A procurement strategy refers to the process of outlining a plan that will involve procuring the necessary goods to run one’s business. The bulk of the strategy will cater to determining the most cost-effective method to acquire these goods. In addition to a reduced cost, a procurement strategy will help to ensure that the customers or the party present at the end of the supply chain receive the best products from the company.
To understand what makes a procurement strategy effective, one must first understand what the procurement process is. The process of procurement refers to a collection of business operations that involve acquiring raw materials from vendors and subsequent compensation for said materials.
Challenges in the Procurement System
The procurement system is susceptible to its fair share of problems. The reason is that it involves several parties or stakeholders. Therefore, ensuring that information flows seamlessly between all the stakeholders involved in the chain is the primary problem of the procurement system.
Processes like determining the quality of raw materials, alterations in the order, approval, and payment of invoices can take longer than they should. To extrapolate on this point, consider the following aspects of the traditional system of procuring goods and services:
- Extensive paperwork
As mentioned above, making a note of every single invoice, solicitation, and the several requisitions that come from the company can be a significant amount of paperwork. In addition to this, carrying out an audit can be an even more difficult task since it involves sifting through all of this paperwork to account for all the expenses and incoming materials.
- Decreased transparency
Due to the constraints that are present in the flow of communication along the supply chain, there is less transparency between all the groups in the chain. This lack of visibility can lead to a state of confusion both within the buying company and between the buyers and the vendors. There can be problems with the requisition where the actual requirements are not brought to light.
Therefore, the company may run short of inventory before the predicted or desired time. In addition to this, there can be a gap in the communication between the buyers and suppliers which will lead to wrong deliveries, unnecessary disputes in regard to pricing, and overall inefficiency in the working process.
- Chaotic process flow
The procurement process flow refers to the theoretical representation of the procurement process. That is, it is a flow chart that connects the dots between all the groups of the supply chain. Thus, the company is capable of tracking which suppliers will be delivering what supplies.
In addition to this, it can help in the process of creating invoices and so on. However, companies, especially international ones, do not possess a very straightforward process flow, and it can be much more of a challenge to ensure a streamlined procurement process.
- Increased workload
The employees that are actively involved in ensuring the smooth working of this process can be under significant stress. From ensuring that all the requisitions are received and reviewed to making payments, the entire process can require a significant amount of responsibility. In addition to this, there is also the looming pressure of determining if the quality of the supplies is worth the payment and up to a certain standard and so on. Therefore, it is safe to say that a procurement team has a lot to do.
- Longer period
With the lack of technology, the steps of approval can take a longer time to get through. For example, receiving quotations, carrying out quality checks, negotiating contracts, and accounting for all the goods coming in can take a long time. If the company also carries out an invoice generating process known as Three Way Matching, the time that it takes between delivery and actual payment for the goods delivered is significantly longer.
Therefore, when one talks about an outdated or primarily paper-based procurement process, there is a great need for improvement. This arduous process was in need of some revamping which occurred through the implementation of procurement strategies and the introduction of software solutions.
The Strategy For Procurement
As mentioned before, a procurement strategy was aimed at significantly reducing the unnecessary costs and inconveniences that accompanied the procurement of goods and services from suppliers. This strategy should accomplish all these things as well as align with the quality standards of the business. A good strategy will function to streamline or obtain the following features:
- International sourcing
This type of strategy involves sourcing raw materials from other countries. The reason for doing this is that a company can receive the required materials for an overall lower cost in comparison to the vendors present in the country.
In addition to this, the goods delivered will live up to the standards of the company, providing the company with a good deal altogether. There is also a greater variety in the raw materials that are available, which can give a buyer more of a competitive advantage.
- Optimization of delivery and suppliers
This involves investing in the supply in a manner in which the buying company will receive the most value out of the supplier. The aim is to make the supply chain as streamlined as possible for the delivery of the goods to be procured.
The most proven method to carry out this optimization is through the introduction of technology, as the company can ensure that inventory will be placed in the most optimal place. In addition to this, one can also add in multiple channels through which the delivery can come in.
- Vendor development
This strategy requires a proactive effort to be put in from the buyer’s side in order to increase the productivity of the vendor. In addition to this, the effort also works to improve the overall performance on the supplier side. By doing so, the buyers ensure that they are receiving the best quality goods from the vendor in the shortest possible time.
This is different from the aforementioned supplier optimization since the focus is on the vendor instead of the supplier. Although both these terms may be interchangeable in some cases, in others, it is not. The vendor is the enterprise that is usually present in the last link of the supply chain, and they carry out B2B or B2C deals. However, the supplier is in the first link and is restricted to B2B deals only.
- Management of risks
Although one may do well in optimizing specific portions of the procurement process like the suppliers or the vendors, there is a general risk that accompanies every section of the supply chain. In order to implement this strategy, the company will have to first identify the risks and the source of the risks in the procurement line. After doing so, they can formulate a plan that can work towards eradicating the risks.
The risks which are identified can be categorized into four different groups. This will help to deal with the risks on the basis of how severe they are. The most severe risks that cannot be fixed or will require a significant investment to do so should be dropped completely.
This involves finding alternate suppliers or channels for procurement or outsourcing some tasks. In case there are certain tasks in the procurement process that are risk-free, the company can build on these aspects and thus, strengthen its supply chain.
- Green purchasing
Companies, especially the larger establishments, are under increased stress to ensure that the processes implemented are environmentally friendly. This constraint also extends to the goods that are coming in and the steps that are taken to procure them.
