Written by Marijn Overvest | Reviewed by Sjoerd Goedhart | Fact Checked by Ruud Emonds | Our editorial policy
Procurement Strategy — 7 Steps To An Effective Strategy
Key takeaways
- A procurement strategy refers to the process of finding and procuring quality goods, services, or works through cost-effective methods.
- Various strategies benefit from implementing procurement skills and technological changes to ensure operational efficiency.
- Different situations/scenarios call for different procurement strategies that optimally address it. Use it with caution and planning.
Building an effective strategy in procurement is a key driving factor in the success of every procurement process. The appeal of building an efficient strategy includes cost reduction, risk management, sustainability, and many more.
In this article, we will be covering the simple steps required to build a robust procurement strategy that will help you understand the importance of each aspect of any procurement process.
We will look into the benefits of a strong strategy, as well as how these methods can aid you in reaching your business goals.
I have created a free-to-download editable procurement strategy template. It’s a PowerPoint file you can use to create your own strategy. I even created a video where I’ll explain how you can use this template.
What is a Procurement Strategy?
A procurement strategy refers to the process or method of finding and procuring quality goods, services, or works through cost-effective methods. These strategies involve various methods of finding and selecting suppliers, negotiating terms and policies, and carrying out procurement processes.
Establishing a well-defined procurement strategy involves more than employing cost-efficient and time-productive practices, it also entails extensive data analysis and market research that will effectively provide an accurately optimized and polished blueprint for the overall strategic process.
7 Steps to Create 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 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.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.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, 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.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.5. Formulate Procurement Policies
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 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.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.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.The Importance of Having a Solid 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 by 2019.
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.
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 Sourcing
Global sourcing 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.
Challenges in Creating a Procurement Strategy
In any aspect of business, there are pros and cons as well as benefits and risks. Several risks come with formulating a defined procurement strategy, such as:
1. Inaccurate Data
Inaccurate data can severely ruin your procurement strategy and derail your vision and objectives. For instance, overlooking your inventory levels can significantly impact your profits. A minor discrepancy in inventory data might lead to overstocking, resulting in a surplus of unsellable products.
On the other hand, you could also run out of stock, which would disappoint customers by failing to meet their demands. Both scenarios negatively affect profits, highlighting the importance of having accurate data.
To counter this, you must ensure that you are implementing quality checks in every area of your procurement process. You can do this by having a checklist to monitor each area of your process. Additionally, you can also use data cleansing tools that will help you improve your data collection process.
2. Lack of Clear Communication
Without clear communication, you might end up having misunderstandings with your suppliers that may lead to delays or even missed deadlines. When this occurs, arguments may arise that may tear your relationship with your suppliers.
To address this issue, it is essential to establish clear communication. Define the roles of everyone involved in the procurement process and hold regular meetings to update and discuss matters with suppliers and stakeholders. This approach ensures that everyone understands their responsibilities and remains well-informed.
3. Supplier Risk
Unreliable suppliers don’t just cost you a lot of money but also damage your reputation and disrupt your operations. Additionally, you may end up having more problems when you are partnered with non-compliant suppliers.
To address this, you must ensure that when you are screening your suppliers, you have not just asked them questions but also checked their background. You must also diversify your supplier base to ensure that you are not heavily reliant on a single supplier.
4. Lack of Accountability
In the procurement process, a team of procurement professionals always works together to ensure that the procedures are smooth and efficient. Each member also has a process to monitor. If no one is accountable for a specific procurement process, problems may arise and it may only be noticeable when it becomes worse.
To combat this, you must have procurement metrics in place for your procurement team to set clear expectations for your procurement process. By doing this, each member of your procurement team has an accountability to achieve your set goals.
5. Reluctance on Using technology
If you will continue to stick to manually doing things in your procurement process. Then you are losing a lot of money right now. By not integrating any tools or software that can help your procurement process, you will have a hard time tracking data and making the procedures more efficient.
The simple solution to this is to integrate tools or software into your procurement process. By allowing automation in your procurement process, you will immediately see an increase in productivity in your operations.
Additionally, you must not forget your procurement team. Upon integrating advanced technologies, you must ensure that they are well-trained to utilize all automated technologies within your procurement process.
Procurement Expert’s Advice on Procurement Strategy
For this article, we asked a seasoned procurement professional to share his insights regarding procurement strategy.
