Why is having a procurement strategy so important? The key benefits are that it helps you reduce costs and deliver greater sourcing value. Which when you’re a procurement professional, is always a top of mind goal.
But the results are, of course, contingent on the approach. There’s the rub. While there is a lot of talk about the importance of strategy, there isn’t a lot of practical guidance available. The hardest question you must answer is, what does a good procurement strategy look like?
If you’ve recently had a merger or acquisition, or if you’re new to your team, the question is even harder to answer. But don't panic. This article will walk you through the three steps to creating an amazing procurement strategy.
Step 1. Assess Your Current Procurement Strategy
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? Which is why 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 how what they’re working on 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 and is not working. Include all your key stakeholders in this discussion. They’ll 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.
Step 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. It essentially says that “80% of the results come from 20% of the efforts.” 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. For example, maybe your highest priority is that you need to reduce your indirect spend. You can also use more comprehensive tools, like conducting a gap analysis. Or using the Kraljic Matrix, which provides “a framework for segmenting supplier spend.” Enabling you to see which spend categories have the most significant impact.
Remember that the concerns you uncover may only be surface needs. For example, your team may tell you the problem is you're not getting the best price on key commodities. While that may be true, your 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.
Step 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’ll probably realize to solve said problems you’ll need some help. Bellow are common areas where you might need some additional resources.
- Better Spend Visibility / Procurement Software
You probably need 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 might need this if you want better supplier savings. If you need particular category expertise. Or you’re a mid-sized business with a smaller procurement team. Learn more.
- Better Contracts / Greater Buying Power
You need this if you don’t have enough volume to get the contracts you want. If 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. 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, remember, the worst thing you can do is set vague goals. I.E., anything that is not “SMART,” which stands for, Specific, Measurable, Achievable, Realistic, or 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.