By Dr. Robert Gordon, CPC | 12/21/2023
To improve your procurement strategy and business operations, you must do two things: understand your needs and manage the supplier relationship.
First, start with clearly defined requirements of what you need. Vague requirements cause many issues with procurement costs management since incorrect materials must be returned and replaced. Knowing the exact requirements becomes critically important to help you avoid mistakes and problems with quality.
Second, it is essential to establish strong relationships with your suppliers. Communicate with them regularly to ensure that they understand your expectations and can meet your key business requirements.
As part of building that relationship and improving your procurement strategies, you should also seek ways to collaborate with those suppliers. Being available to collaborate shows that you are interested in a long-term business relationship, making your company a likely partner for future new products or services.
These top two tips are essential when you’re looking to build a tactical plan and successful procurement strategy. Now, let’s look at the component pieces of an effective procurement strategy.
Building a Procurement Strategy Framework
Three key areas of consideration go into developing an effective procurement strategy:
- Risk management
- Contingency planning
Technology can streamline the procurement process, improve efficiency, and reduce manual data entry errors. Also, implementing an e-procurement system can help you to more effectively manage relationships with suppliers, contracts, and procurement processes, as well as reduce the need to perform administrative tasks.
Also, by leveraging technology to a greater extent, more data becomes available for internal analysis. This data can be used to provide actionable insights and to better understand an organization's needs. It can also play a helpful role in cost reduction.
Data analytics is vital to organizations because internal and external data can be used to create a better procurement strategy. Data analytics can also provide historical information on previous procurement processes. Understanding the different product demand peaks and valleys will lead to a better understanding of what is necessary in developing your procurement strategy.
A procurement strategy needs to consider the materials management side as well to make the most efficient use of the organization's warehousing. Finally, no procurement strategy would be complete without considering if a vendor management inventory (VMI) system might be used. This type of procurement software enables an organization to keep products available without spending cash on inventory that sits unused.
An organization-relevant procurement strategy should include a balanced strategy toward managing risk. The implementation of a risk management strategy could be used to address any supplier disruptions.
Ideally, you should identify equipment or product available through only one supplier – for example, equipment that can only be purchased directly from the manufacturer. There is always risk involved with these kinds of relationships. Obviously, if the manufacturer goes out of business, their equipment or product may not be easy to replace.
However, in some cases, it might be prudent to work with the company to create an escrow account. That account could hold the code for any significant and necessary software systems should the system cease to be available.
For example, suppose a company uses a customized Enterprise Resource Planning (ERP) system that it does not own. In this case, arrangements should be made to put the code in an escrow account in case the software company goes out of business. This process avoids a lengthy wait while the company's receivership processes the assets.
Another strategy for companies to manage risk involves diversifying its supplier base. Some companies have an 80/20 rule for their procurement policies, leading them to award two contracts to two different suppliers, rather than one large contract. This strategy helps to protect against problems if the supply of a particular item is cut.
The expectation with the 80/20 rule is that if either supplier has issues, the other company would be ready to pick up production. Managing risk in these ways is crucial to avoid disruptions that could hinder a company’s production.
Contingency Planning for Business Continuity
As a part of a robust procurement strategy, companies should create contingency plans for business continuity. Suppose there was a disruption involving a pandemic, natural disaster, a power outage, an office building deemed unfit for use, or a similar problem that could affect production.
I was with the procurement team for a company whose building suffered a flood. During the inspection after the flood, the inspector determined that the building could no longer be occupied without significant work. Our contingency plan allowed for remote workers and a small remote headquarters, enabling the company to continue operating and improved employee productivity despite the flooding problem.
You do not need to implement all three strategies to build an effective procurement strategy, but it would be beneficial. There are many other ways to build an ideal procurement strategy framework; however, many procurement strategies must be customized to meet the organization's needs.
For instance, a manufacturer has different needs than a service company. As a result, different procurement strategies would have to be considered by procurement professionals when contingency plans are made. The company may need to update its current procurement process and re-define procurement policies.
Remaining open to options will always bring more value. Even if your every idea is not accepted, it is better to be known as someone who brings new ideas to the table rather than being perceived as slow to innovate.
Strategic Procurement Helps a Business Unleash Its Potential
The three best strategic procurement priorities to help a company maximize its potential are:
- Supplier relationship management
- Spend analysis
- Strategic sourcing
Supplier Relationship Management
Managing the supplier relationship comes first because you should always ensure that the suppliers you use are the best fit for your business requirements. With so much changing in the world, you need to ask questions and do research on market conditions to discover new technology or developments emerging in the market.
