strategic procurement management

1. RUTH NYITRAMAHORO,

2. 1.1What is strategic procurement?
 Strategic procurement is an organization-wide process
that aims at ensuring the timely supply of goods and
services in line with the organization’s business goals,
while reducing risk within the supply chain.
 Closely related to strategic sourcing, it includes
activities such as managing budgets and researching,
identifying and selecting suppliers and negotiation.

3. What is strategic procurement?
 Strategic procurement is an activity that requires co-
operation from all departments throughout the
organization. Companies may opt to have a dedicated
strategic procurement team in order to set the
direction of the business by using data from the
existing procurement process to implement future
plans.

4. 1.2 What does strategic procurement
include?
 Strategic procurement involves identifying key areas of
spend within the business and identifying ways of
adding value through procurement processes.
 This can be achieved by analyzing the company’s
purchasing needs and current spend, creating a
procurement strategy, selecting and negotiating with
suppliers. It also includes activities such as category
management.

5. 1.3 Strategic sourcing v
conventional procurement
 Strategic sourcing and procurement are two
approaches to purchasing the components, raw
materials, supplies and services a company needs to
run its business. Traditional procurement focuses on
finding the lowest-cost suppliers.
 The aim of strategic sourcing is to build longer-term
relationships with suppliers that offer quality, value, a
willingness to collaborate and the flexibility to meet
changing supply requirements as follows:

6. 1.3 Strategic sourcing v
conventional procurement
 Within an organization, procurement is the business
management process which is used to source and
manage external resources.
 This includes activities such as identifying the need
for goods or services, assessing and selecting vendors,
negotiating prices and creating purchase orders.
 As such, procurement includes sourcing, which
means identifying suppliers who can meet particular
requirements of the organization.

7. 1.4 The role of strategic procurement
Reducing Costs
 Cost is an important consideration for both procurement
and strategic sourcing. While procurement managers look
at price as the key factor, managers responsible for strategic
sourcing assess the total cost of doing business with a
supplier.
 In addition to price, they consider the costs of quality
control, delivery, purchasing administration and inventory.
 They aim to reduce the total cost of obtaining supplies, and
they may achieve this through simplifying purchasing
administration or dealing with fewer suppliers.

8. The role of strategic procurement
Improve Quality
 Companies that practice strategic sourcing focus on quality
as one of the most important issues in the relationship.
 By integrating their own quality standards with those of
suppliers, they can reduce their own costs.
 Obtaining components and materials to an agreed quality
standard means fewer inspections and less waste on the
production line.
 As part of the strategic sourcing relationship, companies
may implement joint continuous improvement programs
to further reduce costs and improve quality. Suppliers then
become an integral part of a company’s own quality
process.

9. The role of strategic procurement
Value
 While procurement managers may require suppliers to
meet quality standards, strategic sourcing managers
aim to achieve cost reductions through quality
improvements
 Can be used to obtain additional value from suppliers.
They may select suppliers that offer technologies or
materials that enable them to improve their own
products or develop new products. This adds value to
the relationship and helps a company increase its
competitive advantage.

10. The role of strategic procurement
 Relationships
 In a procurement environment, companies place
orders with suppliers offering the best price. They may
obtain multiple quotes each time they want to make a
purchase and deal with many different suppliers.
 This can increase the overall cost and complexity of
purchasing, even though the headline price is lower. In
strategic sourcing, companies place long-term
contracts with selected suppliers

11. The role of strategic procurement
Collaboration
 Strategic sourcing helps to build collaborative
relationships between customers and suppliers.
Customers provide their suppliers with information on
future production plans and supply requirements,
which enables suppliers to plan and adjust their own
production levels. By sharing information, both
parties can respond quickly to changing market
conditions by adjusting supply

12.  While the goals of strategic procurement are
certainly likely to include achieving cost savings,
this is not the only consideration. By focusing on
the wider objectives of the business, companies are
likely to use strategic procurement for a number of
reasons, such as:
1.5 What are the goals of strategic
procurement

13. Goals of strategic procurement
 Choosing suppliers that best match the company’s
business goals
 Procuring higher quality goods
 Building robust relationships with suppliers
 Collaborating with suppliers in areas such as R&D
 Managing/minimizing supply chain risk, for example
by identifying alternative suppliers in different
geographical locations
 Reducing the supplier base in order to focus on key
relationships and benefit from economies of scale

14. Goals of strategic sourcing
 As such, strategic procurement can play a role in
supporting the strategic goals of the business. It can also
deliver insights that can be used to inform the vendor
management process.
 Conversely, without a strategic approach to procurement,
the company may lack visibility over the company’s
purchasing activities, which may in turn hinder
negotiations with suppliers.
 The process of sourcing and selecting suppliers may also be
overly time-consuming and inefficient without a more
strategic approach.

