procurement strategy

Spend Analysis

Building an effective procurement strategy

Jasmiina Toikka Jan 14, 2022

A comprehensive procurement strategy defines how an organization strategically manages its procurement activities. In other words, it's a directional roadmap. It's a medium-to-long-term plan that includes both policy and processes that drive cost optimization, value creation and management of resources. The procurement strategy determines how goods and services are aquired at optimal cost and best available quality so that this process supports strategic objectives of your organization and enables competitive advantage.

Why do you need a procurement strategy?

The importance of a well-defined strategy cannot be overstated. However, in practice, long term plans may be well defined, but lack the ability to be translated into concrete behaviour and action that harnesses the benefits. The beautiful, yet theoretical vision may get lost in the noise of operative tasks. A well-thought-out procurement strategy should highlight new approaches and push change in thinking that delivers higher customer value, cost efficiencies and continuous process improvement. Commonly, procurement strategies will revolve around a number of objectives, including for example:

  • Better spend visibility and control,
  • Cost efficiency through strategic sourcing,
  • Better contract delivery and coverage,
  • Improved key supplier relationships,
  • Quality management and product development,
  • Improved customer experience and value,
  • Process and policy compliance (for the sake of greater good),
  • Fewer errors and lost opportunities on purchase transactions,
  • Sustainable development goals, such as reduced carbon footprint,
  • Increased supplier diversity,
  • And many more!

Without a clear strategy, prioritization and tracking of progress, such opportunities are lost - or there are simply too many to agree on and effectively push forward!

What’s your vision for procurement?

An effective procurement strategy should answer these questions: What are you trying to achieve? What is your procurement vision and mission? How will it be implemented? What are the best companies doing? What tools and resources will be needed to get there? How will success be measured? How does all this fit with the wider business strategy? Answers to these questions should produce a strategy statement, a plan of action with time frames, and success metrics. If there is a current strategy, this may be the time for a review.

Your proposed strategy must consider the organization’s goals and initiatives, its financial position and current level of procurement maturity.  Consider the current state, available resources and realities. All the elements in a procurement strategy are interlinked and are dependent on having clear visibility on your realized expenditure.

 


how to build an effective procurement strategy

1. Current state analysis (CSA). The basis for developing a procurement strategy is to document the current expenditure and market situation per category. This refers to understanding the full historical spend and analysing it in relevant segments. Identifying categories with taxonomy that represents the business reality and market environment is vital to successful analysis. The analysis will highlight spend trends, where the opportunities lie and where cost reduction is possible. This knowledge base is the foundation of a functioning procurement strategy. The best way to go about this is through spend cube analysis. Document how you plan to harness the identified opportunities, manage costs and mitigate risks.
What does your past performance and expenditure look like?
 

2. Engage stakeholders. Firstly, identify all those who may be impacted by the plan. These include business management teams, suppliers, finance, end-users and subject matter experts. It is vital to manage their requirements and expectations. Some may not be in favor of all the proposed changes. Without stakeholder engagement, any strategy is doomed to fail. Some may have additional insights and business requirements you haven't taken into account. Stakeholder engagement is key in defining potential risks and opportunities as they hold vast substance and market knowledge.

Who are the stakeholders you will need to convince?

Who obtain the best market understanding and insights?

3. Align strategy with organizational goals. The strategy must align with the overall strategic intent of the business. Fact-based spend analysis will help you align and prioritize your strategy to corporate goals across all functions. Inputs to the strategy should include:

  • corporate vision and mission
  • corporate medium-term plans
  • annual budgets and projected revenue
  • economic forecast
  • commodity indices

What is the business vision and mission?

How does your strategy support business plans? 

4. Adopt the tools for success. Big data can no longer be managed manually, it is time-consuming, inaccurate, and slow. For educated decision-making leaders needs insights that are both relevant and timely. Visibility is enabled using a suitable software solution. A dedicated spend analysis solution will identify opportunities, improve effectiveness and value-add from the teams, and reduce errors and costly mistakes. Accenture’s four-part blog series on digital procurement sums it up nicely: “digital procurement gives decision-makers better visibility, reduces risk, and boosts compliance—ultimately increasing spend under management and driving more value for the business.” In part three of the series, the authors lay out these five elements to consider:

  • Data: the internal and external data that touches every aspect of the organization
  • Technology toolbox: the software tools out there to leverage data for insights
  • Intuitive user experience: the magic that makes those tools user friendly and accessible
  • Skills and talent: the critical knowledge and skills that team members bring to the table inside and outside of procurement
  • Policies, procedures, and operating model: the nitty-gritty details of how responsibilities will be enacted.

What are the technologies and tools you will need for your your plan come alive? 

5. Agree on procurement policy. This is the point at which new policies, procedures, and operating models will be agreed upon and rolled out. This is an ideal opportunity to review processes and practices and adjust them to suit the new approach. Dont't become a process police, but instead communicating the opportunities and visualize the benefit for the stakeholders when making change. Remember to be flexible. Policies should be closely monitored and discarded if they are causing more hassle than good.

What needs to change in practice to get to the targets?
Are current processes supporting the realization of the plans? 

6. Define procurement priorities. Procurement is dynamic in its nature and a list of sourcing opportunities is never ending. Armed with reliable spend data that has been cleansed, classified, and categorized, areas of opportunity will emerge. When the most business critical areas of spend are covered in action plans, sub-categories that are underperforming can be identified and addressed. Certain low value/high volume transactions can be highlighted for attention. Align and agree on a set of priorities with stakeholders, so you have a shared understanding and license to operate. Set realistic objectives that can be achieved in a given timeframe. Define the tactics and strategies that will be used to achieve them, like e-auction, strategic sourcing, renegotiation of contracts, and streamlining processes.

What are the priorities guiding your strategy execution?

7. Define measures of success. Tracking supplier and procurement performance open opportunities for continuous improvements and innovation. Measuring, monitoring, and reporting on supplier and category performance with pre-determined Key Performance Indicators (KPIs) creates a performance-driven environment in which people are engaged and accountable. Measures should be aligned with business KPIs to ensure you're going to the same direction and delivering business impact.

How do you track progress and define success?

8. Execute and adjust strategy. Strategy is a living document. External and internal circumstances change, so must your plans. Don't be too fixated on your precious document, but instead consider it as a starting point. You will be wiser after you start executing your plans. Stakeholder feedback should be used to fine-tune the strategy. Utilize data and insights to improve your strategy and effectiveness of your actions. New opportunities may emerge that have higher likelihood for success than the existing ones in your plan. This may require prioritization of projects and timelines.

Have the circumstances changed along the way?
Are the business priorities still the same as when you started?

 

The main goal of a procurement strategy is to deliver business value and competitive advantage for the organization. Commonly this is achieved with cost optimization, increased efficiency and improved performance. Spend analytics provides the key to developing a clear procurement strategy. Identifying savings opportunities, manage risks and optimizing an organization's buying power is accelerated with the application of the right technology to spend management. With optimized cost structure and cash flow, there will be more resources available for product development and customer value creation. 

 

Interested in learning more about how to level-up your procurement strategy with insights while improving stakeholder collaboration? Then read more in our full-length eBook Procurement Loves Data.

Header photo by: Robert Tjalondo (unsplash.com)

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