Elements of a Diversified Procurement Strategy
A diversified procurement strategy will utilize both traditional and nontraditional methods of sourcing to drive cost savings and value.
By Hugo Britt | February 21, 2023
As procurement continues to evolve, practitioners must rely on a variety of strategies to cut costs and drive value. This includes implementing aspects of a traditional procurement strategy and adding in some unconventional means to get desirable results.
Traditional means of creating value include things like managing contracts with preferred suppliers, controlling maverick spend, and minimizing warehouse costs. Focusing on sustainability and partnering with a GPO can lead to greater cost reduction and better spend management, as well.
Traditional value drivers in procurement
Here are the more traditional go-to methods you’ll see utilized when forming an overall procurement strategy.
1. Negotiate better contract terms with suppliers
One of the most impactful ways to drive immediate savings is to renegotiate pricing and other contractual terms with suppliers. Establish clear agreements with suppliers to ensure you receive the products and services you need at a reasonable price.
Keep in mind, however, that it may become impossible to “squeeze” suppliers after a certain point. Putting too much pressure on them regarding price can be detrimental to the long-term relationship.
2. Reduce maverick spend
3. Consolidate suppliers
Is there a need to purchase office stationery from fifteen different suppliers? Paring down certain suppliers will help procurement gain better control of these categories. It will also allow the chance to negotiate volume-based discounts and build upon the relationship with the chosen supplier.
Procurement continues to evolve into one of the most strategic business functions in any organization. Using a variety of strategies will diversify your approach to procurement and produce the cost savings you're seeking.
4. Encourage supplier innovation
Your suppliers can drive cost savings through product innovation. A chocolate maker, for example, may substitute an ingredient with a cheaper alternative while retaining quality. A manufacturer may find a more cost effective packaging solution. Doing so lets suppliers to reduce their costs, passing on savings to their partners.
5. Minimize warehousing costs
6. Create a cost-conscious culture
Create a culture in which employees treat every dollar of company money as if it is their own. Encourage workers to look for savings opportunities, consider purchasing options carefully, and review their purchasing requirements to eliminate waste.
7. Focus on digital transformation
Procurement teams that start automating procurement processes can achieve cost savings of 17%. Likewise, a full digital transformation in procurement can generate a massive cost saving of 45% or higher. The main benefit of going digital (and the main driver of cost savings) is increased speed.
Nontraditional value drivers in procurement
Procurement professionals have proven themselves to be innovative and agile time and time again. Here are some modern sourcing techniques you can incorporate into your procurement strategy.
1. Find new sources of revenue
Traditionally, procurement is concerned with bottom-line savings rather than top-line growth. It pays, though, to keep your eyes open for opportunities to create revenue.
For example, procurement teams can review the end-of-life process for a piece of equipment. Instead of sending it to a landfill, it may be possible to sell it to a scrap dealer, thus generating revenue. Procurement’s involvement with suppliers also provides an opportunity to improve product quality so the business sells more.
2. Promote cross-functional collaboration
In business, teamwork and cross-functional collaboration is crucial to ensure organizations continue to move forward and grow. Before procurement can source goods and services, it must first understand the company’s overall objectives. On a more granular level, what does each function need to be successful? Reaching “across the aisle” will ensure procurement is going after the right things.
Procurement should also collaborate with suppliers to identify cost savings opportunities, explore new product development, and identify ways to improve efficiencies. This can help to create mutually beneficial relationships.
3. Focus on sustainable initiatives
Procurement professionals can lead the way when it comes to implementing sustainable initiatives. This may look like selecting suppliers with sustainable practices like being committed to reducing waste and minimizing their carbon footprint. It also helps to create a positive social and environmental impact while also driving value.
4. Partner with a group purchasing organization
Using a group purchasing organization as part of your wider procurement strategy can be a highly effective way to drive additional value. GPOs are not designed to replace anything but work alongside existing strategies to help meet your goals and create value.
Use a GPO to conduct an indirect spend analysis and access contracts with more favorable pricing. The right GPO will understand how and where they’ll be able to help the most. On average, businesses that utilize group purchasing see additional cost savings of 18-22%. This means that finding the right GPO partner can be an integral piece of an effective procurement strategy.
Looking to develop a diversified procurement strategy? Learn more by visiting Unaversity, Una’s resource center dedicated to empowering procurement.