Procurement Strategy – Pathway to a Building a Sustainable and Robust Procurement Function
The procurement function has grown into a strategic ROI enabler from a mere purchasing function. With more complex and interconnected global supply chains, the need for an effective procurement strategy is more than ever before.
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As per a 2023 Gartner Report, Chief Procurement officers must be prepared with solid procurement strategies and communicate the expectations and aspirations of the supply chain to the leadership. For that, they need a robust procurement strategy that helps in –
- Making better trade-off decisions
- Improving employee experience
- Managing and reducing cognitive overload
- Ensuring that procurement has the right technology
What is a procurement strategy and why is it important?
What are the different types of procurement strategies?
How to develop a robust procurement strategy?
This write-up addresses these key questions and delves into other aspects of the digital procurement strategy.
Understanding Basics of the Procurement Function
Before we get into the details of procurement strategy, we must understand the basics of the procurement function. In simple terms, procurement is all about obtaining or purchasing goods and services required to run a business. The overall procurement process is critically important for businesses as it contributes to the final purchasing decision. What was merely a purchasing process has now grown into a strategic business function that contributes significantly to business success.
The procurement function requires a substantial portion of a company’s resources to function. The procurement process is often a vital part of a company’s strategy, as the ability to purchase goods or services determines if operations will be profitable.
Based on the type of transactions that happen, the procurement process can be classified as –
- Direct procurement – Involves the purchase of any goods or services that are required for the production process.
- Indirect procurement – Involves the purchase of goods and services required for meeting the operational needs of a business.
- Goods procurement – Involves the purchase of physical products required by the company. These purchases could be direct, such as raw materials, or indirect, such as office supplies.
- Services procurement – Similar to goods procurement, services procurement could also be direct or indirect procurement.
How does the procurement function work? In a majority of cases, the procurement process is dictated by the standards followed in the organization. The controls in this function are often centralized by the accounts payable department. The main steps in the procurement process include-
- Identifying the need for goods/services.
- Sourcing the supplier
- Negotiating the contract terms and conditions
- Creating the contract
- Managing the logistics
- Processing the invoice
So, that was the procurement function in a nutshell. An effective and efficient procurement function is almost always backed by a procurement strategy. There is a strategy for each step in the procurement process.
For example, supplier strategy focuses on – finding the right supplier, negotiating the contract terms with the supplier, and building long-term supplier relations. A sample sourcing strategy focuses on gathering samples from different vendors to find the one that matches the quality and cost requirements of your organization. Procurement strategies help align the procurement function with the overall organizational strategy.
What is a Procurement Strategy?
In simple terms, a procurement strategy is a long-term plan that helps build strategic relationships with competitive suppliers for acquiring goods and services that are of high quality, fall within the cost range (as per budgetary requirements), and are delivered on timelines agreed in the contract.
A procurement strategy clearly defines how purchasing decisions are made and outlines budgets and actionable steps based on internal analysis and external observations. Strategic procurement helps determine which goods/services to select from which suppliers, and the payment rates based on vendor data, market pricing, and other factors.
Every company relies on a steady supply of goods and services required for smooth daily operations, but not every company has a clear procurement strategy. A comprehensive procurement strategy defines how an organization strategically manages its procurement activities and gives a clear success roadmap for Chief Procurement Officers (CPOs). A procurement strategy is a medium- to long-term plan that includes policies and processes that drive cost optimization, resource management, and value creation.
A well-laid-out procurement strategy guides the procurement team through the purchase of goods and services at optimal costs and the best available quality. Such a strategy supports the organization’s strategic objectives and enables competitive advantage.
Procurement strategies go beyond transactional procurement relationships extending to long-term, lasting networks of suppliers that meet and exceed expectations. Cost efficiency, quality control, supplier management, operational visibility and transparency, and performance are the main focus points of a procurement strategy.
In the above section where we went through the basics of the procurement function, it is clear that there are several aspects to the function that need to be streamlined and optimized. For example, the sourcing step is crucial for the entire procurement process. With the right supplier strategy, a business can find the right vendor for delivering high-quality goods/services at costs that fit in the budget and delivered on time.
