Strategic procurement is an organization-wide process that aims to ensure the timely supply of goods and services in line with the organization’s business goals, while reducing risk within the supply chain. Closely related to terms like strategic purchasing and strategic sourcing, it includes activities such as managing budgets and researching, identifying and selecting suppliers.
Strategic procurement is an activity that requires co-operation from all departments throughout the organization. Companies may opt to have a dedicated strategic procurement team in order to set the direction of the business by using data from the existing procurement process to implement future plans.
What is procurement?
Within an organization, procurement is the business management process which is used to source and manage external resources. This includes activities such as identifying the need for goods or services, assessing and selecting vendors, negotiating prices and creating purchase orders. As such, procurement includes sourcing, which means identifying suppliers which can meet particular requirements, and purchasing, which includes the tasks specifically involved in making a purchase.
In order to optimize procurement activity, companies may undertake approaches such as tactical procurement or strategic procurement. Whereas tactical procurement may focus on short-term goals such as purchasing goods for the lowest possible price, strategic procurement has a longer-term focus and takes into account factors such as supplier relationships.
What are the goals of strategic procurement?
While the goals of strategic procurement are certainly likely to include achieving cost savings, this is not the only consideration. By focusing on the wider objectives of the business, companies are likely to use strategic procurement for a number of reasons, such as:
Choosing suppliers that best match the company’s business goals
Procuring higher quality goods
Building robust relationships with suppliers
Collaborating with suppliers on areas such as R&D
Managing/minimizing supply chain risk, for example by identifying alternative suppliers in different geographical locations
Reducing the supplier base in order to focus on key relationships and benefit from economies of scale
As such, strategic procurement can play a role in supporting the strategic goals of the business. It can also deliver insights that can be used to inform the vendor management process.
Conversely, without a strategic approach to procurement, the company may lack visibility over the company’s purchasing activities, which may in turn hinder negotiations with suppliers. The process of sourcing and selecting suppliers may also be overly time-consuming and inefficient without a more strategic approach.
What does strategic procurement include?
Strategic procurement involves identifying key areas of spend within the business and identifying ways of adding value through procurement processes. This can be achieved by analyzing the company’s purchasing needs and current spend, creating a procurement strategy and selecting and negotiating with suppliers. It also includes activities such as category management.
Strategic procurement process
Needs analysis. Understanding what types of goods and services the company needs to purchase
Spend analysis. Analyzing existing spend by sourcing data from suppliers as well as from within the organization
Supply market analysis. Researching the supplier market to identify suppliers able to meet different needs
Procurement strategy creation. Determining the company’s supplier requirements, selection process, procurement policies and strategic objectives, and setting these out in a procurement strategy
Supplier selection. Undertaking a Request for Quote (RFQ), Request for Information (RFI) or Request for Proposal (RFP) exercise with shortlisted suppliers to evaluate their suitability for the company’s requirements
Negotiation. Negotiating with chosen suppliers and awarding contracts
Another component of strategic procurement is category management, which involves segmenting the organization’s spend on goods and services across different categories, such as IT, HR, office management and travel and entertainment (T&E). A category manager may be appointed for each category in order to focus narrowly on optimizing specific areas of purchasing, including carrying out market analysis, managing supplier relationships and ensuring that appropriate purchasing decisions are made.
Strategic procurement technology
Technology has an important role to play when it comes to strategic procurement. Companies may take advantage of solutions covering areas such as spend management, RFP and RFQ exercises and contract management in order to increase visibility over the procurement process, optimize the supplier selection process and manage supplier relationships more effectively. Technology can also be leveraged for activities such as running e-auctions, which require suppliers to compete with each other for contracts.
Last but not least, companies can strengthen their supplier relationships and increase the resilience of their supply chains by adopting early payment solutions such as supply chain finance and dynamic discounting. Both solutions enable suppliers to access early payment on their invoices. Supply chain finance includes payment by a third-party funder, whereas dynamic discounting involves deploying the buyer’s excess cash in order to take advantage of early payment discounts.