9 Steps to Build an Effective Procurement Strategy + Examples

What is a Good Procurement Strategy?

A good procurement strategy refers to the process or method of finding and procuring quality goods, services, or works through cost-effective methods, while also aligning with broader organizational goals. These strategies involve researching and selecting the right suppliers, negotiating favorable terms and policies, and carrying out procurement processes in a structured, efficient manner.

Establishing a well-defined procurement strategy goes beyond simple cost savings and time efficiency; it requires extensive data analysis and market research to develop an accurately optimized and refined blueprint for the overall strategic process.

9 Steps to Build an Effective Procurement Strategy

Creating an effective procurement strategy is an essential step in aligning procurement methods with long-term business goals and creating successful business transactions by reducing overall risks. Here are seven crucial steps in achieving an effective procurement strategy.

1. Analyze Company Expenditure

The first step in building a procurement strategy is spend analytics or looking into your current company expense culture; this is a way for organizations to look at their current spending habits and gauge where they can improve and reduce costs. 

Furthermore, this data will provide a base for their procurement strategy and will give teams an accurate idea of what to expect from future negotiations.

Example: For instance, Procter & Gamble conducts thorough spend analytics by gathering data from multiple business units and using advanced analytics tools to consolidate their expenditures. Their approach not only reveals spending patterns and highlights areas with high costs, but also identifies opportunities for supplier consolidation and bulk discount negotiations. The insights gained establish a realistic baseline for future negotiations, enabling the company to pinpoint inefficiencies and optimize costs. This data-driven analysis forms the foundation of their procurement strategy, ensuring both cost reduction and enhanced supplier relationships over the long term.

2. Establish Business Needs

In order to implement a successful procurement strategy, it is essential to have a clear understanding of your company’s needs. This analysis will allow you to determine which areas need looking into and will open a discussion into more efficient and sustainable practices.

One way to establish this is through product category mapping, which is a time-saving, effective method of processing data and other information needed to design a solid procurement strategy.

Example: IBM establishes its business needs by conducting a thorough analysis of its internal processes and aligning procurement goals with overall strategic objectives. The company employs product category mapping to process vast amounts of data efficiently, allowing them to pinpoint areas with potential for cost savings and improved efficiency. This method not only identifies key sectors for closer scrutiny but also opens up discussions on adopting more sustainable practices. By clearly defining its requirements, IBM lays the groundwork for a robust procurement strategy that supports long-term operational excellence.

3. Evaluate Market Dynamics

Once you’ve analyzed your business needs, you need to have an understanding of current supply market conditions. Knowing your market is essential for organizations who want to create a successful procurement strategy.

A number of methods such as Porter’s five forces model, PESTEL, SCOPE, and SWOT, can be used to analyze various aspects of your business and help you determine which areas are doing well, and what steps you can take moving forward.

Example: Caterpillar evaluates market dynamics by applying comprehensive analytical frameworks such as Porter’s Five Forces, PESTEL, SCOPE, and SWOT. The company systematically assesses competitive pressures, economic trends, regulatory environments, and technological changes impacting the supply market. This in-depth analysis not only identifies Caterpillar’s internal strengths and weaknesses but also uncovers external opportunities and threats. The insights gained from this evaluation enable Caterpillar to fine-tune its procurement strategy, ensuring it remains competitive and agile in a dynamic market environment.

4. Specify Precise Goals

After you determine your business needs, you then need to specify a set of objectives. These are the goals you aspire to when creating a procurement strategy.

As an example, using the information you’ve collected up to this point, you can set a goal to implement a supplier diversity program, to strengthen relationships with diverse businesses and suppliers. 

The measures you take in this step need to be SMART — specific, measurable, achievable, relevant, and time-bound. Any objectives you’ve set should also align with company values, policies, and overall vision. 

Example: Microsoft specifies precise goals for its procurement strategy by establishing clear, SMART objectives that align with its overall corporate vision and values. For instance, leveraging data gathered from previous analysis steps, Microsoft set a goal to implement a supplier diversity program to enhance relationships with diverse suppliers. These goals are defined to be specific, measurable, achievable, relevant, and time-bound, ensuring that every objective supports broader business priorities and drives sustainable growth.

5. Formulate Procurement Policies and Procedures

The next step after you’ve identified which needs should be prioritized and which goals to set, is to formulate your policies. Define procurement policies and procedures for each function and assign specific roles to your team.

