Top-8 Procurement Strategies in 2024: Where to Start and How to Get Them Right?

When procurement is a strategy-driven business function rather than a simple set of purchasing tasks, organizations deliver high-value results. A company’s chief procurement (or financial) officer usually introduces a procurement strategy to ensure that sourcing, contracting, and purchasing occur in alignment with the business objectives. Strategic procurement is also key for OPEX optimization and healthy cash flow.

In this article, we go over the basics of strategic procurement, review some key strategies, and discuss how to build a procurement strategy step-by-step to fit the unique business needs.

• What is a procurement strategy?
• What is its purpose?
• Main types of procurement strategies
• Steps to develop a procurement strategy
• Procurement strategy examples and template to create one
• Why is procurement strategy important
• FAQs

What is a Procurement Strategy?

The term procurement strategy refers to a long-term plan aimed at building strategic relationships with competitive suppliers in order to acquire the necessary goods and services of the best quality in a specific cost range and have them delivered on time.

A procurement strategy defines priorities for purchasing decisions and criteria like suppliers qualifications or budget limitations, also outlining specific steps based on internal company audit and external market influences. Procurement strategy is an overarching term that encompasses various processes of a procurement cycle.

The Purpose of a Procurement Strategy?

Procurement strategy helps a business determine which goods or services to source, from which suppliers, and how much to pay for them. While developing the strategy, procurement professionals typically factor in data about supps and vendors, market trends, price fluctuations, legal and compliance demands, and other industry-relevant factors.

Procurement strategy reflects the company's vision, goals, and objectives and provides a set of methods and practices to align with them. It’s a pillar of production, fundamental for ensuring the best quality of its output with optimal use of resources.

In general, effective procurement strategies help companies introduce and promote their best practices of minimizing purchase costs while maximizing quality.

What Is Your Ideal Procurement Strategy?

Each business has unique objectives stemming from the range of internal or external factors, and so there are no two identical procurement strategies. However, we can go over the core procurement strategies that organizations tend to adopt and further customize according to their objectives.

Cost Reduction

The most common procurement strategy focused on increasing profits through recognizing saving opportunities and decreasing the total cost of ownership (TCO). 

Cost savings can be crucial for a company on a tight budget or undergoing structural changes, and keeping that objective in mind while planning procurement operations can be a game-changer.

Cost reduction is a complex and multi-layered process, influenced by various decisions made across the company's departments on many hierarchy levels. It involves negotiating with suppliers, adjusting internal administrative workflows, optimizing operational expenses, minimizing maverick spend, and ultimately cutting excessive purchases.

Risk Management

A risk management strategy focuses on minimizing the impact of unfortunate events on the procurement process. Following this strategy, an organization prepares to compensate for any supply chain risk.

This strategy allows a company to develop appropriate responses to potential risks. Core elements of risk management strategy include the following steps:

• Identify the possible risk events and their causalities;
• Analyze the origins of such events, their nature, and possible impact;
• Prioritize the risks based on their impact force;
• Monitor the red flags to recognize the risk-bearing situations in time;
• Communicate risk management practices to teams involved in procurement;
• Proactively take preventive measures before the disruption happens or react promptly to reduce its impact on a business.

Supplier Management, Optimization, and Relationship Building

This strategy focuses on managing suppliers through building partnerships. The sourcing professionals research potential suppliers and vendors to partner with, vet them, and select the ones offering the best price-to-quality ratio. The procurement team then focuses on introducing communication channels and implementing cooperation workflows in order to build long-term sustainable relationships with selected suppliers.

As part of this procurement strategy, the company might conclude that altering the supplier base and increasing or decreasing its diversity is necessary to achieve a specific procurement goal. Such a strategy also implies that any supplier that does not meet the company's standards should be removed from the supply chain.

Vendor Development

Depending on the scale of cooperation with selected vendors or suppliers, and the relevance of goods and services they provide, it might be necessary to invest in developing such procurement partners. 

This procurement strategy is based on mutual partnerships. Through close cooperation, honest feedback, and constructive suggestions, purchasing companies can support their suppliers and vendors in developing offered products and services, which ultimately benefits both parties. 

