Why is having a procurement strategy so important? Key benefits of a procurement strategy include helping you to reduce costs and deliver greater sourcing value, which is always top of mind. The results are, of course, contingent on the approach. While there is a lot of talk about the importance of strategy, it can be hard to find practical guidance to lead you in the right direction.
The hardest question you need to answer is what does a good strategy look like?
Creating an Amazing Procurement Strategy
If you’ve recently had a merger or acquisition or if you’re new to your team, that question may be even harder to answer. We've put together three steps you should take to ensure you're developing a procurement strategy that works for you.
1. Assess Your Current Strategy
As cheesy as it might sound, you can’t know where you’re going until you see where you are. If you don't have your bearings, how can you tell what's next? Step one to building an effective procurement strategy is evaluating the current approach.
Here are some questions to ask yourself and your stakeholders:
- What is our procurement strategy today?
- Is it documented?
- How specific is it?
- Is it ingrained in daily decision making?
- Can everyone describe what they’re working on and how it fits into this strategy?
If you don’t have clear documentation already, “map out” the current strategy. Be sure to include:
- Major goals and objectives
- Critical efforts and metrics (what does “success” look like?)
- Who fits where - how does each stakeholder contribute
From there, you can start to evaluate what is working and what is not. Include all of your key stakeholders in this discussion as they may be able to help you see things you’d otherwise miss.
Ask your team:
- What’s working about our current approach?
- If you could wave a magic wand and fix anything, what would you fix?
- If you could change only one thing, what would it be?
- What do we want to do but we just don’t have the bandwidth?
- What’s lacking in the current strategy?
- Are maximum cost savings being realized? What opportunities are we missing?
- Which processes aren’t as efficient as they could be?
At this point, your goal is to collect data. Don’t prioritize or plan, just gather puzzle pieces.
2. Building the Strategy: Prioritize Your Procurement Needs
There are several procurement models on which you can base your new strategy but whichever method you choose, start by identifying your top priorities.
Take the feedback from your team and evaluate it through the lens of how you can add value to your organization’s corporate strategy. This approach garners the support of your c-suite, which you’ll need, regardless of your tactics.
Another helpful viewpoint is the economic/business approach called the Pareto Principle, which essentially says that 80% of the results come from 20% of the effort. Ask your team, "what could we change that would have the biggest impact on our KPIs?" The answer is your low-hanging fruit. It's the quick win that will help get your department buy-in from the rest of your organization.
For a deeper dive, try taking the category management approach. Assess every category to see where you have the greatest need. Maybe your highest priority, for example, is that you need to reduce your indirect spend. You could also use more comprehensive tools like conducting a gap analysis or using the Kraljic Matrix which provides “a framework for segmenting supplier spend.” These methods will enable you to see which spend categories have the most impact.
Remember, the concerns you uncover may only be surface needs. If you find out you're not getting the best price on key commodities, the real problem is likely a lack of buying power because your volume is too low. Find the why behind the what.
Surface Problem vs. Real Problems
- Surface problem: paying duplicate invoices
- The real problem: lack of accurate spend tracking and visibility
- Surface problem: too many “wants” rather than actual “needs” are being filled
- The real problem: lack of planning and accountability
- Surface problem: too much time spent on the wrong contracts or categories
- The real problem: poor supplier relationship management
- Surface problem: constant price changes
- The real problem: subpar supplier performance, lack of contract adherence, or lack of category expertise
Drilling down to the more significant underlying issues will set you up to create a successful game plan. As you strategize, your goal is to balance prioritizing corporate requirements while addressing any long-term risks, minimal cost savings and labor-intensive processes.
3. Set Effective Procurement Strategy Goals
Once you identify and prioritize your needs, you can start brainstorming solutions. This assessment becomes the basis of your procurement strategy. Be sure to detail how your initiatives are meeting key procurement objectives. Specifically, how you’re going to increase savings, maximize efficiency and reduce risks. Define how your strategy ties back to your corporate goals.
At some point, you may realize you’ll need some assistance to solve all of the problems. Here are some additional resources available to help:
Better Spend Visibility / Procurement Software: You might want this if you depend on suppliers for spend feedback, if your cost-saving opportunities aren’t crystal clear or if you have multiple locations. Learn more
Procurement Consulting / Outsourcing Procurement Activities: You may need this if you want better supplier savings, if you need particular category expertise or if you’re a mid-sized business with a smaller procurement team. Learn more
Better Contracts / Greater Buying Power: If you don't have enough volume to get the contracts you want, your unplanned spend is high or increasing or if you don’t want to have to issue an RFP every time you need a new supplier, look into leveraging greater buying power. Learn more
Discuss with your stakeholders which areas are most pressing for your business. Don’t shy away from the conversation because a powerful procurement strategy can’t be achieved without real change.
As you build your procurement strategy, the worst thing you can do is set vague goals. Goals should be “SMART" - specific, measurable, achievable, realistic and time-based. It’s too easy to get caught up in “fire drills” and focusing on immediate problems, rather than the essential issues. If you don’t have good targets to keep you on track, you’ll never move the needle.
Lastly, remember a strategy is only as good as its execution. You may have the perfect plan of attack but if your team never reviews it, never analyzes why it succeeded or failed, you might as well not have a plan at all. The most helpful thing you can do as a procurement leader is to provide a clear vision and definition of success.
Simply put, your first job is to help your team build an effective procurement strategy; your second job is to empower them to use it.