Fundamentally, supply chain strategy is required, not only to support overall corporate strategy, but in many cases to also shape strategy by enabling new opportunities for growth and differentiation. By bridging customer needs and supplier capabilities, the supply chain strategy will define a company’s core competencies, core processes, and will choose its suppliers and its tiers accordingly. Procurement and supplier strategy is a critical component of the overall supply chain strategy. It involves identifying key sourcing principles, defining a strategy statement, understanding the portfolio of supply inputs and their use in developing procurement strategies, and analysing the strategies to achieve competitive advantage.

Sourcing Process

The key part in the procurement strategy is mapping what we are buying, how much we are buying, how much it costs, the uniqueness of the product, and how many suppliers there are. While there are several ways of segmenting spend, one useful way is to map procurement of all items into two dimensions: Risk/Impact and Annual Spend (€€€). This produces segments of tactical, leveraged, critical and strategic sourcing as per the quadrants below.

Tactical sourcing – high volume of transactions of items with low risk and low value.

Key strategies in this segment involve reducing the planning, sourcing and administrative overheads on these items while ensuring continued supply.  

• Vendor Managed Inventory or Kanban replenishment to reduce planning resources
• System contracting – use of consolidated suppliers to manage continued supply of c-class items
• Electronic ordering, invoicing and invoice validation
• Application of procurement card to minimise supplier set up and payment processing

Leveraged sourcing – high volume of low risk but higher value items

This frequently involves the sourcing of higher value items where there are many available suppliers for comparable or generic products. In these circumstances leverage may be gained by consolidating supply and by incenting behaviour to share supplier driven cost reductions.

• Segment and consolidate spend across fewer suppliers while managing risk
• Maximise leverage through periodic formal procurement events
• Consider auctions where products are truly generic and volumes are of strategic supplier interest
• Focus on total cost to supply – landed costs, inventory management, supplier engagement
• Consider actions that can drive alignment of incentives

Critical sourcing – high risk but lower value items

Although the spend value of these items is low, these items are critical to revenue generating activities and can appear as bottlenecks. They include capital items and spares, custom tools and other specialty products. Awareness and visibility of the supply risk on these items is essential to prevent being blindsided by a lack of supply.

• Ensure availability through long-term supply contracts
• Adjust the planning parameters to increase the level of safety stock
• Identify opportunities to simplify this category of products – reduce skus through standardisation
• Identify techniques to manage assets over their lifetime
• Where possible identify substitute products to further manage risk

Strategic sourcing – high risk and high value – strategic items and services

Many of these products / services are critical to creating competitive differentiation in the market. These items typically benefit from a more strategic engagement with critical suppliers.

• Establish partnerships / alliances with key suppliers with long term agreements
• Create environment for collaboration with profit sharing, shared approach to investments, combined product development
• Active governance structure with strategic engagement linked to operational strategy and metrics
• Focus on strategic outcomes rather than management of detailed processes
• Potential for vertical integration for risk reduction, innovation, sustainability

The overall procurement strategy will need to support the supply chain and ultimately support the corporate strategy. Supplier segmentation, as above, can inform procurement strategy and prioritise resources to the areas that drive the greatest corporate benefit. The metrics that support these segments should also reflect objectives that go beyond pure financial savings.

Why is Procurement Strategy Important and What are Some of Its Benefits?

Procurement strategy plays a vital role in shaping the operational efficiency and financial health of any organisation. To highlight why procurement strategy is important, we’ve outlined some of the key benefits of implementing a robust procurement strategy in business: 

1. Cost Savings

A well-defined procurement strategy is important as it enables businesses to identify cost-saving opportunities through strategic sourcing, supplier negotiations, and contract management. By optimising purchasing processes and leveraging economies of scale, organisations can significantly reduce their procurement expenses.

2. Risk Mitigation

Effective procurement strategies incorporate risk assessment and mitigation measures to safeguard businesses against supply chain disruptions, supplier failures, and market fluctuations. By diversifying suppliers, implementing contingency plans, and monitoring supplier performance, organisations can enhance their resilience to external uncertainties.

3. Supplier Relationship Management

Building strong relationships with suppliers is important for ensuring reliability, quality, and innovation in the supply chain. A good procurement strategy will encourage relationship development by fostering collaboration and communication with key suppliers, which in turn will lead to mutually beneficial partnerships, continuous improvement, and the opportunity to access cutting-edge technologies.

4. Compliance and Governance

Compliance with regulatory requirements and ethical standards is integral to maintaining the reputation and integrity of an organisation. By implementing a procurement strategy, businesses can incorporate governance frameworks, transparency measures, and ethical sourcing practices to ensure adherence to both legal and corporate policies.

5. Operational Efficiency

Implementing a procurement strategy allows businesses to streamline procurement processes and standardise workflows, enhancing operational efficiency, minimising redundancies, and accelerating time-to-market. Automation tools, such as e-procurement platforms and digital workflows, enable seamless collaboration across departments, reduce manual errors, and optimise resource allocation.

6. Strategic Alignment

Aligning procurement objectives with overall business goals and strategic priorities is essential for driving long-term growth and competitiveness in the market. A coherent procurement strategy will align sourcing decisions with market trends, customer preferences, and organisational objectives, enabling companies to seize new opportunities, mitigate threats, and gain an edge on competitors.

Procurement Strategy Framework

A well-defined procurement strategy framework serves as the linchpin for organisations aiming to optimise their purchasing processes and drive sustainable growth. This framework encompasses various strategic elements which, together, gives organisations the opportunity to enhance efficiency, mitigate risks, and drive sustainable growth in an increasingly competitive business landscape.

1. Strategic Planning

At the core of any procurement strategy is strategic planning, which involves defining the organisation’s objectives, assessing market dynamics, and identifying procurement priorities. By aligning procurement goals with broader business strategies, companies can optimise resource allocation and maximise value creation.

2. Supplier Segmentation

Effective supplier segmentation categorises suppliers based on various criteria such as strategic importance, risk exposure, and performance metrics. This enables organisations to prioritise supplier management efforts, allocate resources efficiently, and tailor sourcing strategies to meet specific business needs.

3. Risk Management

Proactive risk management is crucial for mitigating supply chain disruptions and safeguarding business continuity. Procurement strategies should incorporate risk identification, assessment, and mitigation techniques, including supplier diversification, contingency planning, and compliance monitoring.

4. Contract Management

Comprehensive contract management ensures clarity, compliance, and accountability throughout the procurement process. From negotiating favourable terms and conditions to monitoring contract performance and enforcing agreements, effective contract management within the procurement process will enhance transparency, reduce disputes, and optimise vendor relationships.

5. Performance Measurement

Key performance indicators (KPIs) provide valuable insights into procurement effectiveness, supplier performance, and cost optimisation. By tracking metrics such as savings realised, supplier performance scores, and procurement cycle times, organisations can identify areas for improvement, drive accountability, and make data-driven decisions.

6. Continuous Improvement

Continuous improvement is a hallmark of successful procurement strategies, fostering innovation, agility, and adaptability. By requesting feedback, conducting supplier evaluations, and embracing emerging technologies, companies can continuously optimise their procurement processes, enhance supplier relationships, and stay ahead of the competition.

Contact us at any stage if you are interested in a discussion on how procurement strategies impact your business and how to achieve competitive advantage.