As part of your vendor development activity, it should be noted that the more you work with a specific vendor, the more opportunities there are for both companies to benefit.
In addition, vendors should be coming to your organization with new ideas related to your field. Efficient vendors with a tactical plan for the future often have a good procurement strategy framework to improve your partnership and deliver quality goods and services with a goal to help both organizations.
Spend analysis is all about understanding where a company is spending money and how to maximize the value of that spending. The first step is analyzing and categorizing your organization's spend. You first must understand where the money is going and determine areas of potential cost savings or other associated inefficiencies.
If an organization spends more money with a company over the course of a year, it is time to ask for a greater discount. You can start by looking at the top 20-50 companies the organization spends money with to understand which companies to target for discounts.
You should contact all companies where your spend is increasing. Even if they are unwilling to offer a discount, ask if they will consider a discount if the spend continues to grow.
After all, who is reluctant to provide a discount for increased business? Even if the extra spending does not happen, no one is hurt, but if the additional spending occurs, an automatic discount will be triggered.
Strategic sourcing is all about remaining open to using new suppliers. Too often, organizations get complacent with an existing supplier. An organization needs to remain open to global sourcing for all requirements.
However, that does not always mean that that one organization is the best supplier of goods or services. Sourcing is about being able to identify the best sources for those goods and services by considering factors like quality, cost, lead time, and vendor stability.
You can also look to bundle purchases with fewer suppliers. Use bulk purchasing, global sourcing, or joint ventures for the best value with suppliers, which involves negotiating at times. Remaining open to and looking for new sources can help keep existing suppliers less complacent, leading them to stay competitive.
Considering a green purchasing strategy can also improve the organization's image, showing that a company is devoted to corporate social responsibility. Green purchasing involves working with those vendors that have low environmental impact and are sustainable from a material and production standpoint.
Supplier Management, Optimization, and Relationship Building
Supplier management, supply chain optimization, procurement policies, and relationship building are critical elements that contribute to an organization’s successful operation and sustainability.
The management of suppliers involves overseeing and administering the supplier relationship and performance to gain maximum value for an organization. It encompasses a range of activities, such as:
- Vendor development and selection
- Contract negotiation
- Setting of performance success metrics
- Relationship management
Effectively managing suppliers ensures the steady flow of inputs and raw materials required for production. More importantly, the effective management of suppliers leads to cost reduction through negotiated discounts.
The management of suppliers should drive enhanced quality and supplier performance. In addition, it should mitigate risk and have the potential for increased innovation.
Optimization and a strong procurement strategy framework continuously enhance supplier processes to improve efficiency, reduce costs, and create value. A critical element of optimization is relationship building. Relationship building fosters collaboration, innovation, and long-term partnerships with suppliers.
I learned very early in my career that building solid relationships with suppliers would assist them in discussing future plans or innovations. Knowing about and being open to implementing new products can help put you at the front of the line for future ideas and products. Also, being an alpha or beta testing partner could result in significant discounts for equipment and opportunities for the future.
Building Supplier Relationships
Relationship building is all about what happens outside of the transactions. Understanding the motives and goals of other organizations will help you make a difference. If you perform regular market research and know what motivates others, you can use that information to enhance their alignment with your organization's business goals.
If a supplier has other products, goods, or services that could prove helpful to a company, take a look at those opportunities. Suppose a supplier has skills that might benefit your organization. In that case, it might be useful to speak to those experts and have them meet the organization’s internal stakeholders and decision-makers.
Salespeople love to talk, and engineers love to talk to other engineers. Ideally, you must bring valuable information to an organization to maintain your own competitive advantage.
Creating an Effective Digital Procurement Strategy
Finally, an organization needs to develop a digital procurement and purchasing strategy. The systematic management, optimization, and nurturing of relationships with suppliers are crucial for organizational success and sustainability.
However, using a digital procurement strategy can streamline business activities. By ensuring efficient and effective supplier management processes through Electronic Data Interchange (EDI), organizations can reduce costs, mitigate risks, enhance performance, and foster innovation and growth.
Continuous efforts in optimizing supplier management and cultivating strong relationships with suppliers yield long-term benefits, contributing substantially to an organization's bottom line and strategic objectives. Making transactions digital and visible to all can make a huge difference for an organization.