Elements of a Well-Rounded Procurement Strategy
By Hugo Britt | February 9, 2021
A holistic procurement strategy includes both traditional and non-traditional means of driving savings. In this article, we’ll address the more common ways of driving value including negotiating better terms with suppliers, reducing maverick spend, and minimizing warehouse costs, among others.
We’ll also explore non-traditional means that can enhance your existing procurement strategy, like finding new sources of revenue and creating a circular economy. We’ll also discuss how partnering with a group purchasing organization (GPO) is another viable option of adding value and how group purchasing can play a role in your overall approach to sourcing.
Traditional value drivers in procurement
Let’s start with the more traditional go-to methods you’ll see utilized when forming an overall procurement strategy.
1. Negotiating better terms with suppliers
At first, the most obvious and impactful way to drive immediate savings is to renegotiate pricing and other contractual terms with suppliers. Eventually, however, it no longer becomes possible to “squeeze” suppliers, and pressuring them on price can be detrimental to the long-term relationship.
2. Reducing maverick spend
There are many ways to tackle the problem of maverick spend and create significant savings for your organization. Creating a purchasing approval system, or requiring all purchases to be made from a catalog can both be effective ways to curb rogue spending.
Stakeholder education is also important to help people understand why they should comply. Remember, maverick spend may be the end result of clunky or difficult procurement processes.
3. Supplier consolidation
Why are people in your organization purchasing their office stationery from fifteen different suppliers? Consolidating all these suppliers into one will not only help procurement gain better control of this category but also allow the chance to negotiate volume-based discounts and build upon the relationship with the chosen supplier.
Be warned, however, that having a single supplier (and no plan B) can be risky in terms of supply chain disruption.
4. Reviewing purchasing requirements
Take the time to speak to stakeholders around the business about their requirements. What is the absolute minimum they need to do their job well? Perhaps they are purchasing top-of-the-range products or services when a less expensive alternative would suit just as well.
5. Supplier innovation
Your suppliers can help drive cost savings through product innovation. For example, a chocolate maker may find a way to substitute an ingredient with a cheaper alternative while retaining quality or find a more cost-effective packaging solution. This will enable suppliers to reduce their costs, passing on savings to their partners.
6. Creating a purchasing catalog
A catalog system essentially forces everyone in your organization to purchase from an approved list. This can be a very effective way of tackling maverick spend, but ensure you stay flexible. There will undoubtedly be reasons for exemptions to be made, or for more options to be added to the catalog.
7. Minimizing warehousing costs
Storing goods for any length of time can be a significant drain in terms of warehousing and real-estate costs. Implementing a Just-in-Time supply chain keeps your warehousing lean and at just the right level to meet demand.
However, after the supply shocks caused by the pandemic, many organizations are exploring a “Just-in-Case” option which involves building up a stock buffer against future disruption.
8. Creating a cost-conscious culture
This means creating 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.
9. Procurement digitization
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 digitization (and the main driver of cost savings) is increased speed.
Non-traditional value drivers in procurement
Procurement professionals have proven themselves to be innovative and agile time and time again. When you’re in need of more value than the traditional means can provide, here are some non-traditional value drivers you can incorporate into your procurement strategy.
1. Finding 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.
Opportunities can sometimes arise to barter for goods and services rather than paying money. A training provider, for example, may offer X hours of team training to an IT supplier in exchange for X hours of software support.
3. Creating a circular economy
Procurement can drive cost savings by encouraging the business to reduce, reuse, and recycle all purchased goods.
4. Partnering with a Group Purchasing Organization
Using a GPO as part of your wider procurement strategy can be a highly effective way to drive additional value. But don’t make the mistake of thinking GPOs should be used as a replacement for a well-planned procurement strategy.
GPOs are not designed to replace anything but work alongside existing strategies to help meet your goals and create value.