15. Strategic sourcing
 As businesses today continue to harness the power of
globalization to expand performance, the role of effectively
sourcing goods and services from suppliers has become
inevitable. Additionally, procurement is transforming into
a more strategic function that is aligned to organizational
goals and objectives. Furthermore, issues like economic
and political volatility, technological disruption, etc. have
rendered market a fierce competition. Hence, it is
important for organizations to adopt effective strategic
sourcing skills and processes to maximize their business
performance and efficiency to gain a competitive advantage
over their

16. 1.6 What is Strategic Sourcing?
 Strategic sourcing refers to the process of identifying
the spend profile of an organization and its supplier
base to ensure their business requirements are aligned
with the suppliers.
 There is need to look at what constitutes strategic
sourcing, how it differs from tactical sourcing, and its
driving forces and processes.

17. 1.6 The levels of strategic sourcing
 Strategic sourcing operates at three levels:
 Strategic Level
 Tactical Level
 Operational Level.

18. 1.6.1 Strategic level
 Strategic sourcing involves developing a proactive,
holistic, and continuous evaluation and re-evaluation
of the sourcing activities in an organization.
 Strategic sourcing aims to achieve the lowest Total
Cost of Ownership (TCO) along with minimal supply
chain risk.
 Hence, it reflects the organization’s relationship with
its sourcing partners as a loop instead of a one-way
process—an in-depth profile of the suppliers and their
core capabilities is developed and periodically aligned
to the sourcing requirements of the organization.

19. Product Development

20. Product Development
 Senior Management has to define a strategic direction
when considering the products that the company
should manufacture and offer to their customers.
 As product cycles mature or products sales decline,
management has to make strategic decisions to
develop and introduce new versions of existing
products into the marketplace, rationalize the current
product offering, or whether develop a new range of
products and services.

21. Product Development
 These strategic decisions may include:
 The need to acquire another company or
 Sell existing businesses.
 However, when making these strategic product
development decisions, the overall objectives of the
firm should be the determining factor.

22. Customers
 At the strategic level, a company has to identify the
customers for its products and services.
 When company management makes strategic
decisions on the products to manufacture, they need
to then identify the key customer segments
where company marketing and advertising will be
targeted.

23. Identify the key customer
segments

24. Manufacturing/Facilities
 At the strategic level, manufacturing decisions define
the manufacturing infrastructure and technology that
is required.
 Based on high-level forecasting and sales estimates,
the company management has to make strategic
decisions on how products will be manufactured

25. Manufacturing/Facilities
 The decisions can require new manufacturing facilities
to be built or to increase production at existing
facilities.
 The overall company objectives include moving
manufacturing overseas, then the decisions may lean
towards using subcontracting and third party logistics.
 As environmental issues influence corporate policy to
a greater extent, this may influence strategic supply
chain decisions with regards to manufacturing.

26. Inventory
 Inventory is key to profitability.
 Inventory velocity turns assets into profits.
 The faster inventory turns, the greater the profitability.
Inventory is the key issue to supply chain management
success.
 Customers demand that their orders be shipped
complete, accurate and on-time.
 That means having the right inventory at the right
place at the right time.

27. Suppliers
 Company management has to decide on the strategic
supply chain policies with regards to suppliers.
 Reducing the purchasing spend for a company can
directly relate to an increase in profit and strategically
there are a number of decisions that can be made to
obtain that result.
 Leveraging the total company’s purchases over many
businesses can allow company management to select
strategic global suppliers who offer the greatest
discounts.

28. Suppliers
 But these decisions have to correspond with the overall
company objectives
 If a company has adopted policies on quality, then
strategic decisions on suppliers will have to fall within
the overall company objective.

29. Logistics
 strategic decisions on manufacturing locations and
logistics function is key to the success of the supply
chain.
 Order fulfilment is an important part of the supply
chain and company management needs to make
strategic decisions on the logistics network.
 The design and operation of the network have a
significant influence on the performance of the supply
chain.

30. Logistics
 Strategic decisions are required in
warehouses, distribution centers which transportation
modes should be used.
 If the overall company objectives identify the use of
more third party subcontracting, the company may
strategically decide to use third-party
logistics companies in the supply chain.

31. levels of strategic procurement
 Strategic decisions determine the overall direction of
company’s supply chain.
 They should be made in conjunction with the
companies overall objectives and not biased towards
any particular product or regional location.
 These high-level decisions can be refined, as required,
to the specific needs of the company at the lower levels
which allow for tactical and operational supply chain
decisions to be made.

32. 1.6.2 Tactical Sourcing
 In contrast, tactical sourcing involves a short-term and
traditionally reactive approach towards managing the
sourcing activities of an organization.
 It aims at achieving the lowest possible cost without
considering other factors like supplier relationship
management, supply chain risk mitigation, etc.

