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 to make this process easy and cost-efficient without compromising quality or service.
What is Procurement Strategy?
A procurement strategy provides businesses with steps to follow and objectives to meet when purchasing resources. The procurement team quickly finds excellent suppliers and high-quality products following an outlined strategy. Strategic procurement will lead to lower costs, risk, and stress in the supply chain process.
Types of Procurement Strategies
The first important thing to understand about strategic procurement is that a strategy tailored to your individual business goals is necessary. A low-cost strategy may seem the most appealing, but it is not necessarily the best choice for every business. Common procurement strategies include:
- Cost reduction
- Risk reduction
- Quality control
- Idle time reduction
- Global sourcing
- Green purchasing
- Supplier optimization and relationship development
- Vendor development
- Diverse supplier investment
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
1. 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. Developed in 1983 by Peter Kraljic, The Kraljic Matrix separates assets into four categories based on their profitability and supply risk:
- 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 of the three strategies uses quality, value, and time to evaluate company productivity.
2. Define Procurement Goals and Draft Policy
Now that you understand more about 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 not impossible 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 to “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, and after six months, you evaluate your goals and objectives at the end of the measured 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
3. Integrate Procurement Strategy into a Transportation Management System
The last and most crucial step is integrating your strategy into a transportation management system (TMS) when creating a procurement strategy. If your business hasn’t already invested in a TMS, now is the perfect time to do so.
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 an in-house 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 effectively manage and monitor their shipments and supply chain.
For more information about PLS Pro, please click here.