Procurement and Purchasing Strategy – 9 Steps To The Perfect Strategy
During the procurement process, having a procurement strategy is extremely necessary. Not only will it help the procurement manager get the best supplies possible, but it is also an indication of his skills and abilities.
Today, we are going to learn about the procurement strategy. You will define what it is, learn its different strategies, value its importance, and discuss how to create one.
By the end of this article, you’ll be creating your own procurement strategy like a pro.
Procurement Strategy– What is it?
By definition, procurement strategy is the detailed structure of how the procurement is handled by the procurement manager or a company. Think of it as an overview of how the whole procurement process starts, from selecting a supplier until choosing the methods on how to buy or procure the products or services needed for the company.
As a procurement manager, you can either have your very own purchasing strategy or your boss will hand out to you the company’s very own procurement process. Especially when you are filling in for another procurement manager who is on leave or may have resigned already, you’ll be given the option of following the process already used in the past. It is your job though to determine whether the actual strategy is worth following through.
If the procurement strategy does need changing, then it’s also up to you, the procurement manager, to create a brand new one.
Whatis a Purchasing Strategy?
A purchasing strategy identifies how an organization purchases materials or services. Its main goal is to decrease the bottom line and maximize cost savings.
This can be achieved by reducing inefficiencies, forming buying plans, and establishing approval workflows to get the result that the organization desires.
What is the DifferenceBetween Purchasing and Procurement?
Are you still confused about the difference between purchasing and procurement? Do not worry, we will give you a brief overview of its difference.
For starters, procurement means the process of identifying, shortlisting, selecting, and acquiring needed goods or services from a supplier.
The acquisition of goods can be done through direct purchases, biddings, or tendering processes.
On the other hand, purchasing has a league of its own. It means a set of functions that are associated with buying goods and services that the company needs.
The reason why many are confused is that it is often associated with procurement. However, purchasing is just a subset of a portion of the broader procurement function.
The Different Typesof Procurement Strategies
Because most companies usually procure goods or services from suppliers, there are also many different types of procurement strategies that can be used by the procurement manager. Some of the most common strategies are the following:
- Risk Management – This is the process of identifying, understanding, and grading risks that you may sometimes face during a procurement. This process seeks to better manage such a scenario.
- Green Purchasing – This is one type of purchase strategy that prefers the procurement of products or services that is environment-friendly. Thus, suppliers and supplies are checked to make sure they do not harm the environment.
- Vendor Development – A procurement strategy that focuses on the vendor and the quality of suppliers delivering them.
- Global Sourcing – A strategy that focuses on how an enterprise works to identify the most cost-efficient location for product manufacturing, even if it’s outside the country or not.
- Supplier Optimisation – This is a strategy where the company chooses the best mix of suppliers who can provide supplies at the best terms and prices.
The Importanceof the Procurement Strategy
Without a procurement sourcing strategy, a company is bound to make mistakes during the procurement process. A purchase strategy enables a company to not just save money by making smart procurement decisions, but the company can identify better suppliers too.
Building your own procurement process should also help in identifying the right purchasing goals and the creation of a good procurement policy.
Purchasing Goalsand Procurement Policy
A purchasing goal can either be just one rule or a bunch of rules for the procurement manager. So is a procurement policy.
To be specific, both mean rules that must be followed when creating a procurement plan or strategy.
The ideal framework for your procurement goal or procurement policy should have the following:
- Strategy Statement – The statement should include the basis and rationale for the procurement. For example, your basis for creating the procurement strategy is to buy 1000 new chairs for the office at an affordable rate.
- Desired results – This section is where you place data on the deliverables.
- Timeframe – This means the deadlines you’ve set for the procurement.
- Measures – These are the metrics used for evaluating the whole procurement process.
- Tactical Plan – This is where the steps of the procurement process are discussed in detail.
- Tools used – This is where you enumerate the tools used for the procurement. Tools such as Porter’s Five Choices, SCOPE analysis, Fishbone Analysis, and others.
Procurement Strategy– How to Make One?
Creating your very own procurement process need not be difficult. You simply need to know and understand the results that you want to get for your procurement. Do you want the company to save on money by getting from a cheaper supplier? Or do you want to get or procure the best materials for your company?
With those goals in mind, create a procurement strategy that is best suited for your company’s needs and budget allocation. Below are 9 simple steps in creating the perfect strategy:
1. Determine your business’ needs – In most cases, you’ll be determining the needs of your company, but just in case you do end up building your own business, then this is the first rule of creating your procurement strategy.
You need to understand what your company needs first for you to create the perfect strategy. Check documents, contracts, and other information that will give you an idea of what your company needs for procurement.
If you need to use tools, a category positioning matrix should help you in identifying key business requirements while developing your procurement strategy.
2. Analyze your organization’s spending culture – While some would advise procurement managers to keep this on top of their list when developing their procurement strategy, we believe that this should come after determining what your company needs.
Analyzing your business’ budget or spending habits is also important though, as it will give you an idea as to how much money you’re going to spend for the procurement as well as looking for options when it comes to sourcing suppliers.