Mutual cooperation becomes especially relevant in a market where the purchasing company depends upon one supplier to deliver a specific product. A procurement strategy focused on supplier and vendor development is typically implemented for a limited number of suppliers or highly unique goods. In other words, in situations when the efficiency of a specific supplier is vital for achieving the purchasing company's strategic goal.

Global Sourcing

This procurement strategy focuses on the efficient sourcing of goods and services worldwide. Its objective is to research various locations and utilize sourcing opportunities in those countries or regions where required goods can be produced more economically.

With the international economy's increasing significance, companies are forced to explore alternative source markets to optimize costs and maximize profits. Global sourcing is a way to find the optimal offer. It’s also a possibility to use international expertise and technology that may be unavailable in the company's home country.

However, adopting the global sourcing strategy, one should be aware of the challenges it might imply: 

• Communication barriers that can complicate communication regarding the production process, quality levels, and costs;
• Complex supply chains; 
• Long delivery time and complex logistics; 
• Strict regulations and compliance demands.

Green Purchasing

This relatively young procurement strategy is becoming increasingly relevant among businesses. It is focused on companies making conscious sourcing and procurement decisions in order to decrease the adverse effects (or increase positive ones) on the environment and human health.

Companies prioritize purchases from suppliers that follow sustainable production procedures and offer goods produced with minimal environmental impact. The strategy is based on recruiting new suppliers with a green company philosophy or optimizing the existing network of suppliers and encouraging them to comply with the green approach.

Corporate Social Responsibility

This procurement strategy declares corporate social responsibility standards essential for the source-to-pay process and prioritizes responsible vendors and suppliers. 

As a part of CSR practices, procurement teams audit suppliers and examine how they source raw materials and produce goods, evaluate employees' work conditions and pay levels, validate shipping methods, etc. Following this strategy, a procurement team ensures that CSR principles are included in the official supplier contracts and that the suppliers actually adhere to these principles.

Total Quality Management (TQM)

This strategy revolves around an ongoing procurement optimization process, which involves discovering errors and opportunities for improvement. Total quality management holds all involved parties accountable for their performance and procurement results.

Unlike some other procurement strategies, TQM doesn't focus on any particular objective of the procurement process but rather on the entire transaction lifecycle: from selecting goods and services to invoicing and payment. As part of this strategy, the procurement team strives to optimize the customer journey, automate workflows for sourcing and purchasing processes, and continuously train employees.

Total quality management procurement strategy is based on continuous improvement through optimizing operations and fostering teamwork.

Procurement Training

With procurement practices and tools constantly evolving, this strategy has been becoming increasingly important. Since procurement operations are designed and executed by people, the human factor plays a critical role in procurement efficiency. If the staff does not get relevant training for upgraiding appropriate skills, procurement operations might be at risk.

This is why managers specifically focus on training competitive procurement teams. Both hard skills (like the ability to use specific software, for example a vendor management system) and soft skills (such as negotiation techniques) are essential for maximizing the procurement team's potential.

How to Develop an Effective Procurement Strategy

Any CPO (or anyone entrusted with the task) needs to focus on the company's unique needs and objectives to develop a tailored procurement strategy. By analyzing historical data, companies can identify possible gaps and opportunities in the established procurement proces and make informed decisions while developing customized strategy for the future procurement opertions.

Effective procurement strategy is result-oriented and contains ground rules for the procurement team to follow. Such a strategy considers increasing complexity of the business environment and embraces digital technologies, striving for operational excellence.

To start with developing a procurement strategy, one can start by applying the Kraljic matrix to the company's purchasing portfolio. According to this matrix, purchasing strategy depends on two key factors:

1. The strategic importance of purchasing (determined by the impact on business's profitability);
2. The complexity of the supply market (defined by monopolies, barriers to entry, technological evolution, logistics complexity, etc.).

One of the ways to develop a procurement strategy is by following the steps below.

1. Assess current procurement process

Start by analyzing the current spending culture of the company. Identify what the company buys and how it spends. Then, identify different business units and departments involved in the procurement process and scrutinize them for inefficiencies. Understanding the current purchasing climate in the company is crucial for developing a practical procurement strategy.

