Procurement, is “the overarching function that describes the activities and processes to acquire goods and services. Importantly, and distinct from ‘purchasing’, procurement involves the activities involved in establishing fundamental requirements, sourcing activities such as market research and vendor evaluation and negotiation of contracts. It can also include the strategy of purchasing activities required to order and receive goods.”A procurement strategy is developed and documents the direction of how procurement should be organized in order to implement the procurement process. In simple terms, a procurement plan refers to the “when” and a procurement strategy would refer to the “what”, “how”, “where” and “why” approach of lucratively purchasing a company’s required supplies, taking into consideration several elements and factors such as the timeline for procurement, the funding and budget and the projected risks and opportunities among others.
To develop an effective procurement strategy, first it is necessary to sit down with employees to assess the current details that you have to work with as to understand where your procurement operations are today. These details will include:
- The business objectives – what are the results you hope to achieve and maintain as you run and grow your business – e.g. increasing profitability, creating process improvements
- The available and existing resources and supplies – a company with good cash flow needs financing contacts in the event that capital is needed to expand the organization
- The budget and the timeline – being able to maintain financial operations means that you can prepare for long-term projects and address short-term needs such as payroll and accounts payable.
- Identify what’s important — to the procurement organization as well as to the overall company.
- Define what success looks like.
- Is the expected contract award date realistic given the procurement method?
- Can the procurement process be accomplished quicker?
- Are there opportunities for packaging requirements in order to purchase in larger quantities?
The strategy that is developed has to take into consideration the various procurement principles; primarily, economy and efficiency. Consideration always needs to be given to whatever savings (or economies of scale) can be achieved, by strategically planning how procurements will be carried out over the period covered by the procurement plan. Through the assessment of these details, the team would be able to start planning for an effective procurement strategy that would the most fitting for the company; the key here is to make sure that every detail of the plan would align and contribute towards the company’s goals and objectives.
Another key item that would be planned for during this brainstorming stage would be the choices of either producing or doing procurement outsourcing, with the costs and sustainability being the major determining factor, and whether the existing company resources would be able to support the decision over a long period of time. Outsourcing can have a few major benefits like highly skilled staff that specialize in purchasing, improved communication between purchasing experts and the company staff, market leverage allowing for better discounts and cost reduction from headcount, training, office space and computerization.
Having said that, with the sweet comes the sour. A few key problems with outsourcing include a reduction in control, because with outsourcing you lose control over the day-to-day procurement operations, and outsourcing needs to be managed on a continual basis as products need to be delivered on time.
After the implementation of the strategy a framework needs to be put in place to measure whether the procurement strategy objectives have been met. Performance measurement is important in order to aid integrity and accountability and also to identify strengths and weaknesses in the procurement function, and therefore areas for development. Measures should be developed that are relevant, specific, agreed with relevant stakeholders, and within the control of the organization. Performance measures should also relate to specific strategies or key processes.