7 Key Steps to Develop an Effective Procurement Strategy

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7 Key Steps to Develop an Effective Procurement Strategy

“We cannot solve our problems with the same thinking we used when we created them” -by Albert Einstein.

A procurement strategy is one of the essential documents that your business should have. The procurement strategy has an important role in defining how an organization runs its procurement function.

A Successful procurement strategy is a financial plan to manage your budget, production timelines, workflow, and keep everything aligned with company goals. Effective procurement strategy serves as a compass to guide the organization & should be updated at least annually to make sure ongoing alignment with the complete corporate strategy. 

Without a documented procurement strategy, it is nearly impossible to keep cash flowing smoothly & even. This document helps in ensuring the efficiency of using resources & obtaining new items that can benefit the business in the best way possible.

A procurement strategy in supply chain management takes into account: purchase timeline, possible risks, available budget, current market conditions, company objectives, initiatives, and goals, the total cost of ownership & more. Each organization’s #procurementstrategy should be uniquely customized according to the needs of the business. There is no one-size-fits-all approach to creating a strategy. 

A procurement strategy documentation will:

  • Increase transparency & visibility.
  • Help with strategic planning.
  • Provide a better basis for engagement and eliminate unnecessary inconsistencies.

      Importance of Procurement Strategy

      • A procurement strategy plan helps in the decision-making processes of a business.
      • It can make the procurement phases & processes more achievable, measurable, and realistic. With this document, the business can note down the needs of the operations which can then be obtained and given in an effective & timely manner ultimately leading to a proper business transformation.
      • An effective procurement strategy provides an opportunity for business stakeholders to be aware of the procurement plans of the management. This will act as a platform where communication can be done among various entities involved in business operations and procurement activities so that suggestions and recommendations related to procurement strategies can be established & gathered.

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          Goals of Procurement Strategy

          • Eliminate individualist spend.
          • Enlarging efficiency with timely deliveries.
          • Decrease error & lost savings opportunities.
          • Ensuring purchasing complies with federal & state regulations.
          • Identify authorized buyers.

                  7 Steps to Develop an Effective Procurement Strategy

                  1. Evaluate your Business’s Recent Condition

                  Often, organizations make a strategy without understanding where they are today. But it’s necessary to know before moving forward. From a procurement perspective, this baseline falls into 2 categories:

                  • Acknowledging how your procurement organization is presently adding or generating value.
                  • Acknowledging your organization’s present operational efficiency & effectiveness.

                    To do this, you need to achieve data from internal stakeholders, suppliers & all other parties who are engaged in the procurement process. Some metrics like Procurement spend per employee, Turnover percentage, Total savings, and savings as a percentage of spend are used in the process of supply chain transformation. 

                    2. Use Procurement Software

                    Those businesses which handle the procurement processes manually & don’t combine procurement software are probably to lose money due to errors, delays & overpayments. Procurement software amplifies productivity & decreases errors by minimizing data entry and redundancy.

                    Procurement strategies in supply chain management keeps track of purchases from purchase order to payment, removes approval bottlenecks, and makes sure that purchasing meets approval standards before ordering.

                    3. Identify Business Needs & Evaluate Market Conditions

                    It’s important to understand your organization’s needs clearly. This fact-based analysis will help you align & prioritize your procurement strategy across other functions and business goals. You can conduct a simple ‘what if’ discussion which challenges the status quo & questions the obvious, so in return, it will exploit a lot more savings opportunities.

                    After the internal analysis is done, the next step is to evaluate the supply markets & their conditions. To make sure relevance, organizations need to ensure that the gathered data stays up to date over time. Methodologies like Porter’s 5 forces & SCOPE analysis will help during this analysis.

                    Steps to develop effective procurement strategy

                    4. Define Company Objectives & Prioritize them

                    After acknowledging the business needs, it’s time to come up with a clear vision of what needs to be achieved. Although the end objective of every business is “make more money,” but strategic goals should be far more comprehensive. A well-defined goal includes a particular target to shoot for & a plan to achieve it. Goals might include increasing sales or revenue by some percentage, increased production, higher sales, lower costs, etc.

                    Once goals are identified, sort them in descending order of the impact each has on your company’s bottom line.

                    5. Define Procurement Policies

                    Create a list of effective procurement strategies practice that will remove the existing inefficiencies. Set specific procurement practices for each department, which suppliers are preferred, what kind of purchases require approval, and who will approve when necessary.

                    6. Outline a Procurement Strategy

                    With the help of the data & information you’ve gathered, draft a procurement strategy. The criteria generally contain delivery times, supply quality, price, service, compliance with regulations or company objectives, etc.

                    7. Define Success Metrics

                    Based on success metrics, the new procurement process should be evaluated. What will successful implementation look like & how will you measure it? Refine strategy as necessary to enhance efficiency as the business expands.

                    Guidelines for Developing Procurement Strategy Plan

                    • You need to have a whole idea of the corporate goals of the business the process of lean transformation
                    • It’s important for you to directly engage all the stakeholders of the business who have responsibilities when it comes to procurement so you can make sure that they have an understanding of how their functions can help progressively implement the procurement strategy plans.
                    • You must come up with measures to help you identify the effectiveness of the procurement strategy plan.

                        See Also: 5 Most Important Steps Towards Profitable Supply Chain Transformation

                        Final Word

                        Procurement strategy should be a detailed roadmap for company spend and a tool to amplify budget and decrease errors, late payments, individualist spend, and poorly-timed deliveries. Using an efficient strategy makes sure consistent cash flow and a healthier bottom line.

                        Frequently Asked Questions

                        “4 Best Supply Chain Books”

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