Procurement strategy: definition and applications

Traditionally, the procurement function’s main role is to ensure that all raw materials, equipment, industrial consumables and services required for the production are available. As the structure of the supply chain evolves, buyers take on new responsibilities. From suppliers relationships management to innovation and Corporate Social Responsibility (CSR), the impact of this function can be measured through its impact on the supply chain. A company’s ability to grow partially depends on its ability to implement a lasting procurement strategy. This strategy will help the supply chain achieve excellence by aligning the procurement with the company’s objectives and by optimizing costs.

The Procurement Function in the Industry

In the last ten years, the purchasing function has undergone a profound transformation. Purchasing teams benefit from a strategic position due to their role as intermediary between the company, its partners and its clients. Far from its “cost-killer” image, Procurement is now a pillar of production, innovation and CSR within a company. The procurement strategy also reflects the organization’s vision on the market.

The procurement strategy’s main purpose is therefore to provide teams with a set of methods and best practices in line with the company’s main concerns. It helps enhance profitability by reducing superfluous expenses and by minimizing delays and speeding up the supply chain. In this context, it should provide new opportunities for improvement in production or delivery, for instance by improving Supplier Relationship Management.

The keys for a good Procurement Strategy

A company’s strategy provides buyers with a frame of reference. Naturally the procurement strategy reflects the Procurement function’s main objectives. By taking the following elements into account during the planning phase you’ll be able to establish a clear strategy and provide your teams with everything they need to meet their goals.

The Quality, Cost, Delivery triangle

Sourcing, outsourcing and negotiation are just some of the ways the buyers can influence supply costs. In the collective mind, the Procurement function has often been associated with a pressing need to reduce costs. This is actually only half the story. Even though optimizing costs is an integral part of the department’s mission, its effectiveness can also be measured through its effect on the supply chain. It needs to be flexible in order to deal with unexpected events or disruptions within the supply chain. By developing special relationships with industrial suppliers, Procurement effectively helps meet deadlines and continuously improve quality.

Supplier relationships

These days the Procurement function is responsible for finding the industrial suppliers best suited to the company’s needs. Sourcing requires a proactive approach to market analysis, benchmarking, auditing various industrial clients and rationalising the panel. In truth, this is a very complicated exercise involving a number of factors: price, the technicality of the desired products, risk, competitive environment, etc. When selecting its panel of suppliers, the organization looks primarily at the compatibility of their respective strategic views.

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Then, the teams rationalize the panel to keep only key partners. To do so, they can simply study the total volume of orders passed within a certain timeframe and determine which suppliers the company turn to the least. Conversely, they can establish real partnerships with preferred suppliers. This approach can place the buyer in a strong position when negotiating supply contracts. For example, this allows them to benefit from preferential rates or to reduce supplier management costs.

Innovation

Over the past few years, an increasing number of companies have decided to add innovation to the duties of the Procurement function. Its strategic position allows it to detect their partner’s innovative potential. They are then able to match their internal needs (equipment renewal, reducing industrial maintenance times, etc.) with their suppliers’ expertise, who, in exchange, could benefit from a test environment dedicated to product development. This new type of partnership makes it possible to share the risks and benefits of innovation between all the stakeholders. This is known as co-innovation.

To guarantee the long-term success of this kind of venture, it is essential that all stakeholders share a common strategic outlook.

CSR

Corporate Social Responsibility (CSR) is becoming increasingly important for Procurement strategies. Integrating a “CSR charter” fulfils the company's dual objective of compliance and reputation with its end customers.

To address this, teams can audit Tier 1 suppliers and higher to examine: the origin of the raw materials, the shipping method, the work conditions, etc. To tackle this sourcing issue, some companies don’t hesitate to integrate this CSR charter into their supply contracts.

How to define your Procurement strategy

A Procurement strategy can never be an accumulation of random facts. It’s unique, tailored to each company. It arises from careful consideration and an in-depth knowledge of the industry. And last but not least, it’s based on all of the data collected from the company and its potential affiliates and subsidiaries, as well as from its partners and the market.

Analyzing the ecosystem

In order to develop a procurement strategy that is as close as possible to the real needs, it is recommended to draw up a map of the business and its ecosystem.

Through a combination of their own tracking tools and Industry 4.0 predictive analysis tools, the operators can accurately determine the current health of an organization. Data collected along the entire value chain also allows them to identify the organization’s strengths and weaknesses. This involves identifying the main actors and their respective roles in the supply chain, as well as identifying the processes and protocols which regulate their activities. Incompressible costs, superficial expenses, income sources: mapping the company’s cost structure is an essential part of the optimization process.

