Procurement operations are an essential part of any business, and applying a robust procurement strategy to this process will help improve your business efficiency and mitigate any risks. We will be understanding Strategic Procurement through this article.
What Is Procurement?
Procurement is the process of identifying the demand and acquiring goods and services for the company’s use from an external source. This includes the procurement of raw materials and production inputs, commodities, and capital equipment.
Procurement departments are usually tasked with these main objectives: Identifying the demand for goods, selecting the supplier, conducting contract negotiations, and creating purchase orders.
It has become a vital component in the supply chain to ensure that companies can meet their particular requirements and obtain goods or services at the best possible price. A company can go for tactical or strategic procurement. Strategic Sourcing is a long-term approach that considers the company’s overall requirements and supplier relationships. On the other hand, tactical sourcing is a short-term approach where companies are looking for suppliers that can quickly provide them with what they need.
What Is Strategic Procurement?
Strategic Procurement is an approach to fulfilling the sourcing needs of a company without compromising the quality of the goods and services. It focuses on forecasting the demand for goods needed by the company and selecting a suitable supplier. The supplier is only chosen after thorough market research and ensuring the company’s goals align with the supplier’s capabilities.
Strategic Procurement is closely related to Strategic Sourcing. Companies can dedicate teams specifically for procurement purposes. They manage budgets, assess suppliers, conduct market research and risk analysis, negotiate contracts, and issue purchase orders. They are also responsible for implementing supplier relationship management for long-term benefits.
What Are the Goals of Strategic Procurement?
Adhering to a procurement strategy framework, especially in a large company, can help improve the sourcing efficiency and credibility of the company. Let’s look at a few reasons a business goes the Strategic Procurement.
- Strategic Procurement helps you source goods and services with high-cost savings while meeting quality standards.
- Market research helps you negotiate the best price and contract before choosing your supplier.
- The supplier’s capabilities will align with your business goals and needs.
- Strategic Procurement encourages a long-term synergic collaboration between the supplier and business, which is mutually beneficial.
- By forecasting the sourcing needs of the company and analyzing the supplier market, Strategic Procurement minimizes or mitigates any risks in the supply chain.
Strategic Procurement Process
Each company can choose its way of adopting Strategic Procurement. Let’s carve out the basic steps involved while implementing Strategic Procurement.
Understanding the Need for Goods and Service
Analyze the needs and legacy spending of the goods and services needed by your company. You can use prediction charts to uncover trends to estimate any future requirements.
Analyzing the Spend Profiles
Identify the spend profiles of the different areas of your company. Categorizing them according to their criticality will help in prioritizing them. Each category or area of your business, such as IT, HR, etc., can be appointed a category manager to solely focus on the spending and purchasing needs of the area. This is also called Category Management
Supply Market Analysis
Research the supplier market to find a supplier aligned with your company’s goals and needs. An in-depth analysis of the suppliers based on their market trends, performance, rates, etc., will help you make an informed decision.
Building the Procurement Strategy
Now that you have completed all the research and analysis, the next step is to set a robust procurement strategy based on this data. Drawing out the company’s supplier needs, selection criteria, strategy objectives, and budget will be part of the strategy.
Sending out requests for information (RFI), requests for proposal (RFP), and requests for quotation (RFQ) as needed to the selected suppliers will give you a chance to evaluate their suitability.
Once you have chosen your supplier, notify them and perform a risk assessment and reference checks before negotiating the terms of your contract.
How to Determine the Strategic Procurement Policy?
Procurement Policies are guidelines and standards you set to ensure your procurement processes are executed seamlessly. These documents provide a framework for the strategic procurement team to make decisions about sourcing that are compliant and efficient. Procurement strategy depends on how well crafted these policies are.
Here are a few rules you can follow to determine your procurement policies.
- Gain feedback and insights from significant stakeholders regarding sourcing practices and needs of the company
- Have a good understanding of the compliance requirements of your company before drafting the policy documents.
