How to Build a Successful Procurement Strategy

All businesses must obtain goods, materials and services from suppliers – both to create the goods they, in turn, will provide to customers (direct procurement), as well as to keep day-to-day business operations running (indirect procurement).

A procurement strategy is a plan to acquire these necessary supplies cost-effectively – from efficient vendors who can be relied upon to deliver quality goods, on time, in the right quantities, while abiding by the terms of the contract.

With global supply chains disrupted, developing a procurement strategy has never been more crucial in order to continue meeting business goals in an uncertain year ahead. 

So – what makes an effective procurement strategy right now?

According to the recently published 2020 Deloitte CPO Flash Survey, around 70% of procurement leaders expect and are planning for a longer economic downturn that will last until at least Q2 2021. 

As such, procurement objectives are shifting. CPO respondents identified cost management as a top priority right now, commanding eight times more focus in day-to-day operations than anything else. Two-thirds of organisations (66%) will pursue cost-reduction strategies in the year ahead – compared to just one-third (33%) in early Q1 2020. 

The survey also found that nearly half (47%) of procurement leaders are planning to expand their overall supply base – compared to one-quarter (25%) who plan to consolidate.

(Image source: deloitte.com)

A slight edge was also given to short-term and tactical strategies, which include activating alternative sources, increasing inventory levels and injecting capital into the supply chain to prevent further supply disruption.

(Image source: deloitte.com)

A successful procurement process of course relies on employees and teams. The survey also revealed that 80% of organisations say that worker well-being is “important” or “very important” and that enabling an effective remote working and virtual environment will continue to be a key focus going forward. 

Correspondingly, adopting and investing in strategic procurement technologies emerged as a key theme among CPOs – as did enhancing supply management capabilities. As the report puts it, you can’t manage what you can’t see. Yet only 50% of respondents had high or very high visibility into their tier 1 suppliers, while the vast majority (90%) rated visibility into their extended supply networks as “moderate” to “very low”. By contrast, procurement organisations that are thriving reported higher visibility into tier 1 and tier 2 suppliers. Thriving organisations were also twice as likely to prioritise digitisation and seven times more likely to expand supply bases.

Cost savings. Expanding the supply base. Increasing inventory levels. Digitising. Enabling remote work. Improving supply chain visibility. 

These are all things that an effective procurement strategy must include right now. 

Bearing them all in mind, let’s consider how to build a successful procurement strategy for your organisation.

The first step of the process is to conduct an internal spend analysis. You need to know the following:

What you’re buying

• Who you’re buying it from
• How much you’re paying
• When you’re buying
• If there have been any issues in terms of quality or timeliness

The purpose is to analyse your current procurement operation and to identify areas where there is potential for improvement.

The next step is to analyse the state of the market. You will need to collect data from current suppliers and potential suppliers for this.

The data will reveal what your options are. For example, if you have an item that is in high abundance and available from multiple vendors, you have a good amount of leverage to approach both your existing supplier and potential alternatives and negotiate on price. Many suppliers offer rebate programmes in which you, as the buyer, will receive a certain percentage of the price paid for your items back on the condition you buy X amount of volume in Y amount of time. Armed with the data from your internal spend analysis, you will know precisely if you can meet the terms of such a rebate agreement and can thereby encourage competition between potential suppliers to offer the best value at the most competitive price. 

The third step is to define your strategic procurement goals. Common procurement strategy objectives include:

• Reducing costs
• Improving quality
• Improving risk management (such as by increasing inventory or expanding the supplier base)
• Improving supplier relationships 
• Improving supply chain visibility

Importantly, your procurement objectives must be well-defined, measurable and realistic. A good tip is to keep SMART principles in mind as you define your goals.

(Image source: ppt-online.org)

With your goals identified, you now need a plan to meet them. To do so, you need to develop strategic initiatives that will eliminate any inefficiencies you identified in step one and realise the improvements you’re looking for. 

You will need to create a framework for advancing towards each goal. For example, if the objective is to reduce spend on a specific line of items, you will need to determine your budget, research the market to find alternative supply sources, evaluate each potential new supplier to create a short list, make contact with those on the list and take bids from them.

Even the best procurement strategy will struggle to achieve optimal results unless the procurement team has the right tools to implement it effectively. 

Investing in procurement software or in specialised systems such as rebate management software will enable you to digitise your procurement function. Such a system will give you access to the data you need to make improvements and will help you reduce errors, increase productivity, minimise lost opportunities, give you better supply chain visibility, improve supplier relationships and enable a remote workforce. 

A sophisticated rebate management solution, for example, tracks all purchases made from all suppliers and automatically alerts relevant individuals when crucial thresholds are approaching – such as when volume targets are approaching that would qualify you for a better price on the goods you are purchasing.

Rebate management software also provides procurement professionals with valuable analytics concerning transaction data, contract data, rebate data and supplier performance data. This allows procurement teams to conduct real-time analyses of live trading agreements to evaluate their performance. Robust forecasting and deal-modelling features also allow the team to conduct “what if” analyses to help them understand the impact of changing an underlying condition in a trading agreement, such as switching supplier. 

Greater supply chain visibility is also facilitated with rebate management software. Serving as a single access point for procurement to input deal information and both suppliers and internal stakeholders (i.e. finance) to review and sign off, a rebate management system increases transparency between parties, resulting in greater efficiency and stronger supplier relationships.