Sjoerd Goedhart
Owner, Goedhart Interim Management & Consultancy
LinkedIn Profile: https://www.linkedin.com/in/sjoerdgoedhart/
1. Can you share a personal example of procurement strategy? What can readers learn from this?
“In recent years, more attention has been paid to sustainable sourcing and risk management as a procurement strategy instead of cost reduction and global sourcing.
Driven by global geopolitical instability and attention to climate objectives, this has led to adjustments in the procurement strategy of many companies.”
2. What should readers know about procurement strategy?
“Having a clear procurement strategy is a must to be successful in procurement and as a company. It helps a company to source the lowest prices and to manage (potential) risks.
This will lead to continuity in the availability of raw materials to continue the production and sale of goods.”
Follow-up Question: What trends or changes do you anticipate in procurement strategies, and how can companies remain agile and adaptive in their approach to stay competitive?
“I think the key trends in procurement strategy today revolve around regulations concerning sustainability, ESG laws, and CSRD in the EU and the Netherlands. These regulations will impact how companies must comply with and report in their procurement processes.
Every procurement strategy should also consider the incorporation of AI, requiring companies to form opinions on its implementation. Additionally, companies should focus on becoming experts in ESG and CSRD to assist others in navigating these complex regulations.”
3. What is the biggest misconception about procurement strategy? What do most people get wrong about this topic?
“Strategy does not have to be a lengthy and comprehensive document. In fact, for some companies, it can be a simple one-page plan.
The most important thing is to think about where you want your company or department to be in a few years, how you plan to achieve those goals, and what specific objectives are linked to your strategy.
By doing this, you will provide clear direction for your teams to adjust their plans and align their decisions to contribute to the strategic goals.”
4. How should companies adapt their procurement strategies in response to global economic changes?
“Recent global developments in the field of oil and gas prices, raw materials, and transport have forced many companies to evaluate and review their purchasing strategy.
A movement has been initiated from international to regional/local, from fossil to sustainable, and from risk-bearing to risk-avoiding.”
Follow-up Question: What are the indicators or triggers that prompt companies to reassess their procurement approaches in the face of global economic changes?
“Yes, I believe that over the past few years, factors such as economic crises, heightened regulatory requirements, and political instability in various regions have been key triggers prompting companies to reassess, update, or rewrite their procurement strategies.”
5. What role does technology play in shaping modern procurement strategies?
“Technology plays an important role in contributing to better analysis and data, as well as automating manual tasks.”
6. What are important variables to include in your procurement strategy?
“In my opinion, nowadays, sustainability, compliance, quality management, and certification are becoming more and more important. Therefore, risk management is a mandatory strategy to include in the total procurement strategy.”
7. Do you have tips to improve your procurement strategy? Or how to set it up?
“Improving the strategy differs depending on the specific strategy being addressed. In general, it’s essential to conduct a current state analysis or SWOT analysis.
Ensure that the procurement strategy aligns with the organizational strategy, set clear objectives, and regularly measure these objectives, incorporating a plan to close any gaps.
Additionally, involving stakeholders to contribute and align is crucial.”
Follow-up Question: How do you involve stakeholders in the development and improvement of a procurement strategy, and are there specific communication or engagement strategies that have proven effective?
“The development and improvement of a procurement strategy require specific communication or engagement strategies that have proven effective. It’s a difficult process because involving stakeholders isn’t a one-size-fits-all approach.
Formal meetings and informal interactions, such as reporting progress and sharing KPIs, are essential. However, effective stakeholder involvement also involves informal methods, like personal conversations during car rides.
Procurement professionals should possess both formal and informal ways of engaging stakeholders to effectively manage their involvement.”
Conclusion
To sum up, designing an effective procurement strategy is an essential step toward a successful procurement process. Not only does having a strategy lead to cost reduction but also significantly improves risk management, sustainability, strong vendor relations, and more.
An effective procurement strategy serves as a detailed outline for a company’s vision and objectives, which enhances overall quality and success.
Strategic sourcing is essential in creating strong and mutually beneficial relations with vendors. Each company should formulate a strategy that fits their specific requirements, which will vary depending on organizational structure, market reach, and other factors.
Frequentlyasked questions
What is a procurement strategy?
A procurement strategy is the process of finding and procuring quality goods, services, or works through cost-effective methods.
Why is a procurement strategy important?
Implementing a procurement strategy allows organizations to create a clear outline of their needs, negotiating terms, and business policies.
What are the different types of procurement strategies?
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.
About the author
My name is Marijn Overvest, I’m the founder of Procurement Tactics. I have a deep passion for procurement, and I’ve upskilled over 200 procurement teams from all over the world. When I’m not working, I love running and cycling.