If you have a procurement strategy in place, determine whether it meets your current needs and can support the plans for the company's growth. Upon finding any weak spot or maverick spend, make sure to put them down for review.

2. Determine business needs

To develop a robust procurement strategy, it’s essential to understand and articulate the business strategy.

Check contracts, speak to stakeholders and procurement professionals to get a better hands-on understanding of whether your procurement practices are aligned with the company's business needs.

3. Conduct market analysis

Once the analysis of the business's internal needs is concluded, the next logical step is to assess external factors. Identify the threats and opportunities present in the market in order to develop an ambitious but realistic procurement strategy.

For the study of the market, the following methodologies might be used:

• Porter's five forces are useful to determine competition intensity and, therefore, possible profitability of the industry;
• PESTEL analysis helps to monitor and understand macro-environmental factors that impact businesses: political, economic, social, technological, environmental, legal;
• SWOT analysis combines internal and external factors to identify strengths, weaknesses, opportunities, and threats that the procurement team might face.

To conduct a thorough market study, a procurement professional should pinpoint different market players, such as suppliers and distributors, partners and competitors, clients, etc. Considering that market conditions might change rapidly and frequently, it is crucial to ensure that collected information is always relevant and up-to-date, and that market research is conducted regularly.

4. Set clear and specific procurement objectives

Defining strategic objectives is about balancing desired goals and available resources at hand. Objectives are medium-term goals towards which all teams, including procurement, strive.

Objectives (of a whole company or specific departments) must be aligned with the company's vision and global policy, but at the same time they should stay specific and realistic. To prioritize objectives, it is helpful to rank them based on their impact on the company's bottom line.

5. Convince stakeholders to revamp procurement strategies

In order to develop a suitable procurement strategy, the team should do so in collaboration with different stakeholders and partners. Stakeholders are the people interested in the company’s welfare, such as investors, finance professionals, employees, suppliers, and customers.

All your stakeholders involved in the procurement process should be on board with creating or revising the procurement strategy and should know exactly how they are expected to contribute.

6. Define procurement policies

Define procurement policies for each department, specify approval workflows and types of goods or services for order, list preferred suppliers, and provide other necessary specifications.

Procurement policies should ideally be made available to everyone involved in the procurement process, as they offer solutions to challenges that might arise.

When sketching out strategical procurement policies, it would be best to avoid starting from scratch, but instead review existing procurement policies and adapt them to current business needs.

It will help avoid overlooking any key aspects and streamline policy preparation.

7. Outline a procurement strategy

Based on the information obtained in the previous steps, it’s now time to draft a strategy.

Describe the current situation, list strategy goals, and create a tactical plan for achieving these goals.

Make sure to set SMART goals when preparing a procurement strategy. Every goal should be:

• Specific. Goals must be detailed and aligned with the company's particular needs and business objectives, brought up during previous steps.
• Measurable. The success of achieving goals (or not) should be measured constantly to monitor progress and modify the course of action if needed.
• Assignable. It should be clear who’s responsible for a specific task and which shareholders are responsible for seeing through the particular goal.
• Realistic. Goals must be achievable with available resources.
• Time-related. A timeline should be set for each goal, with the beginning, specified checkpoints, and end date.
8. Implement procurement software

The procurement process is quite complex and includes multiple steps to be followed precisely.

As a result, there’s a substantially higher chance of error if an appropriate digital solution isn't implemented.

Procurement software is crucial for eliminating manual data entry, which helps to minimize errors, streamline administrative tasks, and boost employee productivity.

In addition, automation helps to make the procurement process less time-consuming, prone to error, and more cost-efficient.

9. Evaluate human capital and conduct training

Learn about where your team stands in understanding ways to achieve procurement goals and specifics of procurement processes.

It’s always a good idea to have an open-minded and honest conversation with the team and offer everyone a safe space to express any concerns, offer feedback or ask questions.

If needed, organize training to boost specific skills of the team. It’s especially relevant when introducing new practices and tools like procurement software.

Make sure your team is aligned with key objectives of the procurement strategy and knows how to achieve them.

