5 Steps to Create a Strategic Procurement Process
Strategic procurement or strategic sourcing is a data-driven process focusing on minimizing supply risk and adding value to procurement processes in support of your organization‘s long-term goals and wider business strategy.
It involves implementing strategies to reduce the overall supplier base, remove unnecessary negotiations and communications, and develop long-term relationships with suppliers. Your priority here is to create streamlined supply channels at the lowest possible total cost — and not just the lowest purchase price.
Building a strategic procurement process isn’t too challenging, provided you have the right guidance. Here’s a step-by-step rundown to help you secure the best suppliers:
Step 1: Identify Your Current Supplier Requirements
Strategic procurement begins with having an in-depth understanding of your organization‘s procurement requirements.
Assess your organization’s existing operations and performance to determine what steps need to be taken to meet your demands and goals. This will also give you an idea of the kind of data you'll need for building the appropriate procurement channels and predicting expected future growth.
Next, conduct an internal needs analysis to collect initial data for benchmarking current performance, resources used, departmental and organizational costs, and growth projections before creating a procurement strategy.
Here are a few tips to collect the required data:
- Communicate with your departments
- Analyze workflows
- Collect and study customer feedback
- Do A/B testing to know what works and what doesn't
Once you know your needs, focus on finding the best possible suppliers to maximize cost savings and gain a competitive advantage.
Step 2: Assess the Supplier Market and Collect Supplier Information
Identify potential sources to meet the required raw materials, finished goods and services, or components established in Step 1. Your options will be understandably limited when you have specific requirements, but you should still be thorough in your research.
Start shortlisting your business suppliers. If you end up with suppliers that don’t match your criteria, you run the risk of suffering significant losses or falling victim to procurement fraud.
When considering suppliers there are three broad considerations: track record of the supplier, openness about their relationship with their current customers, and building a solid network of suppliers. Let’s look at each these in greater detail.
Thoroughly research any potential supplier to learn more about their business ethic and experience. You can also reach out to agents familiar with the supplier and the market segment they operate in. More experience means a longer track record and a greater chance that the supplier will be invested not only in short-term dealmaking, but long-term professional reputation.
Talking to the supplier's current or past customers is reliable way to make an informed decision. Raise any negative feedback with the supplier and ask for clarification. It is a red flag if a supplier is unwilling to share the details of existing customers or provide tours of their facilities.
It is recommended that you select more than one supplier to create a competitive environment that is resilient to supply disruptions. This is especially relevant for large enterprises that can facilitate regional distribution while retaining centralized control. However, it is important to set the number of suppliers low enough to allow for deeper long-term relationships to develop.
Step 3: Develop and Implement a Sourcing Strategy
At this stage, you know your organization’s procurement requirements and have selected potential suppliers to meet these needs. Your next move should be to develop a sourcing strategy for your business.
The following are a few of the most popular sourcing strategies:
- Direct purchase. Send the suppliers a Request for Proposal (RFP) or a Request for Quotation (RFQ).
- Acquisition. Purchase goods and services from the most desirable supplier.
- Strategic partnership. Enter into an agreement with a supplier that benefits your organization in the long term.
How do you select the right sourcing strategy for your organization? Consider the competitiveness of the supplier marketplace and your overall business strategy. You should also factor in your company’s risk tolerance and motivation for outsourcing. For example, if you find several suppliers meeting your requirements, you can initiate bidding by calling for RFQs or RFPs.
Implementing your sourcing strategy.
If you choose the direct purchase sourcing strategy, ask identified potential suppliers to prepare an expression of interest (EOI) or an RFP or RFQ. As the bidding process is more competitive here, be prepared to solicit bids.
On the other hand, if you choose acquisition or strategic partnerships sourcing strategies, make sure the supplier(s) meet the following criteria:
- Fits the broader strategy of your business.
- Has access to specific equipment/technology and skilled labour pool.
- Has access to highly confidential proprietary knowledge, or can supply limited raw material, that is vital to your business.
Whichever criteria you set, it’s important to select a strategic partner that you can trust to hold up their end of the agreement.
Step 4: Negotiate With Suppliers and Select Bids
Make sure you’ve given the potential suppliers enough information to submit realistic bids for your requirements before evaluating responses.
Let your strategic supply chain team examine all accepted proposals, bids, and quotations. Using the selection matrix, you can either:
- Choose a first and second successful bidder (if reviewing RFQs or RFPs)
- Shortlist bidders to provide more detailed proposals (if reviewing EOIs)
Once you’ve picked the final successful supplier it is time to initiate contract negotiations.
Step 5: Implement Contractual Supply Chain Improvements
It is critical to set expectations from the outset when bringing on new suppliers. It is also vital to have an transition process for transferring information and making connections between logistics and communication systems of your organisation and that of the supplier’s.
Develop a communication plan and a system to measure and evaluate supplier performance. Make new suppliers part of this process to get them involved from the beginning and promote engagement.
Use this as an opportunity to clarify the quantitative KPIs and metrics you’ll be using to check deliverables. If needed, give the suppliers the necessary training and specific physical assets to eliminate risks.
Implementing these transfers takes time and expertise. It's best to outline your expectations for this timeframe during contract negotiations, complete with milestones for the operations and deliveries.
Digital is the Future of Procurement
You likely have experience of how easily the supplier ecosystem can be disrupted by unpredictable events.
Considering how fully integrated suppliers are in your operations, it's clearly time to rethink procurement management practices and spending. Your first step should be to embrace automation and get technologies to achieve greater visibility in your procurement process, reduce risks and costs, and facilitate internal collaboration with suppliers.
By adopting the right strategies and technology, you can build a new model for sourcing and procurement to unlock greater enterprise resilience and strengthen organizational agility and efficiency.