The potential consequences of not having a procurement strategy are –
- Forfeited cost savings
- Buying from the wrong supplier
- Disrupted supply chain
- Poor quality of products/services
- Bad supplier relations
A solid procurement strategy can turn procurement activities into a competitive advantage for the business. The procurement plan starts with a review of current spending patterns and trends. This data helps forecast future spending requirements by product category and plan for them.
The second step is building a supply chain for key spend categories, and formalizing agreements in contracts and catalogs. Finally, systems are put into place to automate the procurement process from order to payment. Strategic procurement helps determine which goods or services to choose from which suppliers, and how much to pay to each vendor based on data on vendors, market, pricing, and other factors.
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Why Do You Need a Procurement Strategy?
Having a procurement strategy helps businesses gain a competitive edge. Procurement strategies are a reflection of the company’s vision, goals, and objectives, and provide a set of methods and practices that align the procurement function with overall organizational goals. Here are the main reasons why you need a procurement strategy –
- A robust procurement strategy ensures that the final output is of the best quality and that resources are optimally utilized.
- Strategic procurement enables procurement teams to obtain well-structured and relevant data.
- Prioritizes purchases and balances the quality and price of goods or services.
- Effective procurement strategies help companies introduce and promote best practices for minimizing costs and maximizing the quality of output.
- Provides deeper visibility and control into organizational spend
- Enables strategic sourcing for cost-efficiency
- Improves key supplier relationships
- Improves contract delivery and control
- Improves policy and process compliance
- Increases supplier diversity
- Establishes sustainable development goal
Types of Procurement Strategies
Procurement strategies are unique to the organization. Every organization has unique procurement requirements and requires a strategy that is tailored to suit these requirements. Let us look at some of the commonly followed procurement strategies.
1. Cost reduction strategy
This is the most commonly followed procurement strategy. The main focus of this strategy is increasing profits by recognizing saving opportunities and decreasing the total cost of ownership. A good procurement strategy that operates on a tight budget must focus on cost savings. Achieving cost reduction is a complex and multi-layered process that is influenced by various decisions made across the company’s departments on several hierarchical levels. Cost reduction involves negotiating with suppliers, adjusting internal admin and operational expenses, and automation.
2. Risk management strategy
The impact of unexpected or unfortunate events in the procurement process is taken care of by the risk management strategy. This strategy enables organizations to compensate for any supply chain risks. The risk management strategy focuses on developing appropriate responses to potential procurement risks. Risk management strategy covers –
- Identify risky events and their impact
- Understand the origin, nature, and possible impact of risks
- Prioritize risks based on their impact
- Monitor processes to be prepared
- Mitigate the risk for preparing and lessening the impact on business
- Communicate risk management practices to procurement teams involved
3. Vendor development strategy
Maintaining strong vendor relationships is primary for the procurement team. Depending on the nature of cooperation with specific vendors (those that add value to the business) and the scale and importance of the goods and services they provide, it becomes important to invest in such vendors. This procurement strategy focuses on strengthening mutual partnerships.
Supplier strategy focuses on cooperation, feedback, and suggestions that help a vendor offer better and cheaper products. A vendor development strategy is more relevant when a purchasing company depends on one supplier for a specific product, and the supplier cannot meet the required standards.
By following vendor strategy, the company might assist the supplier in implementing processes to achieve the required quality levels. This strategy is most effective when implemented for a limited supplier selection or highly unique goods. For the success of such a strategy, efficient vendors are vital for achieving strategic goals.
4. Supplier Management and Relationship Building Strategy
This procurement strategy is about managing suppliers and relationships that the company builds with partners. Implementation of this strategy means that the company chooses an optimum mix of partners who would offer the best cost of goods or services for smooth cooperation.
This type of procurement strategy implies that any supplier that does not adhere to the company’s standards should be eliminated from the supply chain. The company might decide that it is necessary to alter the supplier base and increase or decrease its diversity to achieve a specific procurement goal.
5. Global sourcing strategy
This strategy takes care of the efficient sourcing of goods and services from suppliers across the globe. The global sourcing strategy enables the discovery and utilization of cost-efficient sourcing possibilities in a specific country or part of the world where goods can be produced more economically. With the increasing significance of the global economy, companies are forced to explore alternate source markets for maximizing profits.