33. Tactical sourcing
 Consequently, the focus on building long-term
relationships with suppliers and understanding how
their core capabilities can meet the organization is
minimal as communication with suppliers only occurs
when problems arise.
 While tactical sourcing can bring gains in the short-
term, it prohibits sustained optimization of its
sourcing activities. Furthermore, compared to
strategic sourcing, tactical sourcing doesn’t necessitate
large investments in advanced technological platforms
and personnel skillsets.

34. 1.6.3 Operational procurement:
 The procurement of goods and services that are
generally required to sustain daily production or
business activities.
 What some organizations do is to outsource those
goods that are needed on daily or weekly basis to
reduce their inventory holding cost.

35. 1.7 Key Benefits of Strategic Sourcing
 Now that the concept of strategic sourcing is clearer, it
is important to understand its benefits and why it
makes sense for more organizations to adopt strategic
sourcing.
Increased Level of Cost Savings
 The most obvious benefit businesses experience from
strategic sourcing is higher levels of cost savings. By
identifying and selecting suppliers that will provide
the highest value at the right pricing enables an
organization to continuously achieve higher cost
savings.

36. Key benefits of strategic sourcing
Better Alignment of Sourcing and Business
Objectives
 Aligning the sourcing activities of a business to its
organizational goals and objectives is at the crux of
strategic sourcing. Better alignment allows the
business to achieve higher business performance with
higher efficiency and minimal supply chain risks.

37. Key benefits of strategic sourcing
 Optimization of Ideal Suppliers
 In order to effectively implement strategic sourcing in
your organization, it is necessary to analyze the
suppliers, their profiles, and core capabilities. Once
this is accomplished, an organization is equipped with
information that will allow them to match their
business objectives to their ideal suppliers. This
implies highest value-creation at lowest-possible cost.

38. Thank you

39. Chapter two

40. 2.1 Procurement strategy
 In an increasingly competitive market,
a procurement strategy is used to pay close attention
to the operational performance of a business.
 Establishing one allows businesses to identify areas
that are often overlooked in order to reduce costs.

41. 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.

42. What is a procurement strategy
Procurement strategies often focus on options like:
 Cost reduction
 Risk management
 Supplier management and optimization
 Green purchasing
 Global sourcing and
 Total quality management

43. Procurement strategy cont’d…
 According to a recent survey, 78% of organisations
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.

44. Procurement strategy cont’d..
 A procurement strategy details how a business should
deal with its procurement process.
 This provides an overview of all of the steps that are
involved in procurement and can be used as a roadmap for
the way a business conducts its procurement activity.
A procurement strategy framework helps businesses
choose:
 suppliers,
 products or services,
 methods and procedures that are going to be used during
exchanges with suppliers.

45. 2.2 Contents of a procurement strategy
An effective procurement strategy should include:
 a strategy statement: mission , vision and objectives of
your strategy.
Mission Statement: Strategic procurement planning should
begin with a Mission Statement.
 The Mission Statement should be:
 Specific to the procurement entity’s purpose and role
within the organization
 A short statement of the reasons for the existence of the
procurement entity which should reflect the Values of
Procurement

46. Features of a mission statement
 Mission must be feasible and attainable. It should be possible to
achieve it.
 Mission should be clear enough so that any action can be taken.
 It should be inspiring for the management, staff and society at
large.
 It should be precise enough, i.e., it should be neither too broad
nor too narrow.
 It should be unique and distinctive to leave an impact in
everyone’s mind.
 It should be analytical, i.e., it should analyze the key components
of the strategy.
 It should be credible, i.e., all stakeholders should be able to
believe it.

47. Contents of a procurement strategy
Vision Statement:
 Strategic procurement planning should include a
Vision Statement. The Vision Statement should:
 Identify where the organization wants to be in the
future.
 Develop possible improvement paths that may be
linked to the goals.

48. Contents of a procurement strategy
 the desired results: these are the deliverables you expect,
 a timeframe: these are deadlines that you must meet,
 a tactical plan: this explains how your strategy will be
implemented,
 key performance indicators: these are business metrics
that are used to evaluate the procurement process,
 Dedicated tools: these are the tools that can be used to
study the internal and external environment of your
business in order to set up a relevant procurement strategy

49. 2.3Types of procurement strategies
 Since most companies purchase or acquire goods or
services from suppliers, here are a few types of
procurement strategies that are commonly found in
business:
 risk management
 supplier optimisation
 green purchasing
 vendor development
 global sourcing

50. 2.4 Key factors when formulating a
procurement strategy
According to Peter Kraljic, a purchasing strategy
depends on two key factors:
 The strategic importance of purchasing: volume of
expenditure, Total Cost of Ownership (TCO),
profitability, differentiation and value-added for the
company and the sales process.
 The complexity of the supply market: monopoly or
oligopoly, entry barriers, technological evolution,
logistics cost or complexity etc.

