Having a solid supply chain starts with a well-thought-out procurement strategy. In its simplest terms, procurement is the process of buying goods and services on a large scale. Then, a procurement strategy is put in place. A procurement strategy is meant to make this process cheaper without compromising quality or service.
What is Procurement Strategy?
A procurement strategy provides businesses with steps and objectives to meet when purchasing resources. Following an outlined strategy, the procurement team finds excellent suppliers and high-quality products. Strategic procurement will lower costs, risks, and stress in the supply chain process.
Types of Procurement Strategies
The first important step in strategic procurement is to develop a strategy tailored to your business goals. A cheaper strategy may seem the most appealing, but it is not always the best choice for every business. Common procurement strategies include:
The most common strategy, cost reduction, focuses on increasing profits by saving money and decreasing costs. While simple in its premise, cost reduction is complex. It involves negotiating with suppliers, automation, reviewing internal expenses, and decision-making by people throughout the company.
Like cost reduction, risk management is a basic concept. Businesses simply try to minimize the impact of negative events and prepare for supply chain risk. Companies should develop how they want to react to any supply chain risk.
Supplier Management and Relationship Building
Under this strategy, the company chooses a mix of suppliers and maintains those relationships. To sustain those relationships, your company must choose suppliers that deliver the best cost of goods. Those that don’t need to be removed from the supply chain.
Beneficially mutual partnerships are the idea behind the vender development strategy. By building a positive relationship with your vendors, both parties collaborate to help each other reach their goals.
This strategy is crucial when a company depends on one supplier for its products.
With this strategy, your company looks for the most economical sourcing possibilities worldwide.
More companies utilize a green purchasing procurement strategy than ever before. Companies have found that prioritizing purchases from sustainable suppliers can reduce shipments. In other words, green purchasing leads to lower costs and reduce greenhouse gas emissions.
Corporate Social Responsibility
A corporate social responsibility, or CRS, is a company’s written initiative to benefit the community and society. Many companies look to see if a company has a CRS before partnering to see if they align in their beliefs.
Quality management is a strategy that puts the company in an ongoing optimization process. Unlike other strategies, quality management doesn’t focus on any specific goal but on the entire process, from obtaining goods to final invoicing.
There is no right or wrong procurement strategy. However, you may need to combine and adjust multiple strategies to meet your business needs.
Best Practices for Optimized Procurement Strategy
Assess Current Business Standings
The purchasing strategy development process starts with researching current internal business standards. Begin by gathering information on current purchasing habits and resources used; this will help you compare the costs incurred to revenue created in each department. Next, a thorough analysis of internal controls will show which business sectors are doing well and which need improvement.
Analyzing every purchase your business makes can be overwhelming, so following a model is best. The Kraljic Matrix separates assets into four categories based on their profitability and supply risk. It was originally developed in 1983 by Peter Kraljic.
- Leverage items: high profitability, low supply risk
- Routine / Non-critical items: low profitability, low supply risk
- Strategic / Critical items: high profitability, high supply risk
- Bottleneck items: low profitability, high supply risk
External business standings need to be accounted for, as well. Which strategies are your competitors implementing? If you can’t compete with large organizations supplying the lowest costs due to economies of scale, focus on reducing the risk or increasing quality in your procurement strategy.
Benchmarking is another excellent tool to use when measuring the performance of your company’s supply chain. By establishing benchmarks, you can identify critical performance criteria and measure relative competitive performance. There are three types of benchmarking: internal, external, and competitive. Each strategy uses quality, value, and time to evaluate company productivity.
Define Procurement Goals and Draft Policy
Now that you understand your current business situation, you can set goals for your procurement strategy. As stated before, there are many different procurement strategies to follow. The internal and external data collected in step one will help shape your strategy to fit your business.
Businesses will often fail to reach objectives because they are not well-thought-out. Goals should be challenging but possible to meet. One way to ensure that your goals make sense for your business is to use SMART goals. SMART goals are:
- S – Specific
- M – Measurable
- A – Attainable
- R – Relevant
- T – Time-based
An example of a SMART goal is “Improve customer service level to 98 percent within six months without any additional net inventory dollars.”
This statement answers each part of the SMART acronym. After six months, you can evaluate your goals and objectives at the end of the period to see what led to your successes or failures.
A good procurement policy should be fluid. Don’t worry if your draft needs to be revised when new challenges and opportunities arise. Revisiting your procurement strategy often will help you stay on track to meet goals.
Integrate Procurement Strategy into a Transportation Management System
The last and most crucial step is integrating your strategy into a transportation management system (TMS). If your business is creating a procurement strategy and hasn’t already invested in a TMS, now is a perfect time.
TMS is a tool to manage freight and carriers. It assists in rating, booking, and tracking carriers to ensure your business receives the best service possible. As a result, spend less time entering pickups and deliveries and spend more time growing your business.
Investing in a TMS can be an expensive and lengthy process, so it may be best for your company to use a TMS from a third-party logistics (3PL) provider. For example, PLS offers a TMS known as PLS Pro to help shippers manage and monitor their shipments and supply chain effectively.
For more information about PLS Pro, please click here.