Procurement Strategy & How To Create One
Foundations of procurement strategy
Procurement strategy is the process of acquiring the goods and services necessary to achieve an organization's goals and objectives. Good procurement management is based on some foundational principles:
Alignment with organizational goals and objectives
Procurement strategy should be aligned with the overall goals and objectives of the organization. So procurement decisions should be made in a way that supports the organization's strategic priorities.
Risk management
Procurement strategy should identify and manage the risks associated with procurement activities. This includes risks such as supplier failure, price volatility, and quality problems.
Value for money
Procurement strategy should focus on delivering value for money for the organization. Goods and services should be obtained at the best possible price and quality, while also taking into account other factors such as risk and sustainability.
Fairness and transparency
Procurement strategy should ensure that procurement practices are fair and transparent. So all suppliers should have an equal opportunity to compete for contracts, and all procurement decisions should be made in a way that is open and accountable.
Procurement strategy framework
Examples of different types of procurement strategy
Single sourcing strategy
Single sourcing involves procuring goods and services from a single supplier. This strategy can be effective for reducing costs and improving efficiency, but it also increases the risk of supplier failure.
Multiple sourcing strategy
Multi-sourcing involves procuring goods and services from multiple suppliers. This strategy can help to reduce risk and improve competition, but it can also be more complex and expensive to manage.
Dual sourcing strategy
Dual sourcing is a procurement strategy that involves using two suppliers for the same or similar goods or services. This strategy can be used to reduce risk, improve competition, and ensure that the organization has a backup plan in case one supplier fails. It is particularly well-suited for critical items that the organization cannot afford to be without.
Consortium sourcing strategy
Consortium sourcing strategy is a procurement strategy in which two or more organizations collaborate to procure goods and services together. This can be an effective way to reduce costs, improve efficiency, and gain access to a wider range of suppliers. It is particularly well-suited for high-volume, low-margin items, where the consortium can leverage its collective buying power to negotiate better terms and conditions with suppliers.
Procurement strategies in different use cases
Procurement strategy in construction project management
The procurement strategy for a construction project should be developed early in the project’s life cycle and should be aligned with the overall project plan. That said, procurement is not a one-time event in construction project management. It is an ongoing process that should be monitored and managed throughout the project life cycle. This is because changes in the project scope or requirements may necessitate changes to the procurement strategy.
Procurement strategies in supply chain management
Some of the most common procurement strategies specific to supply chain management include:
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Strategic sourcing: Strategic sourcing is the process of identifying and selecting the best suppliers for an organization's needs. It involves considering factors such as the supplier's cost, quality, reliability, and financial stability.
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Vendor managed inventory (VMI): VMI is a process in which the supplier manages the inventory of goods and services at the customer's site. This can help to reduce inventory costs and improve supply chain efficiency.
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Just-in-time (JIT) procurement: JIT procurement is the process of ordering goods and services just as they are needed. This can help to reduce inventory costs and improve cash flow.
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Risk management: Risk management is an important part of supply chain management. Procurement strategies can be used to mitigate risks such as supplier failure, price volatility, and quality problems.
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Sustainability: Sustainability and ESG is becoming increasingly important for many organizations. Procurement strategies can be used to source sustainable goods and services and to reduce the environmental impact of the supply chain.
Steps to developing a procurement strategy
Here are the basic steps involved in creating a procurement strategy:
Step 1: Align the procurement strategy with the overall strategy
The procurement strategy should be aligned with the overall organization’s strategy in order to support its goals and objectives. This includes understanding the specific priorities, such as economic development, social justice, and environmental protection.
Step 2: Identify and assess the organization's needs
It’s essential to identify the organization's needs. This includes both direct and indirect goods and services. See also: Types of Procurement
Step 3: Conduct market research
Once you’ve identified the organization's needs, it is important to conduct market research to identify potential suppliers. This research should include an assessment of the suppliers' cost, quality, reliability, and financial stability. You should also consider the organization's social and environmental procurement goals when conducting market research.
Step 4: Develop a procurement plan
The procurement plan should outline the steps that will be taken to acquire the goods and services required. This includes the selection criteria, the evaluation process, and the contracting process. You should also develop a risk management plan to mitigate any potential risks associated with the procurement process.
Step 5: Select suppliers
The next step is to select suppliers for the goods and services required. This could be done through a competitive bidding process to ensure that the organization gets the best possible value for money.
Step 6: Manage supplier relationships
Once suppliers have been selected, it is important to manage the supplier relationships effectively. This includes negotiating contracts, monitoring performance, and resolving disputes. You should work with suppliers to identify opportunities to improve the efficiency and effectiveness of the procurement process.
Step 7: Review and update the procurement strategy regularly
The procurement strategy should be reviewed and updated regularly to reflect changes in the market and the organization's needs. Review the procurement strategy to ensure it is meeting the organization's social and environmental procurement goals.
Here are some additional tips for creating a successful procurement strategy:
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Involve key stakeholders: The procurement strategy should be developed with input from key stakeholders, such as the elected officials, department heads, and other employees. This will help to ensure that the procurement strategy is aligned with the overall strategy and that it meets the needs of all stakeholders.
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Use technology, data and analytics: Data and analytics can be used to identify the most important spending categories, to assess supplier performance, and to track procurement trends. This information can be used to make more informed procurement decisions.
Be transparent and accountable: The procurement process should be transparent and accountable to the public. This includes publishing procurement opportunities, disclosing contract awards, and providing opportunities for public input.