51. Klaljic’s purchasing model

52. 2.5 Categories of sourcing
 Re active sourcing : the procurement approach
where no proactive sourcing strategies have been
put in place and so the purchasing and supply
management function has an entirely reactive role
e.g. responding to requisitions or other unexpected
requirements from the business.

53. Categories of sourcing
 Purchasing and supply management professionals
should move away, wherever possible, from this
type of sourcing. However, some organisations still
operate entirely on this basis due to unexpected
demand, responding to individual needs as and
when they arise.

54. Categories of sourcing
 Tactical sourcing: this is to some extent reactive
as it covers those business requirements that
cannot be planned in advance, but are provided
within a framework of strategic sourcing. It is
however, proactively managed and so resources
and processes are set aside to manage it within the
purchasing and supply management strategy

55. Categories of sourcing
 If an unexpected requirement is ad hoc, low risk
and low value, purchasing and supply
management professionals should not be involved
with obtaining the requirement anyway. All low-
value requirements should have been aggregated
into call off contracts for use by end users; those
that are low value, yet high risk, are precisely those
that require strategic sourcing plans

56. Categories of sourcing
 Developing the strategic sourcing strategy is a
fundamental part of the purchasing and supply
management process. Strategic sourcing is a logical
process involving the application of tools by skilled,
competent and knowledgeable people

57. 2.6 Strategy development process
 How to develop a procurement strategy in 8 steps
 1. Analyze expenditure
 2. Identify needs
 3. Study the market
 4. Set realistic objectives
 5. Implement procurement guidelines
 6. Use a dedicated tool
 7. Set up and execute the procurement strategy
 8. Tailor the strategy to your needs

58. 1. Analyse expenditure
 When setting up a procurement strategy, the first step
that you should consider is analysing your current
expenditure. This will provide you with insight into
your current spending habits in order to identify areas
that are often overlooked and where you can cut costs.
This will allow you to have a clear idea of what you
should expect from your future supplier

59. 2. Identify needs
 The company (e.g. the procurement team)
must identify and formulate a need for products or
services. This need must be analysed and confronted
with the requirements of your procurement process.
This is a key factor that you must consider when
choosing suppliers in order to guarantee cost savings.

60. 3. Study the market
 Once you have identified your needs, you must now have
an overview of current market conditions with an external
analysis.
 To study the market efficiently, here are a few
methodologies that you can choose from:
 Porter’s five forces can be used to understand the
competitiveness of your business environment and identify
your strategy's potential profitability,
 a PESTEL analysis helps you to identify the main external
opportunities and threats in your market,

61. Study mkt cont’d…
 a SWOT analysis combines external and internal
analysis to summarise your Strengths, Weaknesses,
Opportunities and Threats.
 However, you must keep in mind that market
conditions may change frequently depending on the
type of industry you are in. Therefore, it is
recommended to make sure that the information that
you collect is frequently updated and stays up-to-date
over time.

62. 4. Set realistic objectives
 Now that you have identified your needs and
completed an external analysis of your market, the
next step is to set your objectives.
 The information that you have collected in the
previous steps will allow you to identify the needs of
your procurement strategy which can then be ranked
according to their level of importance. The objectives
could be to; reduce procurement costs, improve
quality of supplies, supplier optimization,etc.

63. 5. Implement procurement
guidelines
 Question: identify 5 procurement objectives that
an organization can pursue.
 Once you have studied your market and set your
objectives, you must now create a list of
practices that you can implement to improve your
current procurement process. It is recommended to
review your current procurement guidelines and adapt
it to the current needs of your business that you have
identified in the previous steps

64. 6. Use a dedicated tool
 A procurement process involves multiple steps that must
be followed with precision in order to avoid mistakes that
could result in delays or late payments. This can be a
difficult task to manage as it is time-consuming.
 However, with a dedicated tool, you will be able to improve
employee productivity and reduce errors by eliminating
manual data entry and associated inefficiencies.
 With an enterprise management software such as NetSuite,
businesses of all sizes can set up and manage procurement
procedures in an easy-to-use interface.

65. 7. Set up and execute the procurement
strategy
 The is used to identify the desired goals of your
procurement strategy and the strategies that will be used to
achieve them.
 It is recommended to use SMART goals when setting up
your procurement strategy:
 Specific,
 Measurable,
 Attainable,
 Relevant,
 Time-based.

66. 8. Measure progress
 Once you have created and implemented your
procurement strategy, the final step is to track and
measure its progress and identify areas that could be
improved in the future. This will require the
participation of other departments that are involved in
the process such as HR, production, administration,
sales or finance for example.

67. Conclusion
 When strategic supply chain is optimized, a company
is delivering what its customers want, when its
customers want it - and spending as little money as
possible getting that done.