Therefore, the buyer implements the green purchasing strategy that helps to align the procurement goals of the business to the protection of the environment. This is the basis of the Green Purchasing Strategy, which is also known as the Environmentally Preferable Purchasing or EPP.
To implement this strategy, the company will be required to invest in goods that are less taxing on the environment and the health of humans in the long run. Therefore, aspects such as inventory wastage, inefficiencies in transport, and overall emission of toxic gases must be brought to a minimum.
- Total quality management
TQM or Total Quality Management is a strategy that was a product of the capitalist shift seen in America. The companies work towards procuring goods and using procured goods only after they have undergone thorough scrutiny.
This strategy involves two major components that are Quality Control and Quality Assurance. These two components ensure that the customer will always receive the best quality goods or at least products that live up to the standards of the company. The company, on the other hand, will also put in a considerable amount of effort to ensure that there is constant innovation and improvement taking place on the development front.
Developing a Tailored Strategy
The process of developing a detailed strategy differs depending on the company. The reason is that the supply chain varies on the basis of the sector it is present in. However, every procurement strategy has a particular framework upon which a company can build its strategy depending on the goals of the business. This framework involves carrying out the following activities:
1. Identification of needs
This step requires a company to determine what the needs of the business are at the moment. That is, there must be awareness about the kind of materials that will be required from the vendors and suppliers. In a way, this is also the first step in a procurement process. However, there is an added aspect that has to be thought about, and it is in regard to cutting costs without compromising the quality.
Therefore, this will be a starting point from which a company can approach different suppliers. In addition to this, a company can also benefit from using categorization to prioritize the needs and thus, invest wisely. This can help with companies that are working with smaller procurement budgets.
2. Determining the current expenditure
Once this is done, it is time to analyze the financial status quo of the business. More precisely, the expenditure that occurs during the entire procurement process. By laying out the spending habits of a company, the company can determine where its revenue is being spent unnecessarily.
This will, in fact, help weed out areas that need improvement in the procurement process since it may require more spending than is required. In addition to this, it can also contribute to a better idea of prioritizing the needs and the kind of supplier that will best suit the business financially.
3. Analyze the present conditions
In this case, the conditions would refer to the market conditions. Understanding the state of the market can help orient the expenditure as the company will understand what products or services will bring in the most profit. Enterprises often use a few methodologies that help better understand the position of the business in the current market.
A few examples are the Strength, Weakness, Opportunity, and Threats analysis shortened to SWOT. This is a comprehensive look at separate components of the business, both internal and external factors. Another example is the PESTLE analysis. Here, a company takes a look at the Political, Economic, Sociological, Technological, Legal, and Environmental factors that are affecting the market at the moment.
4. Outline objectives
Creating a clear objective can help drive the strategy forward. The previous step of studying the market and finding the areas that need to be strengthened can now become part of the objective. The creation of the list of objectives will help to give the procurement team or the company a sense of direction as they implement the strategy.
5. Propose guidelines
Now that the end goal has been thought of, it is time to determine a few methods that would help reach these goals. The idea is to use the data collected from the previous steps and create a list of policies or guidelines that might act as a set plan for everyone involved in the procurement process. Therefore, it would be best to first determine the objectives instead of looking at the policy creation as a separate entity from the rest of the strategy.
6. Implement the use of tools
Technology can greatly enhance the efficiency of any process. However, this improvement is more evident when technology is implemented in the procurement process. As mentioned before, the process of procuring goods can be liable to several human errors and other inefficiencies as a result of human intervention.
There is a significant amount of paperwork, and it is necessary to track them all. Therefore, there has to be a faster way to ensure that the quality goods are being delivered and are correctly accounted for.
For many companies, the tools that are in use are procurement systems. These are software solutions that take care of every aspect of the procurement process and can even be used after receiving the goods as well. These systems can be one of the cost-saving aspects to add to a process since it automates most of the tasks.
Employees no longer need to carry out monotonous tasks that may also have some errors. Rather, the software will carry out tasks like sending in the orders after manual requisition, invoicing, obtaining approval, and so on.
The digital solution at Procurement Partners allows a business to carry out all their procurement activities on one platform. It even goes beyond the delivery of goods. This is because, after the goods have been delivered, the software can also be utilized to account for the goods and track their usage and inventory levels.
7. Communicate with shareholders
Now that the strategy is ready to go, it is time to determine what the views of the shareholders are. This is an important aspect since they are partners and should have a say in such a drastic change that is to take place in the company. For both smaller and large-scale companies, this can be a way of making sure that all the items or needs are addressed in the strategy. In addition to this, the plausibility of the strategy will also be reviewed in this case as well.
8. Execute the procurement strategy
Finally, the actual implementation of the strategy will take place. Since all the requirements like objectives, policies, and more have been thought of, it is now simply a question of implementing it. This process may be stressful at first since there is a significant amount of change coming into the process, but it will pay off in the long run.
9. Monitor results
Companies must also take it upon themselves to understand how well the implementation is taking place. In addition to this, there should also be a medium through which the success of the new strategy can be measured. Therefore, another requirement of creating a strategy to implement in the procurement system should also have a benchmark or be measurable.
This will help the company understand how effective the strategy is. In case the desired results are not being met, the company can tweak or alter the strategy in a manner that will produce results.
Every modern procurement strategy now has a commonality irrespective of the industry. This commonality is the use of procurement software. The primary reason is that using this software can greatly improve the state of the procurement process and provides a significant return on investment.