management and followed by all buyers across your company. Without it, you can struggle to control costs, consistently deliver high quality goods and services, and ensure availability of the products and services you need to run your business.
Here are steps you can take to develop and execute on an effective strategy:
- Identify the types of expenses, categories, and commodities that require increased control
- Find reliable sources of supply
- Define a clear procure-to-pay policy and promote it broadly
- Have consequences when people don’t follow the process
- Get support from all stakeholders, including senior leadership
This last step is critical. Senior management needs to know the value of sourcing supply, enforcing contracts, invoicing against POs and related policies that strengthen compliance. They must also commit to supporting them.
Finally, you must acknowledge that implementing a winning procurement strategy takes time, effort and resources. Adequate training, regular communications, and ongoing support through tutorials, webinars and a help desk can go a long way to making your procurement strategy pay off.