10. Execute, evaluate and refine the strategy

Finally, it’s time to execute the procurement strategy. It’s a process that must be overviewed, analyzed, and measured.

To maximize success, it’s necessary to define the successful implementation and measure it.

Improving the strategy is only possible when you are consistently tracking the outcomes.

To evaluate the success of procurement strategy, there are several KPIs related to:

• Cost and Savings – how do costs change, and how are we saving?
• Spend – how effectively are we spending?
• Contracts – how well are contract conditions fulfilled?
• Suppliers – how efficient is spending per supplier?
• Competition – how high is ROI compared to the market players?
• Processes – how efficient is each step of the processing time- and cost-wise?
• Customer Satisfaction – how satisfied are end customers?

Last is refining the strategy based on actionable insights from measuring its success.

Any strategy should be periodically reviewed to reflect the number of factors such as market fluctuations, business growth, technology development, policy changes, etc.

With the help of other departments involved in or influenced by the procurement strategy, analyze success metrics and identify areas that can be improved in the future.

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Procurement Strategy Examples

When it comes to strategic procurement, there's no universal solution.

Even companies of the same size in the same industry might opt for different procurement strategies based on their values and business requirements.

Some companies may choose a vendor development strategy and decide to go with a single-source procurement. As a result, a single vendor is trusted to deliver quality goods or services.

This strategy is predominant, for example, while purchasing software subscriptions in IT, ordering staff training, or doing office cleaning.

Goods or services required by the client are tailored to their needs through mutual partnership and honest feedback.

Other companies choose to focus on procurement costs management and use auctions to find the best price offer.

When minimizing budget is the main objective, the supplier selection process looks to reduce costs.

Such a strategy would work for purchasing office supplies and stationery – goods that aren’t unique.

There are many alternatives of comparative quality; therefore, choosing suppliers is mainly based on the better price.

Standardizing the purchasing chain would be an example of a TQM strategy. Intending to improve procurement performance, some organizations focus on process efficiency.

Aiming to optimize procurement function, a company would invest in digital technologies and employee training and develop elaborate workflows to automate the approval process and streamline purchasing as a whole.

Template for Your Strategy

The strategy should be documented. The procurement strategy framework should generally include:

• Specified benchmarks — how procurement achievements align with the company's business goals.
• Strategy statement — what are the objectives of the strategy in place.
• Expected results — what should be achieved.
• Timeframe — deadlines to meet and milestones to pass.
• Implementation plan — which steps to take, when and by whom, and how are they measured.
• KPIs — which targets to use to evaluate the success of strategy execution.
• Approaches for analysis and gathering supporting data — Spend analysis, SWOT analysis, Porter's Five Forces, etc.
• Dedicated tools — which tools to use to implement, track and analyze the procurement strategy.

Importance of Procurement Strategy

When markets shift rapidly and unexpectedly, every company looks for a competitive edge to distinguish its goods or services from other players.

Strategic sourcing and procurement allow a company to have a solid base for experimenting and searching for ways to innovate.

With an efficient procurement policy, a company can expect quality goods and services delivered on time and be prepared to face any unforeseen circumstances.

Strategic procurement also allows building meaningful and lasting supplier relationships by ensuring real-time visibility of the procurement process and trust in it.

This may lead to securing exclusive deals for lower costs, thus increasing revenue.

FAQs

To Sum Up

Strategic procurement enables sustainable business development. Procurement strategy reflects the company's vision, goals, and objectives and provides a set of methods and practices to align with them.

The procurement strategy outlines a detailed plan for introducing and promoting the company's best practices of minimizing costs while maximizing quality. In addition, strategy is vital for building trustworthy and mutually beneficial relationships with suppliers.

There’s no universal solution for strategic procurement. While there are several common strategies, each company should develop one aligned with its own needs, structure, size, market presence, etc. Industry specifics is another criteria — for instance, whether it's a construction business, renewable energy sector, hospitality, healthcare or other industries.

Developing a procurement strategy is a complex step-by-step process that requires understanding the current situation, having a vision for the desired outcome, and being prepared to create an actionable plan.

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