6. Strategic sourcing
This procurement strategy consolidates the vendor pool to increase contract performance and security. This approach enables buyers to leverage a small number of trusted vendors, establish long-term relationships with these vendors, and take advantage of cost-saving opportunities.
IT procurement strategy – This strategy focuses on implementing IT to improve the efficiency of the procurement function. Technology like cloud computing, workflow automation, and robotic process automation can streamline the procurement function by eliminating redundancies and automating repetitive tasks.
7. Sustainable procurement
In light of global shortages and environmental concerns, sustainability in the supply chain assumes utmost importance. Sustainable procurement focuses on reducing waste, choosing energy-efficient alternatives, and leveraging purchasing power to promote positive environmental practices from vendors. Some of the ways to increase sustainability in procurement are –
- Minimizing inventory warehousing and transportation requirements
- Purchase recycled or eco-friendly products when/where available
- Implement green technology solutions where possible
8. Supplier lifecycle management strategy
Managing vendor relationships right from initial purchase to offboarding – creates safer and better procurement outcomes. Suppliers must be evaluated throughout the vendor lifecycle – from initial sourcing through contract negotiation and execution. End-to-end evaluation ensures that vendor contracts remain compliant and competitive. Adherence to company policies helps build stronger and mutually beneficial relationships with partner vendors.
Developing a Robust Procurement Strategy
How do you build a robust procurement strategy? Should you focus on the IT procurement strategy to get the right technological tools that help build a strong strategy, or should you focus on the supplier strategy, or should you focus on strategic sourcing? Here are 8 effective steps that help you streamline your procurement strategy –
1. Spend analysis
Analysis of the current state of spend in the organization is an important preliminary step in strategic procurement. The basis for the procurement strategy is to document the current expenditure and market situation (category-wise). The current state analysis includes gathering complete data on the historical spend and analyzing it in relevant segments. The segments must be named to reflect business reality and market environment for successful analysis. A thorough analysis of the spending will shed light on spending trends, cost-saving opportunities, and cost-reduction opportunities as well. The knowledge base is the foundation of a functional procurement strategy.
2. Onboard stakeholders
Once spend analysis is done, you need to identify all those that are impacted by the plan. The procurement strategy usually impacts the business management teams, suppliers, finance and accounting teams, subject matter experts, and end-users. Managing their requirements and expectations is vital for the success of the procurement strategy. Some of them may be in favor of the changes, while others may not support them change. Without 100% stakeholder engagement, the procurement strategy will not deliver the expected results. Some may have additional insights and business requirements that might be useful in framing the policy. Stakeholder engagement is a key factor in defining potential risks and opportunities.
3. Align strategy with organizational goals
The procurement strategy must align with the overall organizational goal and strategic intent of the organization. Fact-based spend analysis will help you align and prioritize your strategy to corporate goals across all business functions. The procurement strategy must gather inputs from – corporate vision and mission, corporate medium-term plans, annual budgets and projected revenue, commodity indices, and economic forecasts.
4. Invest in technology
Managing the huge volumes of data generated by business transactions and customer interactions manually is a cumbersome job. Moreover, managing big data manually is time-consuming, slow, and inaccurate. Visibility into data is key to framing a powerful procurement strategy. Automating key procurement tasks provides deep visibility and better control over these transactions. Cflow is a no-code workflow automation solution that can automate the procurement lifecycle. The reports and analytics feature in Cflow enables users to stay updated on the status of processes and gain better insights into spending.
5. Roll out procurement policy
The new policies, procedures, and operating models must be rolled out. This is an ideal opportunity for reviewing processes and practices and adjusting them to suit the new approach. Here, we mustn’t become the process police. It is best to communicate the opportunities and visualize the benefits for the stakeholders involved in the change. It is important to review policies regularly and discard anything that is causing more harm than good.
6. Define priorities
Procurement is dynamic and the list of sourcing opportunities is exhaustive. The data gathered from the procurement function must be reliable, cleansed, classified, and categorized, to derive useful insights from it. When business-critical areas of spend are covered in the procurement strategy, the underperforming sub-categories can be identified and addressed. Alignment and agreement on the set of priorities with stakeholders is essential to gain an understanding of procurement operations. The tactics and strategies that must be used to achieve procurement objectives must be clearly defined by the strategy.
