With just 22% of businesses worldwide having a proactive supply chain that involves forethought and planning, many organisations are losing money by settling for suppliers that aren't optimised for their needs.
In this guide, DeepStream looks at strategic procurement and how businesses can develop a long-term plan that yields the best return on investment.
What is Strategic Procurement?
Strategic procurement is a plan for making sure a business accesses the right goods atthe right time and without overpaying.
It is a collaborative effort between departments – mainly between business executives, employees and external suppliers – to get the best resources most efficiently at the best price.
It's a forward-thinking type of procurement that encompasses ongoing budget management and thorough internal and market research to identify the best suppliers and create positive working relationships. The goal is to improve efficiency and minimise risk in predicted and unforeseen circumstances respectively.
What are the three strategic procurement strategies?
When businesses scout the best products and resources from prospective suppliers, they usually do so in three ways:
Also known as ‘direct sourcing’, this strategy involves going straight to suppliers to access resources, materials and technology that are used to create the products or services that eventually make their way to the consumer, client or end user.
For example, a manufacturing business sourcing the raw materials used to create products that are then sold to retailers.
Indirect procurement is the purchasing of goods like supplies and equipment for staff. Anything that doesn't directly impact a company's trade but helps staff and businesses streamline day-to-day operations is indirect procurement.
SMEs may hire an office manager to handle indirect procurements – like office supplies and IT equipment – while more established corporations may have third-party companies on-hand to manage indirect procurement within a budget.
Services procurement involves accessing labour and the resources needed for growing a business' capacity for providing. For example, hiring temporary staff, importing software, and bringing in vendors on short-term contracts to help manage logjams.
What are some best practices in strategic procurement?
When creating a strategic procurement plan, it's crucial to lay the foundations so that your strategy has the desired effect long-term. This may include:
- Establish procurement goals – Businesses must conduct data-led research to identify potential areas of improvement within day-to-day operations. These insights can be leveraged to give companies a competitive edge by highlighting opportunities to reduce manufacturing costs, make logistical changes or adjust the end-product price to maximise profits.
- Research – Gathering multi-faceted data is crucial – specifically in three key areas. A thorough and independent analysis of a company's long and short-term needs, a review of its budget allocation and a detailed understanding of the market need to be conducted to gauge the next steps before they even begin drafting a strategy.
- Develop supplier selection criteria – Based on an initial internal analysis of the business and external analysis of the market, finding the best suppliers for a business requires a strict list of criteria. For example, many companies look at a supplier's track record of production capacity, quality, performance, risk, and environmental impact when negotiating long-term contracts.
- Create supplier performance evaluation criteria – Businesses need to have a tangible framework on-hand to evaluate prospective suppliers in the short term and established suppliers in the long term. For example, an organisation might assess a supplier by looking at their value for money, quality of products, reliability and consistency, responsiveness to a crisis, and flexibility in adjusting demand before putting pen to paper for a long-term contract.
How does Strategic Procurement differ from Standard Procurement?
The main difference between strategic and standard procurement is the level and detail of analysis that informs decisions. Strategic procurement is a forward-thinking alternative to simply obtaining products, services and resources when needed –instead considering the business’ long-term needs and success in every decision.
While some businesses might organise procurement using a single factor like price or convenience – often resulting in significant maverick spending – strategic procurement forces them to research and evaluate suppliers and partners based on a range of factors to find the most optimal overall partners.
Strategic procurement focuses on remedying existing inefficiencies in a business' current plan. It also looks at sustaining long-term growth by predicting potential future challenges and mitigating them with contingency planning.
For example, a business planning to expand and diversify its product assortment may consider automating elements of the supply chain – from warehouse operations to automating proposals – to avoid potential challenges in bottlenecks from intensive manual tasks.
What is the significance of Strategic Procurement?
Strategic procurement provides a framework with the ability to completely transform how businesses operate – minimising wasteful spend and optimising trading relationships to boost a company’s bottom line and freeing up employees to work on high-value tasks such as roadmaps for future success.
Ultimately, strategic procurement forces businesses to filter suppliers against strict criteria – if they can't match the standard, they don't get the contract. This way, it facilitates businesses accessing the highest quality suppliers and products, efficiently and at the right price.
Although time-consuming, it's the best way for businesses to find suppliers that match short-term and long-term objectives while providing quality products promptly and at the right price.
How can strategic procurement build stronger supplier relationships?
Strategic procurement improves supplier relationships through data-led insight and trust.This is because suppliers are chosen based on research and confirmed through proposals that can be reviewed against a pre-determined framework. For conscientious business, the entire source-to-contract process can be audited in an e-procurement platform, too.
Any strategic procurement plan worth its salt includes a set of criteria expected from a potential supplier. However, these expectations work both ways.
If either party has requirements or limitations that don't align with the other, an efficient day-to-day working relationship isn't possible.
Strategic procurement facilitates the aligning of internal and external goals for suppliers and businesses. Those who go into long-term business together, therefore, have reasonable expectations ahead of time.
In a strategic procurement plan, nothing is left to chance in a potential supplier relationship, with businesses collecting supplier feedback, establishing effective communication channels, managing expectations and conducting end-of-year relationship assessments to pinpoint where to improve.
This leads to more positive and long-standing relationships than those born out of short-term convenience or the prioritisation of a single objective such as cost.
