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Strategic Procurement – Everything You Need To Know
- Strategic procurement focuses on acquiring goods or services to meet customer demand while aligning with long-term organizational goals.
- Strategic procurement emphasizes cost reduction and optimal use of purchasing power without compromising quality.
- Procurement, sourcing, and supply chain management are all part of the same process continuum but there are key differences between them.
Strategic Procurement is having a long-term plan to meet procurement goals in the fastest and most efficient way possible. Procurement is already a tricky game and it requires the kind of efficiency only possible with thought and intention. Thus, it feels like a no-brainer to mix both procurement and strategy as these two seem like a match made in heaven.
If you’re interested to know more then we are here to be of service. And if you want something more in-depth than this article you should check out our Procurement Strategy Course.
What is Strategic Procurement?
Before anything else let’s dive into the definition of strategic procurement. Strategic procurement or procurement strategy is a process of acquiring the goods or services of the right quality, at the right price, and at the right time to meet customer demand.
It doesn’t fall into the hands of one department completely either. As much as the procurement professionals captain procurement strategy it’s also an organization-wide process for a company’s long-term goals.
Strategic procurement is set up to make sure that it gets the most efficient return of a company’s purchasing power while at the same time reducing operational risk. There’s a big emphasis on cost reduction when it comes to strategic procurement and that’s because of how procurement is the acquisition of goods and services from external sources.
This process involves a big budget and this budget has to be used wisely. Just because there’s a lot of money to go around doesn’t mean one is allowed to splurge. As long as the goods and services are still of high quality, strategic procurement makes sure to get the best deal possible with as little spending as possible.
Strategic procurement is also particularly useful in a globalized world as it keeps companies in the know when it comes to navigating the challenges and opportunities of the global market. This is due to strategic procurement being such a data-driven thing. Strategy is in the name for a reason after all,
Additionally, strategic procurement is associated with many other terms, some of which seem to be interchangeable. But is strategic procurement interchangeable with strategic sourcing or supply chain management? Let’s find out, shall we?
Procurement vs Sourcing vs Supply Chain Management
Strategic sourcing and supply chain management come up at least half the time that strategic procurement is mentioned. Some people even use them interchangeably but it’s important to know that there are distinctions between them and also to know what these distinctions are.
The most important thing to note before we differentiate is that procurement is an umbrella term that encompasses sourcing and supply chain management. However, these terminologies should not be interchangeable since they all have different functions within the overall procurement process.
Though both exist within the same process continuum they have different strategies, dynamics, and implementations at play. This can be seen clearly by the differing KPIs (key performance indicators) of each one. To illustrate this further, take a look at the table below where we show some KPIs of each.
The table shows different sets of KPIs which is a clear indication of the differences in functionality of each. So let’s break it down.
Supply Chain Management
As the name suggests, supply chain management oversees and manages the supply chain. White procurement gets the goods, and supply chain management is in charge of getting those goods to the organization.
It involves the entire network of stakeholders involved in getting the product into the hands of the customer. From gathering the raw materials, through to manufacturing, transportation, warehousing, processing, and through to the end-user.
Ultimately supply chain management should still fall under the responsibility of the procurement department.
Procurement refers to the process of acquiring goods and services needed for the organization’s business model. It typically stops the moment the organization has those goods and services.
Sourcing is all about finding sources of goods and services needed by the company. Sourcing is solely focused on finding the best and most cost-effective suppliers of goods and services, as opposed to the broader reach of procurement’s whole process of the acquisition of those materials and the logistics of that.
Sourcing is concerned with finding quality goods and services from suppliers who are aligned with the company’s goals and morals, all at the best price. It may seem like sourcing is a one-time thing but it’s a constant maintenance of supplier relationships and supplier quality and cost.
Hopefully, the differences between supply chain management, procurement, and sourcing were explained enough here.
Importance of Strategic Procurement
Why is strategic procurement important? The biggest reason why is because it works. Business is always a gamble, especially because there are so many ways that it can be handled. However, certain systems and processes have been set up over many years to ensure that a business can be successful.
Strategic procurement is a trusted and tried method. As much as innovation and creativity are needed to run a good and successful business, certain processes remain the same for a reason. Strategic procurement is one of these.
Having a data-driven process for the efficient handling of the procurement process is a no-brainer. This system was made for the efficiency of a complex web of systems that work together as one. As an organization, there is no question about the importance of something so integral to the efficiency of a business.
Strategic Procurement Process
The strategic procurement process varies from company to company but here’s a general outline of what you can expect from one.
