Build a Solid Digital Procurement Strategy in 9 Simple Steps
75% of CPOs believe that they will deliver a digital procurement strategy in the next five years. ‘Procurement strategy’ is the most sought-after concept by the procurement community. However, the process of creating a robust and relevant procurement strategy is anything but easy.
What is a procurement strategy?
The term procurement strategy refers to a long-term plan to cost-effectively acquire the necessary supplies from a list of efficient vendors who will deliver quality goods on time, abiding by the purchasing terms. Typically, a procurement strategy depends on a number of factors like purchase timeline, the available budget, the total cost of ownership (TCO), possible risks, and more.
Procurement strategies often focus on options like reducing costs, mitigating risks, and expanding organically. According to a recent survey, 78% of CPOs around the world identify cost reduction as their top priority procurement strategy. Organizations can choose to focus on a single priority or more than one, depending on their business requirements.
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Types of procurement strategies
Irrespective of an organization’s size, there are a few common types of procurement strategies that can be adopted by everyone. They are:
- Cost reduction
- Risk management
- Supplier management and optimization
- Green purchasing
- Global sourcing and
- Total quality management
Steps to create an effective procurement strategy
A robust procurement strategy will minimize errors, spot savings opportunities, eliminate maverick spend, and ensure policy compliance. Listed below are the nine key steps in the quest towards delivering a successful procurement strategy:
1. Analyze organizational spend
The first step of developing a procurement strategy is to analyze the existing spend culture of your organization. In order to do this, you need to obtain data from internal stakeholders, suppliers, and all other parties who are involved in the procurement process.
The data obtained on this step will not only serve as a knowledge base within your organization but also function as the foundation of the procurement strategy. Tools like total cost of ownership (TCO) can be used to identify and analyze the often overlooked or unknown costs that an item/service incurs in addition to its initial purchase price.
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2. Determine business needs
To design a robust procurement strategy that provides the best results, it is essential to understand your organization’s needs clearly. This fact-based analysis will help you align and prioritize your procurement strategy across other functions and business goals.
A simple ‘what if’ discussion that challenges the status quo and questions the obvious will reveal a lot more savings opportunities. Tools like a category positioning matrix can help organizations identify the key business requirements that will go into the development of their procurement strategy.
3. Assess market conditions
Once the internal analysis of determining the business needs is complete, the next obvious step is to look at the external side of things: supply markets and their conditions. Here, the necessary data needs to be collected from suppliers and potential suppliers.
To ensure relevancy, organizations need to make sure that the collected data stays up-to-date over time. A number of methodologies such as Porter’s five forces and SCOPE analysis will come in handy during this analysis.
If you follow the procurement best practices of knowing your market and suppliers better, this step will be relatively easy.
4. Set clear objectives
Once the business needs are identified, it is time to come up with a clear vision of what needs to be achieved. The data collected in the previous steps can be used to determine the niggles in your procurement process.
Once those are determined, sort them in descending order of the impact each has on your organization’s bottom line. Tools like a SWOT analysis can be used to identify the current state of your procurement functions. For instance, if you need to reduce maverick spend, you need to implement procurement software that makes the process transparent.
5. Define Procurement Policies
Now that you know what needs to be addressed, it is time to create a list of procurement best practices that will eliminate the existing inefficiencies. You can start the process by modifying your procurement policy to address risks identified during the SWOT analysis.
When you’re in the process of sketching out a procurement policy for your business, it would be best to avoid starting from scratch. Instead, you can adapt existing procurement policy templates to fit your organization’s business needs. Ideally, procurement policies need to offer guidance on fair practice for everyone involved in the process, as well as remedies for possible violations.
6. Implement procurement software
Organizations that handle the procurement process manually are more likely to spend more due to human errors, delays, and late payments. A procurement system improves employee productivity and reduces errors by eliminating manual data entry and associated inefficiencies.
A procurement management system will track the procure-to-pay process end to end. Every step of the procurement process, from identifying the sourcing needs to completing payment, will be streamlined. The best-in-class features of procurement software will spot and address process gaps and enforce purchasing policy without any manual intervention.
7. Outline a procurement strategy
With the help of the data and information you’ve obtained, draft a procurement strategy. This needs to list down the desired goals, and the tactics that will be used to achieve them.
The goals have to be measurable, time-sensitive, and realistic. The tactical plan will list down the methods that will be used to achieve the pre-defined goals. A procurement strategy can also incorporate a ‘big idea’ that will eventually push the boundaries of possibility.
8. Develop a digital procurement strategy
With the help of the data and information obtained from the previous steps, you need to draft a digital procurement strategy. In this step, the organizations need to revamp their procurement technology, strategy, process, talent, skillset, and supporting systems.
Implementing a digital procurement strategy should be considered a priority, since it enables organizations to spend more time with suppliers and the strategic part of procurement, rather on administrative tasks and transactions. A digital procurement strategy will help businesses deploy the resources they need to obtain outsized gains and make their procurement process agile.
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9. Execute, manage, and refine the strategy
Once a digital strategy is created, the next step is to execute it. As the strategy is executed, it will demand involvement from other business functions (HR, admin, sales, finance). After executing the digital procurement strategy, you’ll need to track and measure the progress and success of the implementation.
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Procurement strategy framework
An ideal procurement strategy framework will include the following:
- Strategy statement: the basis and rationale
- Desired results: deliverables
- Timeframe: deadlines
- Tactical plan: how a strategy will be implemented
- Measures: metrics used to evaluate the process
- Tools used: TCO, SWOT analysis, Porter’s Five Forces, Category Positioning Matrix, SCOPE Analysis, Fishbone Analysis, etc.
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Unleash the Power of Automation in Procurement Strategy
A structured procurement strategy will challenge the status quo and highlight new approaches that deliver cost savings and process efficiencies. Using process automation tools to implement the strategy and monitor its progress will yield significant long-term benefits. They automate complex procurement processes while proactively minimizing risks and errors.
With Kissflow, organizations can deploy their procurement strategy model to improve the operational management of procurement from process automation to role-based user dashboards. Automation allows organizations to engage in a dynamic cost optimization process through actionable insights and seamless integration with third-party data sources.
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