3. Setting clear objectives – Once your company’s needs are identified, it is now time to think of the end goals for your procurement. While you are trying to come up with your procurement strategy, it will also be a good idea to use your company’s existing procurement policy templates that fit your company’s needs.
4. Assess market conditions – You’ve already taken care of your company’s internal procurement analysis, so the next thing that needs doing is to check for external data. Have a look at the supply market and determine its current condition. Data can be collected not just from your current supplier, but with other potential suppliers as well.
5. Procurement policies should be defined – For your procurement strategy to work efficiently, you should also come up with the best procurement policies to follow. We’ve already discussed what the ideal framework should be for your procurement policy, so check it out in the section above.
6. Implementing procurement software – Your company should have its own procurement software if you want to keep getting updates regarding the market trends and information from various suppliers.
If your procurement software needs updating, then it should be a part of your procurement strategy. If you don’t update your software, your procurement process is liable to get delays, late payments, and other issues due to human error.
7. Outlining your procurement strategy – Once you’ve finished discussing the nitty-gritty of your procurement strategy, then it’s time to create a draft of it. List down the desired goals, tactics to be used, data that was collated from all sources, and other information that is needed.
8. Developing a digital procurement process – With the data and information you’ve drafted for your procurement strategy, it’s time to create its digital copy.
Drafting a digital procurement strategy requires a revamping of your company’s procurement technology, process, strategy, talent, skillset, and supporting systems.
Keep in mind that digital procurement helps businesses in deploying the resources they need to procure and it also makes the whole procurement process easier and faster.
9. Refine, manage and execute the procurement strategy – Once you’re finished with developing the strategy, it’s time to start working on it. When it is executed, your strategy will need help from the other departments in the company.
This may include human resources, upper management, the finance department, and others. Once your strategy starts working, don’t forget to keep track and measure its progress and success.
What is the Procurement Strategy Framework?
The procurement strategy framework is like the outline of your procurement. An ideal procurement strategy framework includes:
- Your strategy statement
- Desired results
- Tactical plans
- Measures or metrics
- Tools or applications you will use
Examples of Procurement Strategy
Strategic procurement has no universal solution. Even companies of the same size will have different procurement strategies based on their goals and business requirements.
Some companies may select a supplier development strategy and choose to go with a single-source procurement. Thus, a single supplier is trusted to deliver goods and services that meet the quality requirements of the company.
This strategy is widely used, especially when sourcing software subscriptions in IT, doing office cleaning, or ordering staff training.
Other companies may decide to focus on procurement costs management and use auctions to identify the best price offer.
When reducing budget is the main objective of your company, the supplier selection process seeks to lower costs.
Nonetheless, procurement strategy is different for each company. The main factor of a company choosing its preferred strategy is by looking at its objectives and goals and aligning them with its strategy.
Real-Life Example of A Procurement Strategy
Gorillas is a German online grocery delivery business that continues to thrive in the market and continues to work hard on various strategies to be profitable. To achieve its goals, Gorillas formed a four-pillar strategy:
1. Expanding the range of products
Gorillas expanded their range of products to gain negotiation power. In e-commerce, the greater the offer, the fuller the basket. The assortment range of Gorillas has to grow rapidly due to the fact that it improves their negotiating position versus suppliers.
2. Automation in warehouses
The collection, scanning, and packaging of products by some companies are still carried out by people which comes with a hefty price tag. Gorillas saw an opportunity in using automation to optimize these processes in the long term.
3. Build more locations of mini-warehouses
Despite the fact that Gorillas need to spend a lot of money to procure more locations to build mini-warehouses, It has reduced the delivery radius and created more storage places.
4. Earning money with their app
Gorillas wants to focus more on its app as it can earn money with its personal app through negotiation partnerships and advertisements in addition to revenue from delivery.
As the number of downloads continues to increase, the company grows too and it can earn more money from personalized advertising.
Gorillas is successful in leveraging their negotiating position and integrating technology into their strategy as consumers continue to change their buying habits, especially using technology to procure their needed products.
What is Strategic Procurement?
Strategic procurement is a term used to encompass different procurement processes that support the long-term development of an organization. It aims to ensure that the goods and services that the business needs are delivered on time and purchased within the budget.
Additionally, it involves a careful analysis of supplier selection, payment terms, contract negotiation, and acquisition of goods. When it is done correctly, it can help the organization to optimize profit margin, reduce risks, and streamline its procurement process.
+ What is a procurement strategy?
A procurement strategy is a detailed process of how the procurement manager handles the procurement of materials or supplies.
+ How to create a procurement strategy?
To create a procurement strategy, one needs data, market and/or product research, sourcing for potential suppliers, and an automated system for assistance.
+ What is a good procurement strategy example?
A good procurement strategy example is one where the procurement manager is able to buy high-quality supplies/materials for the cheapest price possible. This is achieved thru market research, analyzing data, and sourcing for potential suppliers.
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