Estimated reading time: 5 minutes
• Procurement is a complex undertaking for organizations and requires a careful strategy to ensure it aligns with and supports the overall corporate strategy. The importance of procurement has increased over the past few decades, as demands for firms to be more efficient have increased.
• The fact that firms can now source globally and collect useful data regarding their procurement processes makes procurement a new front for competition.
• Firms can use intelligence from data to select the most reliable suppliers, minimize operational costs, and provide the most competitive prices to their customers.
There are numerous other reasons for a procurement strategy including the need to align with internal sustainability policies. In other cases, the firm is faced with regulatory constraints that it must contend with. Whichever of these, here is a guideline on how to develop an effective procurement strategy. These are not steps to follow chronologically, but rather they are elements present in every efficient procurement strategy.
Analysis of Current Spend
The starting point of any strategy should be an understanding of the current situation. As an organization, you need to know where your current procurement spending is going. Who are your most important suppliers? Are you spreading your human resources too thin by negotiating with too many suppliers?
During the analysis, you should come up with a categorization criterion for your procurement spend. Category management makes it easier to strategize your procurement operations because you can develop objectives for each category of goods. Goods can be categorized by their market of origin, by function, or by value. Refine these categories as much as you need to so that they become manageable. Assign a lead to each of them so that they oversee their procurement as a project. You can always reorganize your categories at the start of a new strategic period.
Identifying Your Priorities
The overall corporate goals that you are seeking to achieve will guide your procurement priorities. Take, for instance, a business that is in a highly competitive market whose objective is to position itself as having the lowest prices. The effective procurement strategy ought to be to find the most competitive prices. The sourcing function within the procurement department must be well resourced so that they can spot, evaluate, and onboard new potential suppliers that provide competitive prices.
In industries where timely delivery of goods is paramount, the business must build resilient supply chains, by working with reliable suppliers and taking redundancy measures to avoid disruptions. Procurement priorities, therefore, mainly dictate the suppliers to work with and what to negotiate for when signing contracts.
Studying the Market
Your procurement strategy must remain alive to the prevailing market conditions. You must be constantly on the lookout for new opportunities and threats. You can use one of several methods to evaluate the market, including PESTEL analysis.
You ought to be ready to adjust your strategy in response to the legal and regulatory environment. You should also be willing to adjust in case new opportunities arise. If a new supplier emerges who can deliver products of higher quality at competitive prices, that represents a new opportunity.
Develop and Implement Procurement Guidelines
Any organization that deals with multiple suppliers and large volume purchases ought to have procurement guidelines. These guidelines break down how each of the procurement steps occurs so that there are internal controls to prevent fraud or information breaches. There should be a clear process of how purchases originate. It’s normally useful to have templates for purchase requisitions. The requisition is then taken to the relevant department (purchasing) for approval, depending on whether the budget allows for it. An order is then sent to suppliers.
Similarly, there should be an approval process for invoices before they are paid off. The business must have a proper method for record-keeping for audit purposes. Procurement guidelines must ensure that there aren’t any grey areas with regard to responsibility in every step of the procurement process.
Adoption of Technology
The use of technology to augment various steps of your procurement process can massively add value. For instance, the use of procure-to-pay software to automatically check invoices against purchase orders and delivery notes shortens the time it takes to pay suppliers. It adds accuracy to the approval process, reduces the risk of fraudulent payments, and improves relations with suppliers.
The use of analytics to assess supplier performance also adds objectivity to the procurement decision-making process. Human beings are limited in the amount of information we can take in simultaneously. We easily fall into cognitive traps such as recession bias and confirmation bias. Therefore, it’s beneficial to fall back on a scoring algorithm that assesses performance, risk, and other measures objectively.
Tracking and Measuring
As highlighted, your procurement strategy will require tweaking now and then. You have to check your performance against the goals you had set prior. For instance, is each of your categories performing as you had expected when setting the strategy?
Your business should also ensure that it keeps all important stakeholders in the loop about performance. Your employees should understand the rationale behind the strategy. Let shareholders know how the effective procurement strategy is creating value for the business. This will draw support for the strategy.
Your procurement software is an important part of your procurement strategy. ProcurePort has world-class software to augment various procurement functions, including spending analysis, purchase requisitions, contract management, and more. Reach out to us for a consultation on all your procurement software requirements.