1. Data Gathering
One way or another every company starts with data gathering. You have to know the data and understand how that affects your organization and your procurement goals. You have to gather data from internal stakeholders, suppliers, and other involved parties.
The more you know the better equipped you are and the better your analysis will be. Analysis is integral to strategic procurement so make sure all your data is relevant and accurate.
2. Organizing Your Information
Knowledge is power but without wisdom, it’s almost useless. You have to learn to organize your information to make a foundation for a cohesive plan of action.
This helps your organization analyze the costs and hone in on your needs for uncovering savings, risk management, and other opportunities.
3. Formulate Strategy
This is what all that data gathering and data organization is for. Come up with a feasible and efficient procurement strategy. Through the data you have you now know your organization’s spending patterns, risk tolerance, general operational strategy, etc.
You now have everything you need to build a procurement strategy that aligns with your company’s goals while being efficient and cost-effective.
4. Actualize Your Plan
This is the time you put your words into action. Do the necessary steps to apply your plan to the real world. Now you go and look at your suppliers, see what you need, see what they need, see if the partnership is compatible and beneficial for all, and many more.
5. Negotiation Process
Now it’s time to look at bids. You look through all the bidders and select from a pool of your most comprehensive propositions. You may also pick out the most appropriate bidder and the second most successful bidder.
After every bid and vendor has been reviewed and upheld to your strategic procurement criteria then contractual talks can be initiated with the winner.
This isn’t a one-and-done deal. After this whole process, there’s still maintaining your relationship with your suppliers and maintaining the agreement you have with them to keep things beneficial on both ends. Strategic employment is, after all, a long-term process.
Once again, it’s important to note that the procurement strategy can be different for every company as each company has its own needs and resources unique to them. What we’ve listed down is simply a vague outline of possible steps that would generally be present in the strategic procurement process.
Benefits of a Strategic Procurement Plan
Here are some benefits of a strategic procurement plan that you should know about!
1. Standardization and Streamlining
Strategic procurement is all about analysis and optimization and doing this means having to standardize and streamline. Standardization of procedures is a must and having it go hand in hand with leveraging technology and implementation of best practices keeps an organization on top of its game.
Due to strategic procurement organizations can easily streamline the procurement process as there’s little resistance to overall process effectiveness.
It always helps to have visibility in any aspect of procurement. Having a solid procurement strategy means organizations gain better visibility into their spending and can identify the areas in which they can be more efficient with their spending.
A very important part of strategic procurement is the identification of cost-saving opportunities. These opportunities can be found or made through negotiations, volume discounts, supplier consolidation, and process efficiencies.
4. Risk Management
There are many risks in the supply chain and as time goes on new risks are introduced day by day. However, having a robust procurement strategy helps swat away the risks and ensures little chance of them disrupting the flow of operations in your organization.
5. Good Supplier Relationship
Strategic procurement makes sure that supplier relationships are good and mutually beneficial. Strong relationships are built with key suppliers, collaborative partnerships, and open communication.
This ensures that suppliers are more likely to deliver their best and more to your organization. A good relationship keeps everyone happy and mutually productive in their partnership.
6. Quality Goods and Services
Strategic procurement allows organizations to scrutinize their supplier’s capabilities, track record, and commitment to quality. This gives them better opportunities to access high-quality goods and services. As we’ve established that their supplier relationship is also well maintained, suppliers are also more likely to provide innovative solutions and more readily collaborate on improving processes and products.
These are only some of the benefits of a good procurement strategy. Overall it would improve the quality of life of any organization and keep said organization efficiently run and well maintained.
Examples of Strategic Procurement
Here are some examples of strategic procurement that you may want to know about. These examples are derived from companies that are pioneers in their field because of their strategic procurement.
1. Toyota Motor Corporation
Toyota Motor Corporation is one of the largest and most successful automotive manufacturers in the world. It also has a well-known sourcing strategy that keeps it at the top of the game.
Aside from using advanced technology to improve supply chain efficiency and the implementation of the JIT inventory management system, Toyota also focuses a lot of its energy on developing strong relationships with its suppliers.
Toyota has rigorous standards for safety and reliability that they make sure their suppliers meet to keep up their high-quality components. They also ensure long-term partnerships to keep the continuity and stability in their supply chain. All this only upholds Toyota’s reputation for reliability and quality.
2. Procter & Gamble (P&G)
P&G has made strategic sourcing a key part of its business strategy which has turned it into one of the most successful companies in the business world. It’s a multinational consumer goods company that implements a supplier relationship management program.
