The importance of procurement strategy for business
What is strategic procurement?
Strategic procurement is a process that looks at the entire supply cycle within an organisation with the aim of optimisation. Sometimes it’s referred to as strategic sourcing or strategic purchasing, but the goals remain the same: managing supplier relationships, minimising costs, and reducing risks within the cycle.
Many larger organisations will have a dedicated procurement team that works across the business ensuring that all stakeholders are involved in the long-term plan and strategy. In the past few years, the importance of procurement strategy has been highlighted by the pandemic, Brexit in the UK, and the climate crisis all affecting supply markets.
Pressure on supply and demand has been high due to socio-economic, political, and environmental factors, forcing organisations to frequently review their supply chain, long-term strategy, and tactical procurement during periods of high risk. Procurement is also increasingly involved in ensuring CSR objectives are built into procurement policy for example, to ensure ethically sourced raw materials.
What does a procurement manager do?
Supplier management, risk management, and supply chain management all come under the procurement function, so a procurement manager’s everyday tasks will involve these areas. In a large organisation, the wider procurement team will be able to support, but it’s fair to say that a procurement manager holds a lot of responsibility in the smooth running of a business. In recent years, the importance of an excellent procurement manager has been recognised, because they often have extensive knowledge of the sourcing process, the business’ purchasing history, and deep insights into how to improve overall operations. Procurement professionals are analysing the nuts and bolts of how a business works so are well-equipped to comment on the health of business and what improvements are required at ground level.
In order to do their job properly, procurement managers require buy-in from all teams across the business. This can be challenging as it requires transparency on all spending and without nurturing good relationships company-wide, the procurement function can be seen as simply creating barriers. The role of procurement needs to be understood by all teams so that they can cooperate with the strategy.
The Chartered Institute of Procurement & Supply (CIPSS) offers useful information and resources including this diagram of the procurement and supply cycle, which can help stakeholders understand how procurement is a cross-organisation process.
How to improve sourcing strategy
There are many articles across the internet that advise on how to improve a sourcing or procurement strategy, and though they offer helpful tips, every business is different and requires a holistic view from the ground up. Carrying out the basics like a spend analysis will help inform next steps. Procurement software and online platforms are available which can help with collating and visualising data, analysis, and creating reports. These provide the vital tools that help procurement managers see what is happening across the business in real-time and make sourcing decisions.
The sourcing process tends to follow some fairly standard procurement methodologies for finding potential suppliers. These include open tenders, restricted tenders, requests for proposals (RFPs), two-stage tenders, requests for quotation (RFQs), and single-source procurement. The preferred process needs reviewing regularly to ensure that the business is maintaining a competitive advantage, especially during times of rapid change and upheaval in the world, but also as a routine exercise. RFPs can be useful because they compare and score the qualifications, experience, and capabilities of similar vendors. RFP automation software can be particularly useful here as it saves time and can remove bias, ensuring the business’ highest priorities are met.
Total Cost of Ownership (TCO) is a calculation tool that helps procurement managers understand the total cost of a product or service beyond its basic purchase price. For example, an overseas supplier may provide a cheaper product of good quality, but the shipping costs mean that the TCO increases substantially. Interestingly, it’s believed that this concept dates back to the Napoleonic era when the service life of cannons was assessed including costs like repairs and maintenance. The approach was formalised in the USA by the US Department of Defense, who published a military standard in the late 90s.
The full life cycle costs of a product or service includes:
- Purchase price (cost price including supplier mark-up)
- Associated costs (transportation, packing, custom duties etc)
- Acquisition cost (procurement team operating costs)
- Cost of ownership (storage, depreciation etc)
- Maintenance costs (repairs and spare parts)
- Usage costs (use value and operation)
- Non-quality costs (deadline compliance, non-compliance processes)
- Disposal costs (recycling, resale, or disposal)
It can be useful to look at various templates and case studies of procurement strategy to compare and contrast what makes a successful strategy. Public sector procurement strategies follow a policy that includes a legal framework, which can also make for interesting reading, especially since it has recently become a major political issue.
Another major consideration is that procurement technology is already impacting the strategic procurement process and will continue to play a major role in the near future. This includes the integration of digital transformation, artificial intelligence for automation, cybersecurity systems, big data for decision-making, and block chain infrastructure.
What are the main objectives of procurement?
The overarching goal of strategic procurement is usually efficiency, but that’s not the only focus for the procurement team of any forward-thinking businesses. Other considerations include:
- Partnering with suppliers that are aligned with the company’s business goals
- Sourcing higher quality products
- Building long-term relationships with suppliers
- Minimising supply chain risk by assessing risk in various geographic locations
- Reducing the supplier base to benefit from economies of scale
- Investing in R&D with key suppliers
Strategising and streamlining the procurement process is key to supporting the wider business strategy; it provides a bedrock on which the whole company’s functionality sits. It provides visibility for all stakeholders within the chain, so that they can plan accordingly when it comes to decision making.
Contract management amongst suppliers also becomes a lot easier with a procurement strategy in place, saving time and money, and avoiding partnering with suppliers who turn out not to be a good fit.
Find out more about procurement strategy
If you’re interested in specialising in procurement management or are simply looking for the opportunity to upskill in the sector of logistics and supply chain management, an online MSc Management with Supply Chain from the University of Lincoln could be the perfect fit for you. Find out more about course dates and requirements and take the next step in career advancement.
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