In an increasingly competitive market, a procurement strategy is used to pay close attention to the operational performance of a business. Establishing one allows businesses to identify areas that are often overlooked in order to reduce costs.
Here is a complete guide to what a procurement strategy is and how to develop one in 8 steps.
What is a procurement strategy?
In business, the term procurement refers to the act of acquiring or purchasing services or goods on a large scale.
A procurement strategy details how a business should deal with its procurement process. This provides an overview of all of the steps that are involved in procurement and can be used as a roadmap for the way a business conducts its procurement activity.
A procurement strategy framework helps businesses choose:
- products or services,
- methods and procedures that are going to be used during exchanges with suppliers.
An effective procurement strategy should include:
- a strategy statement: these are the objectives of your strategy,
- the desired results: these are the deliverables you expect,
- a timeframe: these are deadlines that you must meet,
- a tactical plan: this explains how your strategy will be implemented,
- key performance indicators: these are business metrics that are used to evaluate the procurement process,
- dedicated tools: these are the tools that can be used to study the internal and external environment of your business in order to set up a relevant procurement strategy.
Types of procurement strategies
Since most companies purchase or acquire goods or services from suppliers, here are a few types of procurement strategies that are commonly found in business:
- risk management
- supplier optimisation
- green purchasing
- vendor development
- global sourcing
Procurement strategy matrix
The Kraljic Matrix is a popular method used when setting up a procurement strategy. It is used to classify and analyse the purchasing portfolio of a company.
According to Peter Kraljic, a purchasing strategy depends on two key factors:
- The strategic importance of purchasing: volume of expenditure, Total Cost of Ownership (TCO), profitability, differentiation and value-added for the company and the sales process.
- The complexity of the supply market: monopoly or oligopoly, entry barriers, technological evolution, logistics cost or complexity etc.
This principle is illustrated with a chart that can be used to prioritise purchases and sort them into four main categories.
- Non-critical items
- Leverage items
- Bottleneck items
- Strategic items
How to develop a procurement strategy in 8 steps
Here are eight steps that you should implement when developing your procurement strategy. Please keep in mind that these steps should be adapted to your procedures. And, you should implement additional actions or sub-steps according to your needs.
1. Analyse expenditure
When setting up a procurement strategy, the first step that you should consider is analysing your current expenditure. This will provide you with insight into your current spending habits in order to identify areas that are often overlooked and where you can cut costs.
Moreover, this information will serve as the foundation of your procurement strategy and will allow you to have a clear idea of what you should expect from your future supplier.
2. Identify needs
Next, one or more members of your company (e.g. the procurement team) must identify and formulate a need for products or services.
This need must be analysed and confronted with the requirements of your procurement process. This a key factor that you must consider when choosing suppliers in order to guarantee cost savings.
3. Study the market
Once you have identified your needs, you must now have an overview of current market conditions with an external analysis.
To study the market efficiently, here are a few methodologies that you can choose from:
- Porter’s five forces can be used to understand the competitiveness of your business environment and identify your strategy's potential profitability,
- a PESTEL analysis helps you to identify the main external opportunities and threats in your market,
- a SWOT analysis combines external and internal analysis to summarise your Strengths, Weaknesses, Opportunities and Threats.
However, you must keep in mind that market conditions may change frequently depending on the type of industry you are in. Therefore, it is recommended to make sure that the information that you collect is frequently updated and stays up-to-date over time.
4. Set realistic objectives
Now that you have identified your needs and completed an external analysis of your market, the next step is to set your objectives.
The information that you have collected in the previous steps will allow you to identify the needs of your procurement strategy which can then be ranked according to their level of importance.
5. Implement procurement guidelines
Once you have studied your market and set your objectives, you must now create a list of practices that you can implement to improve your current procurement process.
It is recommended to review your current procurement guidelines and adapt it to the current needs of your business that you have identified in the previous steps.
If you start a new procurement guidelines from scratch, there is a chance that you miss out on some key aspects that can be overlooked.
Ideally, procurement guidelines are used by everyone involved in the procurement process, as it lists solutions to possible challenges.
6. Use a dedicated tool
A procurement process involves multiple steps that must be followed with precision in order to avoid mistakes that could result in delays or late payments. This can be a difficult task to manage as it is time-consuming.
However, with a dedicated tool, you will be able to improve employee productivity and reduce errors by eliminating manual data entry and associated inefficiencies.
With an enterprise management software such as NetSuite, businesses of all sizes can set up and manage procurement procedures in an easy-to-use interface.
This can save employees time, reduce errors and lower costs by channelling purchases to approved suppliers and pre-negotiated contracts.
Another alternative is Smart by GEP, a cloud-based procurement software designed to prevent supply chain disruptions by monitoring expenditure, supplier contracts and savings.
Zycus is another popular tool used by businesses of all sizes. Its intuitive platform improves communication and workflows with suppliers and offers a plethora of features including eProcurement, eInvoicing, inventory management and dynamic discounting.
7. Set up and execute the procurement strategy
The following step is used to identify the desired goals of your procurement strategy and the strategies that will be used to achieve them.
It is recommended to use SMART goals when setting up your procurement strategy:
© Incremental marketing group
Then, once you have implemented your procurement strategy, you will be able to spend more time focusing on how you can improve supplier relationship and the strategic part of procurement instead of focusing on administrative tasks that may take up a lot of time.
8. Tailor the strategy to your needs
Once you have created and implemented your procurement strategy, the final step is to track and measure its progress and identify areas that could be improved in the future. This will require the participation of other departments that are involved in the process such as HR, production, administration, sales or finance for example.
Now that you know what a procurement strategy is and how to implement one, it is in your hands to choose the one that fits your needs. Take your time and plan out all of the details that you want to include in your strategy. And, once you put it into action, you may be able to improve your cash flow and relationships with suppliers!