P&G’s program enables them to work closely with suppliers which reduces cost, improves quality, and enhances innovation on a world-class level. P&G commits itself to sustainability and ensures that its environmental impact is reduced, hand in hand with its suppliers.
P&G is also dedicated to improving social responsibility throughout its supply chain. Because of its commitment to innovation, sustainability, and collaboration, P&G is known to provide high-quality products while prioritizing environmental responsibility and innovation.
3. Apple Inc.
It’s no surprise that Apple Inc. is on this list. One of the most strategic companies in tech is one of the most successful as well, which is no coincidence. Apple Inc. keeps itself on top through its strategic sourcing practices which prioritize innovation, design, and social responsibility.
The company actively seeks out suppliers that provide cutting-edge technologies and materials that help enhance their product design and performance.
Apple Inc. is known for its design aesthetic which is maintained by its high standards for aesthetic and functionality which does not waver in collaboration with suppliers. Apple is also committed to social responsibility which keeps them working closely with their suppliers to ensure that they uphold Apple’s strict code of conduct.
This code of conduct, also called the Apple Supplier Code of Conduct, governs its suppliers’ operations and audits its supply chain regularly to ensure compliance with these standards. Apple also promotes diversity and inclusion in its supplier base by actively seeking out suppliers who are owned and operated by minorities.
Through their priority of innovation, design, and social responsibility, Apple keeps itself as a leading global brand all the while creating technologically advanced products and keeping up with social responsibility.
Procurement Expert’s Advice on Strategic Procurement
For this article, we asked a seasoned procurement professional to share his insights regarding strategic procurement.
Owner, Goedhart Interim Management & Consultancy
LinkedIn Profile: https://www.linkedin.com/in/sjoerdgoedhart/
1. Can you share a personal example of strategic procurement? What can readers learn from this?
“During the COVID-19 pandemic and the Ukraine crisis, companies with robust strategic procurement practices experienced significantly less impact. Those who had implemented effective strategic procurement processes and utilized advanced technologies were able to mitigate risks and maintain better availability of goods. Consequently, they gained a competitive advantage in the market. This highlights the importance of strategic procurement in navigating challenging times, enabling businesses to adapt and thrive in volatile environments.”
Follow-up Question: How did these companies ensure the implementation of a strategic procurement method? What challenges did they face during times of crisis?
“To implement a strategic procurement method, companies need to prioritize it on the management agenda and integrate it into overall risk management. This involves identifying weaknesses, formulating plans to address them, and having a proactive management team. Regardless of company size, risk management is crucial, and even startups should consider potential risks and adapt accordingly.“
2. What should readers know about strategic procurement?
“Strategic procurement is essential when doing business around the globe. It contains different procurement processes to support the long-term strategy and development of a company.“
Follow-up Question: What is the difference between strategic procurement and the traditional procurement process?
“The key distinction lies between strategic procurement and short-term procurement. Some companies incorporate strategic elements into traditional processes. Modern companies often leverage AI and data, while traditional ones may not. Comparing strategic and short-term procurement provides a more relevant comparison.”
3. What are the essential elements of a comprehensive procurement plan?
“A comprehensive procurement plan begins with a clear understanding of the company’s strategic objectives and adapts to changing business goals. Set and review procurement KPIs to ensure that they are not only a procurement goal, but an organizational goal as well.“
4. To what extent should stakeholders be involved in the development of the procurement plan?
“Stakeholders should be involved in developing the procurement plan to a strategic extent when the initiative spans more than one year.“
5. When should procurement professionals take into consideration when making a procurement plan?
“Procurement professionals should consider category management as a key element in developing a good strategic procurement process.“
To conclude, strategic procurement is a key player in an organization’s success because it saves time and effort while keeping everything in check and efficient. It minimizes both cost and risk and keeps organizations prepared for the future.
Strategic procurement is a long-term organizational investment in the maintenance and management of an organization’s partnerships with suppliers. This ensures quality goods and services at a cost-effective rate.
So if you haven’t already, this is your sign to invest in strategic procurement. Save the time, energy, and money of your organization by befriending the strategic procurement process to keep your procurement needs efficiently satisfied.
What is strategic procurement?
Strategic procurement is the process of acquiring goods or services of the right quality, at the right price, and at the right time to meet customer demand.
Why is strategic procurement important?
It helps reduce costs, manage risks, and align everything with organizational goals.
What is the difference between procurement, sourcing, and supply chain management?
Procurement is acquiring goods, sourcing is finding suppliers, and supply chain management is overseeing the entire supply chain process.
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.