procurement

Procurement Strategy: A Definitive Guide

by Beroe Inc

13 December 2020

What Is Procurement Strategy?

A procurement strategy is a long term strategy or a plan to ensure a smooth procurement process from vendors to procure the specified goods accurately, punctually and in a cost-effective manner with good risk management. Ideally, a procurement strategy should reduce the TCO (total cost of ownership) while also ensuring quality, timely supplies and mitigating risks. A procurement strategy should also ensure that the procurement process can grow with the company.

Why Do You Need a Procurement Strategy?

A good procurement strategy helps the procurement process to align and support the company’s vision and bottom line. It creates a very precise and specific plan that the procurement teams can follow to implement the priorities of the company. It also enhances the quality and cost-effectiveness of the supplies while ensuring that supplies are made on time. Good procurement strategy speeds up and improves production.

A procurement strategy that has good risk mitigation factors will be able to handle any unforeseen issues or disruptions and helps insulate production from such potential disruptions. A procurement strategy that maintains good relationships with suppliers ensures that there is excellent support from the vendors.

A clear procurement strategy plan empowers the procurement team to achieve the company’s goals and maintain a group of suppliers without ambiguity. It also helps set goals and measure the effectiveness of procurement against the goals.

Procurement Strategy Matrix: Kraljic Matrix

A procurement strategy matrix is a method of mapping procurement to two key factors; risk and profitability. It was defined by Peter Kraljic and is also called the Kraljic matrix.

Risk mitigation is an important function of procurement. When certain supplies are critical to production, any unforeseen disruption in their supply could disrupt the entire production line. So, every supplier selected should be selected while factoring in the potential risk factor. This could include the geographic location of the supplier. The political stability, accessibility, ease of transport and potential for weather disruptions determine the risk factor associated with the supplier.

The effect that the cost-effectiveness of procurement has on the profitability of the company is the second vital factor in the procurement strategy matrix. Not all the procured goods or services have a direct impact on profitability but those that do are vital in the overall procurement strategy.

These two factors of risk and profitability create a t2 x 2 matrix that can be used to assess and classify the procured items and suppliers. An item that has low risk, as well as low impact on profitability, is not critical. Items that have low risk and higher profitability are advantageous to the buyer. On the other hand, items that are high risk but have a lower impact on profitability are advantageous to the supplier. The critical items are the ones that have both a higher risk as well as a higher impact on the profitability. These are the supplier relationships that the procurement team should focus on nurturing and building into a lasting and mutually beneficial partnership.

Types Of Procurement Strategy

The types of procurement strategies depend on which of the procurement planning goals are more vital to the company.

Cost reduction management
Risk management
Supplier optimization
Quality management
Green purchasing
Global sourcing

Steps To Create A Procurement Strategy Plan

Analyse Spend: A thorough analysis of all the data relating to the items procured including hidden cost is analysed.
Identify Needs And Priorities: Analyse the needs of the company and prioritise them. A procurement matrix will help at this stage.
Analyse The Market: Collect and analyse the most up to date data on the supply market.
Set Goals: Identify and define goals based on all the data analysed and prioritise them based on their impact on the company’s bottom line.
Create A Procurement Management Strategy: Define the procurement policy to realign the existing procurement methods with the new goals.
Implement And Refine The Procurement Management Strategy: A good procurement management strategy continually evolves to become more in line with the goals of the strategy. Continual refinement also makes the sourcing and procurement strategy flexible to the changing goals of the company and changes in the market if any.