- Ensure the policies are written in clear and straightforward language that the users will understand.
- Try to include options or alternatives in the policies to avoid any risks.
- Define the roles and responsibilities to avoid any confusion
- Assign a POC for all policy-related queries and interpretations
- Maintain a POC for periodic checks and renewal of the policy documents
- If there are any templates or checklists that the strategic procurement team should use, they should be included in the documents.
Strategic Procurement Technology
Technology helps automate strategic procurement processes that can be a boon for large companies dealing with a massive volume of data. You can do online bidding for the shortlisted suppliers using e-auction solutions. They help optimize the selection process, handle the RPF/RFQ procedures, and aid contract management and market analysis.
Suppliers can access early payments and discounts using
procurement software solutions like Supply Chain Finance and Dynamic Discounting. This helps nurture supplier relationships and strengthen the supply chain.
How Can Strategic Procurement Help with Spend Management?
Spend Management deals with the Spend and efficiency related to the organization’s good and service procurement activities. Strategic Procurement helps with Spend Management by making informed decisions based on business goals and detailed Spend Analysis. The Spend profile of every business area is identified and categorized in a process called Category Management. This helps them minimize the risks and errors in the supply chain.
The market insights, contract negotiations, risk and spend analysis, etc., all help with the Spend Management of a company.
Frequently Asked Questions (FAQs)
Why Is Strategic Procurement Important?
Strategic Procurement gives you better control over the entire supply cycle of your company. A well-developed procurement business strategy gives you the knowledge for improving business efficiency and minimizing risks. In this competitive global economy, you need in-depth market research and dedicated resources to get the best prices with the best value.
What Is the Difference between Strategic Sourcing and Procurement?
Procurement involves daily activities like issuing purchase orders to suppliers, inspecting the items, keeping track of the items, and such. At the same time, Strategic Sourcing encompasses various activities like supplier market research, risk and cost analysis, contract negotiations, periodic performance evaluations, supply relationship management, etc. It is the overall process of selecting and implementing the supplier’s services.
What Are the Procurement Strategies?
Procurement Strategies are guidelines procurement teams use to find the most suitable supplier. A few of the strategies used are-
- Cost optimization
- Risk mitigation
- Quality control
- Global sourcing and purchasing
- Local sourcing to avoid logistics and environmental issues
- Vendor engagement
- Supplier relationship development
- Diversify supplier locations
- Managing downtime
- Developing backup plans for regions susceptible to geopolitical risks
What Is the Importance of Strategic Procurement?
It would help if you had thorough market research and specialized resources in this cutthroat global economy to receive the best-valued deals possible. A well-crafted procurement plan gives you the information you need to increase operational effectiveness and reduce risks. A successful procurement strategy focuses on reducing the Total Cost of Ownership(TCO). Thanks to strategic procurement, you have better control over your company’s whole supply cycle.
What Are the Characteristics of Strategic Procurement?
Characteristics of Strategic Procurement-
- The Procurement Strategy
Business needs, timelines, and contingency plans should be outlined clearly in the strategy.
- Supplier Management
Supplier Management entails assessing the supplier market, selecting the suitable supplier, conducting periodic performance re-evaluations, and maintaining a long-term relationship with the supplier.
- Negotiations and Contract Management
Contract Management is an essential part of procurement. Efficient negotiations will help you end the best value packages. Define all the roles and responsibilities to avoid confusion along with the SLAs, OLAs, and KPIs. All the stakeholders should be aware of the contract specifications being drawn up.
What Are the Tools of Strategic Procurement?
Procurement Tools are e-solutions that help override the inefficiencies of manual work. Some of the few in the market now are Kissflow Procurement Cloud, Coupa Procurement, Procurify, Precoro, and SAP Ariba. All of them are cloud-based and allow you to manage supplier invoices, create purchase orders, manage contracts, etc., improving the efficiency of the overall supply cycle. They help reduce errors and financial risks and enhance visibility in the market.