Understanding the What, Why & How of Strategic Procurement
A recent survey found that 78% of Chief Procurement Officers globally are most concerned with reducing costs in the procurement process. Prioritizing savings has led CPOs around the world to adopt strategic procurement processes, objectives, and technology. Strategic procurement can deliver both cost savings and lower risk. Here are the basics of strategic procurement and how to get started using strategic sourcing at your business.
What is strategic procurement?
Strategic procurement, also known as strategic sourcing, is the process of planning to ensure that the goods and services needed to do business successfully are obtained on time as needed — and on budget. Strategic procurement involves carefully optimizing everything from vendor selection, payment terms, vetting, contract negotiation, and the purchase of goods and services.
As compared with regular procurement, strategic procurement involves finding efficiencies across spend categories, minimizing supply risks, improving vendor selection, and bringing greater visibility to pricing and forecasting.
“Strategic sourcing views suppliers as crucial value partners and aims to build sustained, collaborative relations,” wrote the Zycus. “The customer-supplier loop is assessed at every stage of its lifecycle in order to ensure that the needs of the organizations are continuously and efficiently met. To accomplish this, strategic sourcing leverages spend analysis, supplier evaluation, supplier relationship management, and detailed market research.”
[Read more: Strategic Sourcing]
When done correctly, strategic procurement can help an organization optimize its profit margin, lower risk, and streamline the internal process of procuring goods and services necessary to achieve business outcomes.
Strategic procurement objectives
Ultimately, strategic sourcing focuses on maximizing the ROI of the procurement process for an organization. How can the business receive the best overall value from its sourcing function?
To maximize ROI, many organizations start by setting smaller, measurable strategic procurement objectives. These objectives can be internally-focused (e.g., implement strategic sourcing software to streamline procurement workflows) or externally-focused (e.g., build long-term supplier relationships). As you develop your strategic procurement approach, keep in mind the entire lifecycle of a product一not just its initial purchase price.
Here are some examples of strategic procurement objectives from the UN Procurement Practitioner’s Handbook:
- Minimize administrative effort needed to source goods/services
- Reduce total expenditure (incl. indirect spend)
- Ensure continuity and quality of supply
- Reduce risk and cost by managing supplier relationships
If you’re not sure how to set strategic procurement objectives, start by understanding the strategic sourcing processes and how they relate to your core business practices.
How to get started with strategic procurement
Strategic sourcing will look different for every organization. Nevertheless, here are four steps to strategic sourcing as defined by SAP Ariba. These steps are:
- Collect data and analyze spend: Begin with spend analysis that brings together supplier data in one place and identifies areas of indirect spend so you know exactly how much is being spent where. This will reveal areas in which you can streamline vendors, cut down on redundancies, or negotiate for a better deal.
- Begin the RFx process: Then, use your supplier data to RFx processes for goods and services that you’ve identified can be improved. Allow suppliers to compete for your business with a strategic sourcing tool. This allows you to get the best possible bids for your business needs.
[Read more: RFQ vs. RFP vs. RFI: What's the difference?]
- Negotiate and agree on a contract: Bring on a supplier that has been fully vetted and start building a long-term relationship. Use an automated tool to route approvals, create digital records of signatures and contract revisions. Keep a repository of documents for better compliance and organization.
- Optimize and automate: Measure your strategic procurement objectives regularly to make sure your supplier relationships are meeting your needs. Build feedback loops to constantly optimize and use procurement software to automate some of the labor-intensive parts of the procurement process. Evaluate suppliers regularly to make sure that you’re getting the best possible deal on your goods and services.
Fairmarkit has a range of tools that can help you improve strategic sourcing. For more advice on optimizing the procurement process, check out Fairmarkit’s blog, The Source.