The role of technology in strategic procurement
It's no secret that technology increases efficiency – so incorporating it into procurement strategies is vital to success. There are a range of procurement software solutions available that automate key procurement processes and streamline supplier relationships – ultimately saving time and cost for businesses.
e-Procurement software digitises the entire procurement process – streamlining each stage from source to contract with RFx tools, e-auctions and contract management solutions in a single intuitive solution.
RFx software facilitates time and cost savings by templating processes, requests and proposals and keeping all communication within a single platform. This saves teams on time spent on intensive manual tasks such as producing documents and sending emails.
This also produces a downloadable audit trail – with all data time-stamped and stored in a single platform ready for auditing.
Ultimately, these technologies transform procurement processes from traditional paper trails and manual tasks into a single, integrated and semi-automated solution.
The Pros and Cons of Strategic Procurement
There are many advantages for businesses that strategically procure goods – armed with a comprehensive plan – over those that don’t. Some of the advantages of strategic procurement include:
- Allows thorough quality assurance – With a comprehensive vetting process, businesses can be sure they're getting the best quality goods from trusted suppliers.
- Helps businesses get the best price – By shopping around the market using strategic RFx processes, companies are better positioned to evaluate the quality and quantity of products prospective suppliers can offer and negotiate the best price.
- Makes business operations more efficient – Having a strategic procurement plan in place means businesses can better consolidate communication with suppliers and streamline the management process.If anything goes wrong, they can easily communicate to navigate and mitigate disruption – as well as access an audit trail if needed.
- Directly impacts the bottom line – A strategic procurement plan prevents losses from maverick spending, consolidates suppliers and often introduces technology that cuts down on time-consuming and expensive paper trails.
- Improved supplier relationships – Strategic procurement plans help businesses and suppliers better match their needs before a contract is signed.When working with suppliers that integrate well with a business' communication network and can handle fluctuating demand efficiently, it reduces stress on the business. When both parties are working efficiently and able to communicate and resolve issues quickly, the trust needed to continue a long-term relationship is established much quicker than partnerships teething problems in the early stages of the contractual agreement.
However, there are some downsides to strategic procurement – mainly involving those with limited resources. Some disadvantages of strategic procurement are:
- Time-consuming – To vet a multitude of companies and evaluate based on criteria takes time and effort – something not all businesses can manage without overspending and creating inefficiencies. Some may be tempted to prioritise short-term convenience over a long-term strategy.
- Expensive – To save time, it's not uncommon for companies to hire third parties to do the heavy lifting when finding suppliers and procuring goods. Unfortunately, those that go down this route can also expect significant costs.
- Restrictive – If a company faces issues with a supplier and must follow the same procurement procedures to scout another supplier, they might not have the agility to make quick decisions or source alternative solutions in the short term.
How is strategic procurement different to strategic sourcing?
Although they often work in tandem with each other and are often confused, strategic procurement and sourcing differ slightly.
Strategic sourcing focuses on the needs of the company. It's a multi-faceted approach that looks at scouting what types of suppliers will be a good fit for the business based on their needs.
Strategic procurement happens when the sourcing process is complete. When the sourcing team has revealed what to look for, strategic procurement takes over in vetting individual providers and securing the goods by handling things like auctioning and RFx processes, issuing purchase orders and paying invoices.
Frequently Asked Questions (FAQs)
What are the five steps of strategic procurement?
The five stages of strategic procurement are:
- Identification – Analysing what a business needs long-term and what areas need direct attention for growth over time.
- Creation – The plan is made, and purchase requests are submitted to potential suppliers.
- Evaluation – Assessing suppliers based on the criteria outlined in the plan to get the best fit.
- Negotiation – guarantee on price, quality and quantity are laid out, and the terms of service are established by both parties.
- Finalisation – Contractual agreements are finalised, and the procurement of goods gets underway.
With DeepStream RFx software, this entire process can be streamlined in a single intuitive platform.
What should a procurement strategy include?
Below are some examples of key considerations for an effective strategic procurement strategy:
- Supplier engagement plan – A strategy for maintaining healthy, long-standing supplier relationships.
- Capability development plan – Outlines supplier and employee expectations, including day-to-day performance requirements and development opportunities.
- Contract management planning strategy – A document that dictates how procurements are made at every stage in the contract. This includes price conditions, dates and deadlines, compliance monitoring and risk aversion contingencies.
- Procurement activity plan – A log of past procurements and an outline of future procurements over a pre-determined period.
- Market research –Thorough research of competitors' suppliers and a clear understanding of the needs of both parties.
- Clear targets – A list of objectives that the strategy aims to hit.
What is the KPI for procurement?
Many KPIs are used by businesses to evaluate procurement. The most important ones include:
- Number of suppliers – Businesses with high numbers of suppliers could indicate consolidation problems or overspending.
- Timeliness rate – The percentage of deliveries made on time.
- Quality of goods/defect rate – The percentage of goods sent back because of defects against those in good condition sent to the consumers.
- Supplier capacity –The maximum amount of output from a given supplier.
- Compliance rate – The number of protocol breaches compared with how many opportunities there have been to break compliance.
- Procurement ROI – Overall profit from procured goods.
How can DeepStream help you?
DeepStream is an expert in streamlining procurement.
Our software lets you automate workflows by offering a seamless setup and RFx process and keeps procurement management data in one place for ease of review and auditing.
For more information on how DeepStream can help develop a tailor-made procurement plan to suit your business, chat with our expert team today.