Creating a solid procurement strategy that aligns with your business goal is the first step toward a higher ROI. But what exactly is it, and how does it fit into your overall procurement processes?

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What This Article Covers:

• What Is Procurement Strategy?
• Types
• Steps
• Key Elements
• Importance
• Next Steps

What Is a Procurement Strategy?

A procurement strategy is the long-term plan or method used by organizations to build strategic supplier relationships to acquire supplies at cost-effective rates. It reflects the company’s goals and objectives and includes a set of practices that align with them.

Some of its common objectives include better spend control, improved cost efficiency through strategic sourcing, and enhanced supplier diversity, quality management and product development. Its primary purpose is to use optimal resources to provide the best output quality.

Procurement Strategy Matrix

The Kraljic Matrix is a tool used in procurement strategy to identify the best approach for sourcing different categories of goods and services based on their profit impact and supply risk. It consists of four categories:

• Strategic Items: High-profit impact, low supply risk. These items are critical to an organization’s success and require a strategic procurement approach, with a focus on long-term supplier relationships and cost optimization.
• Leverage Items: Low-profit impact, low supply risk. These are typically commodity goods and services procured through a direct sourcing approach, with a focus on cost reduction and supplier standardization.
• Bottleneck Items: High-profit impact, high supply risk. These have a significant impact on an organization’s profitability and require a managed procurement approach, with a focus on risk management and supplier collaboration.
• Non-critical Items: Low-profit impact, high supply risk. These aren’t critical to an organization’s success and can be procured through a passive approach, with a focus on reducing administrative overhead.

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Types

Organizations are always looking for time-saving and economical strategies. There are various strategy types you can employ to help improve your procurement processes. Some of the popular ones are discussed below:

Cost Reduction

This is one of the most common procurement strategies used by businesses to save money and maximize profit. How’s it achieved? By identifying cheaper alternatives!

Start with streamlining the purchasing process, negotiating with vendors, adjusting operational expenses and looking for cheaper alternatives by lowering the total cost of ownership (TCO) of the procured products.

Risk Management

As the name suggests, this process is all about mitigating potential risks associated with your procurement process. The core steps involved in risk management are as follows:

• Identifying probable risks
• Assessing their nature and potential impact
• Prioritizing based on their potential effect
• Monitoring employee preparedness
• Mitigating by using pre-established contingency plans
• Communicating risk management practices

Supplier Management & Optimization

This particular procurement strategy focuses primarily on fostering supplier relationships and setting and enhancing performance standards. As a follow-up, you can remove any vendors from your supply chain who fail to adhere to the set company standards.

Green Purchasing

If you’re looking to reduce your carbon footprint and operate sustainably, you can take the green purchasing approach. How do you do that? By identifying vendors that follow the green philosophy and use energy-efficient, recycled materials generating low emissions.

Global Sourcing

The purpose of this strategy is to diversify your supplier search to procure services at a cost-effective rate. Global sourcing enables you to pick from multiple supplier alternatives with maximized production capacity.

Total Quality Management

Streamline your supply chain management technique by detecting errors and optimizing manufacturing processes. To achieve total quality management, implementing quality control, setting and conducting inspections are some necessary steps.

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Steps

The purpose of an efficient procurement strategy is to eliminate maverick spend, minimize purchasing errors, ensure policy compliance and recognize cost-effective opportunities. To develop a robust procurement strategy follow the steps below:

Analyze Current State

The first step towards developing a procurement strategy is to assess and identify areas of improvement in your supply chain. This primarily focuses on organizational spend — product acquisition and the amount spent on them and identifying different departments associated with the procurement process.

The actionable data gathered after analysis will give you insight into spend trends and highlight overlooked areas where cost-cutting is probable.

Engage Stakeholders

Collaboration with key stakeholders and partners is essential to developing a suitable procurement strategy. Having your stakeholders actively participate and be on board when proposing change is vital to an effective process.

Align Strategies

Once you’ve evaluated your business needs, it’s essential to set specific, achievable objectives. Having your objectives outlined, you can align your procurement strategy per the set goals.

Define Procurement Policies

Review process workflows and existing procurement policies for each department. The purpose of this is to recognize and address inefficiencies to adjust policies per the new approach.

Create an Outline

Now that you’ve evaluated your business needs, set objectives and defined policies, it’s time to outline your procurement strategy. The aim is to prepare SMART goals:

Specific: Setting up goals on par with the company’s needs and objectives.
Measurable: Monitoring the progress of set goals.
Achievable: Making your goals achievable based on your existing resources.
Realistic: Goals that align with company values and can be realistically accomplished.
Time-bound: Have a deadline associated with the goals.

Implement Procurement Software

Managing data manually can be tedious and slow, leading to inaccuracies. Automation helps curtail these issues and improve effectiveness. Implementing procurement tools enables visibility, boosts compliance, and mitigates risks.

Procurement tools can assist you with various functions, including:

• Sourcing, purchasing and generating purchase orders
• Vendor and supplier management
• Inventory control
• Spend reporting
• Billing and Invoicing
• Contract Management

Execute & Adjust

The final step is executing the procurement strategy, which you then need to analyze and review. To further fine-tune the process, use actionable data collected from measuring the success of implementing the strategy.

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Key Elements

The elements of a procurement strategy are the building blocks that form the foundation of the procurement process and include:

• Objectives and Goals: Define the purpose and outcomes desired from procurement activities, such as reduced costs, improved quality and strengthened supplier relationships.
• Market and Supplier Analysis: Understand the current market conditions and assess the capabilities and performance of potential suppliers to identify those that can meet your organization’s needs.
• Cost and Value Analysis: Evaluate the total cost of ownership for each item or service procured, including direct and indirect costs, to determine the best value for your money.
• Risk Management: Identify, assess and mitigate potential risks associated with procurement activities, such as supplier risk, contract risk and market risk.
• Stakeholder Engagement: Engage with key stakeholders such as internal customers and suppliers to ensure that procurement activities are aligned with their needs and expectations.
• Performance Improvement: Monitor and evaluate the performance of procurement activities and suppliers and implement continuous improvement initiatives to enhance performance.
• Sustainability Considerations: Incorporate sustainability considerations into procurement activities, such as using suppliers that have environmentally friendly practices or procuring products made from recycled materials.

Importance

An effective procurement strategy will aid in streamlining processes and enhancing transparency by setting clear guidelines. It’ll help create a system to efficiently track progress, measure the results and identify areas for improvement.

It also involves implementing a purchase management system to improve the purchasing process and help develop supplier performance standards.

Other than these, a robust procurement strategy improves supplier relationships and uses automation to eliminate manual tasks, thus, making the process cost-effective and less time-consuming.

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Next Steps

The goal of a successful procurement strategy is to improve cash flow, deliver business value and improve supplier relationships.

Are you looking for procurement software to facilitate and execute your procurement strategy? Our comparison guide can give you a look at some of the top performers in the category.

Have you implemented a procurement strategy before? What were the biggest challenges? Let us know in the comments below!