Having identified the aspects that require attention, your next step is to review your procurement policy to evaluate what data collected during the analysis needs to be prioritized.

Consider drafting procurement policy templates that encompass your organization’s requirements. Preferably, a company’s procurement policies should provide extensive guidelines on ethical practices and sustainable methods.

Example: General Electric (GE) implements its procurement policies and procedures by first reviewing data collected during prior analyses to identify key priorities. GE develops comprehensive procurement policy templates that clearly outline ethical practices, sustainable methods, and detailed guidelines for each procurement function. The company assigns specific roles and responsibilities within its procurement team to ensure accountability and adherence to these policies. By doing so, GE creates a structured framework that not only supports efficient decision-making but also reinforces its commitment to sustainability and ethical conduct throughout its supply chain.

6. Draft a Procurement Strategy

You can decide how your strategy will operate based on the goals you’ve set. 

For example, if your objective is to prioritize supplier relationship management and global sourcing, one way to achieve that would be through creating a supplier diversity program where your business commits to having a wide range of suppliers from different social and economic backgrounds.

This approach is an effective way of encouraging inclusivity in vendor collaborations and building diverse and equitable supplier relationships that will effectively contribute to a strong and sustainable supply chain.

In today’s virtual age where research-driven functions are pivotal, having a well-defined procurement strategy is crucial to sustaining a successful business.

Example: Walmart drafts its procurement strategy by first aligning its approach with clearly defined objectives, such as enhancing supplier relationship management and expanding global sourcing efforts. To achieve this, Walmart implements a supplier diversity program that commits to engaging a wide range of vendors from different social and economic backgrounds. This initiative not only promotes inclusivity in vendor collaborations but also builds a robust, sustainable, and equitable supply chain. Leveraging data-driven insights and modern digital tools, Walmart continuously refines its strategy to ensure it remains competitive and resilient in today’s dynamic virtual marketplace.

7. Design a Digital Procurement Strategy

Not only does a digital procurement strategy prompt better cost savings, it encourages companies to make well-informed decisions, mitigate risks, and foster strong vendor partnerships.

By integrating these practices with other objectives, organizations can also pursue other long-term goals, such as sustainability, increased transparency, competitive demand, and strategic sourcing.

Example: Amazon designs its digital procurement strategy by leveraging advanced analytics and integrated digital platforms to streamline procurement processes and drive cost savings. Their approach enables real-time data insights, which support well-informed decision-making, risk mitigation, and robust vendor partnerships. By integrating digital practices with broader objectives, Amazon not only enhances transparency and strategic sourcing but also supports long-term goals such as sustainability and competitive demand in a dynamic marketplace.

8. Supplier Risk Assessment and Management

This step involves identifying, analyzing, and monitoring potential risks related to suppliers, as well as developing strategies to mitigate these risks. It ensures business continuity and reduces the impact of unexpected issues.

Additionally, establishing clear communication channels with suppliers enables early detection of potential disruptions. Regular audits and assessments further strengthen the ability to manage and reduce risk.

Example: Johnson & Johnson implements a comprehensive supplier risk assessment and management strategy. The company systematically identifies, analyzes, and monitors potential risks within its supplier network, developing robust mitigation strategies to ensure business continuity. By establishing clear communication channels with suppliers and conducting regular audits and assessments, Johnson & Johnson is able to detect early signs of potential disruptions and address them proactively. This approach not only minimizes operational risks but also reinforces strong, transparent supplier partnerships, contributing to a resilient and sustainable supply chain.

9. Implementation, Monitoring, and Continuous Improvement of the Strategy

After defining the strategy, it is crucial to execute it effectively. Include a system to track key performance indicators (KPIs) and conduct regular reviews to identify opportunities for improvement, respond to market changes, and maintain competitiveness.

This step also involves training the team on new processes and technologies to ensure seamless adoption. Periodic benchmarking against industry standards can help refine the strategy and drive ongoing operational excellence.

Example: Unilever executes its procurement strategy through a comprehensive system that emphasizes effective implementation, continuous monitoring, and regular improvement. The company establishes clear KPIs and utilizes real-time dashboards to track performance, conducting periodic reviews and benchmarking against industry standards. Additionally, Unilever invests in training its teams on emerging processes and technologies, ensuring seamless adoption across the organization. This proactive approach enables the company to identify opportunities for enhancement, swiftly respond to market changes, and maintain its competitive edge in the supply chain.