7. Set KPIs
Tracking supplier and procurement performance opens up opportunities for continuous improvements and innovation. Measuring, monitoring, and reporting on supplier performance must be done based on key performance indicators. A performance-driven environment where employees are engaged and accountable can be set by KPIs. These measures must be aligned with KPIs to ensure that you are on the right track to delivering business impact.
8. Execute and adjust strategy
The procurement strategy is not static, it needs to be aligned to the changes in external and internal circumstances. It is best to consider the procurement strategy as the starting point. Fine-tuning the procurement strategy is done based on stakeholder feedback, data insights gathered from procurement software, and KPI data of key processes. While you adjust the strategy, new opportunities may emerge that have a higher likelihood of success than the existing ones in your plan. This requires prioritization of projects and timelines.
Examples of Procurement Strategy
Coming to procurement strategy examples, it should be borne in mind that there is no universal solution for the procurement function. Even companies of the same size might opt for different procurement strategies based on their values and business requirements. Procurement strategies that are commonly followed in organizations include –
Supplier consolidation – This is where supplier selection is streamlined into a single preferred vendor for each category or product type. This strategy reduces processing while increasing volume discounts.
Product benchmarking – This procurement strategy example identifies the prevailing market costs and total costs of products and supplies that your company uses to ensure competitive pricing with vendors.
Leveraging technology – Using eProcurement software to initiate competitive bidding from suppliers identify best-cost solutions and elicit best-price offers from a range of potential suppliers, is the main focus of this procurement strategy example.
Procurement forecasting – This strategy enables teams to anticipate and plan future purchases based on current and projected demands to understand the impact on cash efficiency. This may be paired with long-term contracts to enhance cost efficiencies further.
Sourcing similars – This strategy focuses on selecting products similar to current supply requirements from additional manufacturers to acquire quality options at competitive prices.
Technological Tools in Procurement
We have talked about the importance of embracing technology for the success of procurement strategies. Let us look at the top technological tools that can be used in the procurement strategy –
e-Procurement systems – These systems automate several aspects of the procurement process, leading to significant efficiency gains and cost savings.
Inventory management tools – These tools help track inventory levels, orders, sales, and deliveries.
Supplier management software – These tools help manage supplier information, performance, and interactions, and also streamline supplier selection and evaluation processes.
Spend analysis tools – These tools help in the analysis of spending data for identifying cost-saving opportunities and making informed procurement decisions.
Risk management tools – These tools help identify and manage the risks associated with suppliers and procurement activities.
Contract management software – Managing contracts efficiently and ensuring compliance is simplified by this software.
How does Cflow fit into your Procurement Strategy?
Cflow is a no-code cloud-BPM tool that can automate your procurement workflows within minutes. This workflow automation software comes with a host of features that can streamline key business workflows so that managers and leadership teams can gain useful insights for framing procurement strategies.
Drag-and-drop form builder – Cflow’s automation is designed to suit all types of workflows and for everyone in the organization.
Reports and analytics – All the data related to workflows is readily available for users to glance through, make informed decisions, and stay updated on employee productivity.
Rules engine – You can create one-click workflows, and send or approve pending requests based on rules that can be tweaked based on business demands.
You can use Cflow to streamline and power up your procurement strategy with updated and real-time data on procurement tasks and processes.
Key Takeaways
The Global Procurement Software Market was valued at USD 6.67 billion in 2022 and is expected to grow at a CAGR of 10.9% to reach USD 13.80 billion by 2029. This growth can be credited to a solid procurement strategy that includes cloud computing, intelligent automation, and other digital procurement methods.
Digital procurement strategy is all about combining human ingenuity with technology innovation to drive sustained procurement outcomes. A survey conducted by PwC on more than 800 procurement spread across 64 countries, revealed that cost reduction and strategic sourcing are the top priorities for CPOs. Start building your procurement strategy with a powerful workflow automation solution like Cflow. Get started right away- sign up now.
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