Procurement Strategy Development
Why Procurement Strategy Development?
Whether you are in an emerging market, a mature business, an organization in decline or a combination of all, it is likely that your current business outlook is subject to change, impacted by macroeconomic factors like technology disruption, globalization and counter movements, regulatory changes, skills shortages or economic distress.
Procurement can and should have pivotal role in this environment, but to ensure this, the Procurement function needs to adapt and evolve to stay relevant and maximize business impact. When Procurement is Done Right, the Procurement strategy is an integral part of, and aligned with, the overall business strategy.
How to Develop a Procurement Strategy?
Understanding the terrain
To know where we are going, we first need to know where we are. While the end goal and direction might be uncertain or evolving rapidly, we need to understand the terrain, and where the wind is blowing. Hence, the starting point for developing a Procurement strategy is the establishment of a common understanding of where we are, i.e. our supply markets and where they are heading, our current capabilities, our operating environment (our stakeholder environment and their drivers), and where the operating environment is heading.
The basis for this is a combination of quantitative and qualitative assessments, where the quantitative parts include analysis of spend, budget projections, market forecasts, organization structures, process metrics etc., and the qualitative parts include understanding of the overall organizational operating model vs the Procurement operating model. Typical dimensions of these operating models would include Strategy, Processes, Systems, Organization, Governance and Data
Some of the key questions to understand are:
– What is the scope and mandate of the procurement function?
– How well aligned is it with the supply markets and their expected development?
– How well aligned is it with the internal stakeholder environment and their projected demand?
– And finally, how well aligned is it with the overall business agenda?
Many of the above factors are internal, but a good understanding of the overall industry and business context is critical for the analysis – Procurement in an organization within a mature, highly competitive, low margin market will be driven by a very different business logic than one in an emerging, technology driven environment where access to scarce skills, resources and innovation might be pivotal for company success.
Strategic alignment
When a thorough understanding of the starting point and the terrain has been established, there is often already a compelling case for change on the table; as few businesses operate under static conditions, there is normally a continuous need for evolution and improvements. Strategic alignment is however not only about rhetorically aligning the Procurement mission with the overall business agenda, but also making sure that the management and key stakeholders agree to the assessment, the analysis, the needs, the mission and the plan.
PIR’s experience shows that business leaders, especially in the Nordic countries, tend to be reluctant to accept ideas and solutions if they have not been involved in formulating the issues from the start. Hence, formulating the Procurement strategy is as much an analytical exercise as proper legwork, engaging with key stakeholders in finance, operations, legal departments, R&D, IT etc., to gather a solid, undisputable fact base, and a common view on strategic priorities forward. In many cases, driving the development through several collaborative workshops is an effective mode of working, but the approach needs to be adapted to the stakeholder environment.
In the end, the Procurement strategy needs to provide an outline the following:
- What is the mission of the Procurement function?
- What is the scope of its responsibilities? (e.g. procurement categories, organizational scope, types of expenditures, process scope, accountability for savings, internal service levels etc.)
- What are the capabilities required within the Procurement function and its operating environment (target operating model) to deliver on the established objectives?
In most cases, the last part will entail a step change in one or several areas, which will need to be underpinned by a business case and credible roadmap for completion.
Performance measurement
To understand whether our strategy and roadmap are effective, we need to measure the progress and results. While this might seem like an obvious statement, many procurement organizations struggle in this area, with lack of definitions, lacking tools and data, as well as unreliable governance and processes. Being unable to prove that your performance has bottom line effects, or back up your business cases with sufficient data will quickly erode your credibility with key stakeholders.
Further, defining performance measurements is a critical activity itself when developing a procurement strategy, because it ensures alignment with organizational goals and provides a clear framework for evaluating success.
Setting measurable targets for cost, value, risk, supply security, ESG (Environmental, Social, and Governance), and efficiency is essential for tracking progress and making informed decisions. For instance, specific cost reduction targets help manage expenses effectively, while value targets ensure procurement activities contribute to the bottom line. Risk management targets identify and mitigate disruptions, supply security targets ensure a resilient supply chain, ESG targets promote sustainability, and efficiency targets streamline operations. These measurable targets drive continuous improvement and deliver significant value across the supply chain.
Clear policies & instructions
Clear and easy-to-follow procurement policies and instructions are vital for ensuring consistency and compliance across the organization. Well-defined policies provide a harmonized approach to procurement activities, making it easier for employees to understand and follow procedures. This clarity helps in minimizing errors, reducing risks, and enhancing overall procurement process efficiency. Additionally, clear instructions facilitate better communication with suppliers, ensuring that expectations are met, and relationships are strengthened. Ultimately, having straightforward procurement policies supports the successful implementation of the procurement strategy and contributes to achieving the organization’s goals.
What Are the Key Objectives to Consider For Procurement Strategy Development?
There are five key objectives that any Procurement strategy must consider.
Take out cost
The first one is given and is fundamentally the right of existence for any Procurement function – namely to take cost out bottom line. This is the key expectation from most organizations, and if Procurement cannot prove bottom line effects, its credibility may erode quickly.
Mitigating third party risk
Managing supply risk is an obvious responsibility of Procurement, which many became painfully aware of during the COVID crisis, however there are many other aspects to consider in this area, such as concentration risk and related cost exposure, reputational risk, IT security, fraud IPR etc. Traditional procurement functions tend to be very focused on risk mitigation, while growth-oriented functions increasingly adopt risk optimization perspectives, similar to the mindset of investment banking where risks are linked to business opportunities, i.e. there is “bad risk” and “good risk”.
Business engagement
A critical part of the Procurement Strategy is to consider how we engage with the internal customers and orchestrate effective cross-functional collaboration. This means questioning procurement’s role and focus and making sure that value is delivered from a holistic perspective, and looking into our attitudes, culture and skills. In many areas, Procurement needs to move from negotiation specialists in clerical roles, to business operators and business custodians. To form an agenda around this, Procurement might have to review its talent strategy, and consider how talent is attracted, developed and retained.
Leverage digitalization to become efficient
We have yet to come across a Procurement function that has all the resource to deliver everything on its business agenda. The answer to this is rarely business case-based growth only, but strict fact-based prioritization and triage, as well as an aggressive agenda for improvements of efficiency and effectiveness. Digital transformation should be an intuitive part of this. Most larger procurement organizations have already made investments in digital platforms, but few get the intended value out of these, due to poor data, unflexible process support and poor usage adoption. While the market is now providing more end user-friendly solutions, with higher degrees of flexibility, automation and analytics capabilities, organizations need to address underlying issues in legacy systems, data and consider customer journey approaches to ensure that Procurement can provide attractive, collaborative and positive experiences.
Develop a sustainability focus
In markets where customers, owners, regulatory bodies and organizations revise their views and expectations on sustainable business, Procurement functions need to act; for most business, a significant impact on environment and society are related to external supply of goods, energy and services. The Procurement strategy needs to consider the business requirements on this, and align its scope of responsibilities, capabilities and strategies, to support the evolving agenda and deliver on regulatory requirements.
What Value Does a Procurement Strategy Bring?
Developing a robust procurement strategy involves a thorough analysis of current processes, setting clear objectives, collaborating with stakeholders, and building a plan for leveraging technology. By focusing on these key elements, organizations can optimize their supply chains, reduce costs, and build a resilient procurement function well prepared to take on its next set of challenges. Ultimately, a well-developed procurement strategy delivers significant value to the business by increasing efficiency and cost, enhancing supplier relationships, and achieving long-term business goals.