Why You Should Have a Good Procurement Strategy

An effective procurement strategy depends on a number of factors, such as vendor risk management, cost reduction, sustainability, global sourcing, buyer-supplier relationships, and total quality management.

By designing a solid procurement strategy, organizations can create a clear outline of what they want, how they will negotiate their terms, how to ensure the purchased products are delivered on time, as well as how to build strong relationships with their suppliers.

For instance, PepsiCo reaffirmed its capabilities by streamlining its global sourcing, which reaffirmed its ability to succeed in its objective of reaching productivity savings worth $5 billion.

In their five-year strategy, they incorporated enhanced investment in industrial automation, restructuring their supply chain, and refining back-office operations with the aim of modernizing the overall organization across the entire enterprise.

6 Types of Procurement Strategies

There are a number of methodologies used to help businesses work efficiently while saving time and money.

As an experienced procurement manager from amongst others Ahold Delhaize, I will give some personal examples of how I did it:

1. Cost Reduction

This type of strategy is beneficial to organizations in accounting for company expenditures and improving organizational functions.

Implementing strategies that assist vendor negotiations, identify more economical alternatives, and modernize procurement systems is key to ensuring high-quality and cost-effective purchases.

Cost reduction is of course one of the key objectives of a procurement department. Naturally, I can share many strategies and experiences on how to achieve this, and much of this information can also be found on our platform.

My advice would be to read more articles on topics such as the RFx process or to gain more knowledge of negotiation itself by taking one of our negotiation training courses, or those offered by another reputable organization.

2. Sustainable Purchasing

Also known as green purchasing, sustainable purchasing highlights the procurement of quality goods and services with low environmental impact.

This strategy covers products made from reusable materials or resources with low energy consumption. Sustainable procurement is an ideal option for businesses striving toward minimizing their carbon footprint. 

I’ve seen this strategy become increasingly important over the past 20 years. When I started in procurement, there was hardly any consideration given to how sustainable articles or processes are.

Now, a company can’t survive without having good answers to these questions. The sale of greener products has also significantly increased over the years. There are plenty of examples in every industry where greener alternatives can be found in many categories.

As a procurement manager, you can make a difference by purchasing more sustainable products, but there’s also a lot to be gained by focusing on packaging. Using less plastic, cardboard, and other packaging materials helps companies contribute to sustainability goals.

3. Risk Management 

Risks are a part of any business transaction or process. Risk mitigation concentrates on minimizing risks related to the procurement of goods and services. The ability to identify risks is crucial in effectively managing possible issues and taking appropriate, proactive action.

But how do you mitigate risks in procurement? To create an effective risk management outline, businesses can conduct research into potential risks, formulate a risk register, and employ policies accordingly.

Risk reduction and cost reduction can be contradictory. Although cost reduction is very important, it can be a good idea to sometimes pay a bit more in order to avoid certain risks. A good example of how I did this was by spreading volumes across different suppliers. If I had chosen to consolidate the entire contract with one supplier, I could have obtained a lower purchase price.

However, I chose to split the volumes to ensure that if supplier A couldn’t deliver (for example, due to a fire in a factory or other calamities), we could quickly order the volumes from supplier B. We only did this for our strategic items and it certainly cost us some money. However, this saved us multiple times and ensured that availability was maintained.

4. Supplier Relationship Management 

Supplier relationship management emphasizes forming robust supplier relationships and empowering them to enhance their capabilities. Organizations and procurement teams do this by providing team support and extensive preparation.

This approach allows procurement managers to assess the efficiency and quality of the services they purchase while utilizing vendor management software tools to better coordinate processes and strengthen supplier relationships.

5. Global Procurement

Global Procurement is a well-defined strategy that entails procuring products and services from an expansive range of international suppliers. The advantage of this approach lies in the enhancement of competitive pricing and the presence of a diverse supplier base that offers innovative, quality products.

6. Total Quality Optimization

Total quality optimization is a method of strategy that ensures quality procurement by way of acquiring the right products that adhere to the highest standards.

Organizations execute this strategy by clarifying their standards for the products they purchase, as well as performing thorough inspections in the initial stages of the process.