As important as this analysis is, it must always be accompanied by a detailed study of the environment in which the organization operates. In order to create an ambitious but realistic strategy, it’s important to identify the threats and opportunities present on the market. To that end, the Purchasing teams must pinpoint the different actors: end clients, potential partners, suppliers and distributors, competitors… This study may also include consumer preferences or competitive practices.

Setting objectives and priorities

A company’s priorities are often associated with its vision and global policy. Setting priorities is about finding the right balance between the global vision, the available resources, the potential opportunities for growth and the obstacles you might face. Some of the most common priorities include:

  • Cost reduction

  • Supply chain risk management

  • Optimizing supplier relationships

  • CSR

  • Improving sourcing activities

  • Total Quality Management (TQM)

Strategy, on the other hand, can be thought of as the logical conclusion of the corporate policy. Even though the primary goal of any company is to increase its turnover, that’s not enough to build a sustainable long term strategy. It’s important to set goals specific to the organization that reflect its priorities and internal policies while being based on the reality of the market. Similarly, a Procurement strategy would be incomplete if it’s only goal was reducing procurement costs.

Procurement teams can gain a better understanding of their goals by using a SMART approach. This acronym refers to a set of criteria which must be met by all the elements of a strategy to ensure its sustainability.

  • Specific: goals must be detailed and in line with the company’s specific needs. They address the issues brought up during the previous analysis phase.

  • Measurable: operators must have measurable goals in order to monitor their progress and modify their strategic trajectory, if necessary.

  • Assignable: a set number of stakeholders must be assigned to each goal and be responsible for seeing it through. This is when the supply chain is organized and operators take responsibility.  

  • Realistic: corporate objectives should be ambitious, but also realistic and achievable.

  • Time-related: it is important to establish a chronological framework (beginning, end and key dates) for each objective in order to guarantee its implementation.

Identifying your levers for action

Once the objectives are clearly defined, you must identify the means to achieve them: process and methodology, stakeholders, tools, budget allocated...

For example, for a procurement strategy that would mean specifying the supplier selection criteria. In that case, it is recommended to proceed by purchasing category. By applying Pareto’s law it is possible to prioritize purchases in three categories: A, B and C. Although the third one only represents a small portion of the total volume of purchases, it accounts for almost half of the purchases from suppliers. These purchases are considered “non strategic”. However, they shouldn’t be neglected, instead they should be rationalized using thorough processes. A budget may be allocated for each of these categories.

After selecting suppliers, it’s time to approve the operations. There’s an increasing number of flexible, user-friendly solutions available on the market which help streamline the approval process. Depending on the type of purchase (strategic or recurring) or on the supplier’s profile, some procurement operations can be automated. Intelligent sensors, CMMS software and next-gen purchasing management are just a few Industry 4.0 solutions to automate the supply chain. For example, integrating an order schedule, as well as the conditions and delivery rate of certain consumables, into the procurement strategy allows teams to improve their responsiveness and efficiency and grants them the time to focus on more strategic purchases.

Mobility Work is the first platform dedicated to putting industrial suppliers in touch with maintenance experts. Mobility Work Hub was designed to be a real driver for collaboration between the different stakeholders for the supply chain.

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From a performance perspective, the importance of good supply management software should not be overlooked. The software reduces the risk of errors, delays and payments as well as simplifies the sourcing process and automates order management. From the very first contact to the payment, operators control every step of the process.

Establishing key indicators

Regularly monitoring the activities will ensure the success of the strategy. It is essential that each team and operator has individual key performance indicators (KPIs) to use as a reference. Whether it’s the evolution of costs, the average order processing time or the amount of stock, the KPIs must be determined beforehand in order to measure the success of operations.

While it used to be very time-consuming, monitoring key indicators is easier than ever thanks to emerging technologies, predictive analysis and Big Data.

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As the Industry 4.0 progresses, Procurement strategies will continue to evolve. The key is to stay as close as possible to the organization's needs and to understand its strategic vision and its environment. A good procurement strategy shouldn’t be conceived in isolation: it must be designed in collaboration with the relevant teams and the company’s partners to benefit its end customers. Mobility Work Hub is the first tool dedicated to improving relationships between industrial suppliers and their customers.