Six steps to strategic procurement success

March 30, 2010
by Andrew Bulmer and Jennifer Horton

It is no exaggeration to say that corporate procurement has evolved dramatically in recent decades. Most large organizations have graduated from purely price-driven procurement practices to more sophisticated policies.

Today, we talk about strategic procurement, a holistic approach to the acquisition of goods and services that not only includes price but the economic impact of everything from sourcing to delivery methods.

Equally, forward-thinking organizations seek goal-oriented relationships with suppliers aimed at producing innovative, streamlined solutions and continuous improvement.

The strategic approach, in other words, aligns procurement with a corporation’s broader goals of profitability and sustainability, and it pays environmental benefits. Corporations that procure thoughtfully and efficiently will simply use fewer resources and be more environmentally conscious than those that don’t.

And there’s nothing static about strategic procurement. The proliferation of information technology in recent decades has given organizations the tools to improve their procurement methods—and the corporate commitment to strategic procurement is continually growing.

According to Statistics Canada, More than 700,000 people work in supply chain management in Canada today. Over the next three to five years, another 86,000 supply chain management recruits will be needed annually for new or vacant positions, according to the Purchasing Management Association of Canada (PMAC).

But how will they operate? What principles will world-class sourcing teams follow to maximize the opportunities procurement can provide to corporations? What will be the best practices that allow these emerging professionals to be both supply chain specialists and strategic business managers?

What follows are six best practices that can enhance any organization’s strategic procurement effort.

1. Demand management

Experience shows us that a store offering 50 styles of jeans will have lower sales than one that offers five styles. The same principle applies to strategic procurement: why purchase several versions of a product when one may be all you need?

Consider too that fewer items will be much more efficient to source, track and warehouse. The fewer items you procure, the simpler the process is, and the easier it will be for suppliers and partners to meet your needs. The net result is improved efficiency, lower overall costs and an improved bottom line.

2. Bring more spend under control

Most companies have higher-than-necessary costs because they cannot break down their costs for office spend. One automotive company we know of discovered it did not have a strong grasp of what its decentralized procurement team was buying or how many suppliers were being used. 

Organizations can close this costly knowledge gap and gain control of spend by using a variety of strategic sourcing principles to procure goods and services and reduce overall costs. For example, companies can build controls into electronic commerce platforms to ensure employees cannot make unchallenged, ad-hoc purchases. They can also develop core lists to manage demand or standardize category coverage guidelines for sourcing behaviours throughout the company.

More broadly, other functional areas—including IT, HR and marketing—can and should be aligned with the procurement team as well as vendors to maximize efficiency and enhance buying power.

All these efforts must be backed by robust behaviour and spend analysis and cost-management tools. Companies must always know where the money is going because there will be savings.

That automotive company we mentioned eventually realized where the gaps were and streamlined its procurement processes. As a result, it cut hard costs by 25 percent and greatly reduced soft costs by implementing more efficient practices.

3. Rethink processes

It’s true that many large organizations still use inefficient, paper-based procurement systems, either because they were inherited or because internal policies require extensive paper documentation.

The migration from paper to electronic systems can be a big undertaking, but it is necessary in a world where we must do more with less. And the task can be made easier using the same “keep it simple” principle that applies to procurement.

One electronic platform may be better than several, especially if it’s populated with extensive information about buying requirements and supplier offerings. This allows companies to reduce the time spent in procurement and allows them to communicate effectively with suppliers. Those suppliers, in turn, will better understand their customers’ requirements and respond accordingly.

4. Rethink company needs

Next-day delivery, once a means to differentiate service, has become standard practice in many industries. But many companies may not really require it, and it can be a wasteful luxury, adding costs, creating additional packaging waste and increasing fuel consumption. Increasingly, next-day delivery is seen as environmentally unsound.

Consolidated orders reduce the number of deliveries and the use of fuel. By embracing the concept of the “right-day delivery” of goods on a predetermined cycle, companies can be more efficient and minimize the use of resources.  

One major Canadian beverage company intends to reduce CO2 emissions by 12 percent and packaging output by 27 percent in 2010 by switching to weekly deliveries at two of its major centres.

5. Make suppliers true partners

Stronger relationships with strategic suppliers are critical, especially coming out of a downturn. The more suppliers know about a business and its idiosyncrasies, the more they can help it become more efficient and make the most of strategic procurement efforts.
If they completely understand an organization’s overall challenges, its sustainability goals and procurement process, they can better design effective solutions.

World-class sourcing professionals are tapping into their supply partners to track market trends, get strategy advice and really work together to establish a successful partnership that benefits both stakeholders.

6. Streamline procurement

Procurement officers concerned with reducing the costs associated with dealing with too many indirect suppliers will be inclined to consolidate their company’s business with a single partner that has these desirable characteristics.

Streamlining procurement in this way can help make processes more efficient by identifying previously unrecognized opportunities to save and maximize buying power. Supplier rationalization can reduce the supplier management burden and can keep the company in control of total office spend.

None of these methods are beyond the reach of most companies. It isn’t necessary to have a large budget and extensive dedicated team to have a well-developed sourcing strategy.

With the support of corporate management, some of these steps are simple to take. By thinking strategically and simplifying the procurement process, organizations will cut costs, add value and boost efficiencies while also becoming more sustainable.

Andrew Bulmer is general manager for large business, sales and Jennifer Horton is senior director, marketing for large business at Grand & Toy.