Strategic Procurement: Creating Value for Organizations and Customers

By Rafael Vela / March 02, 2023

Strategic procurement is the process of acquiring goods, services, and works from suppliers with a long-term view of creating value for an organization. It involves the development of a procurement strategy that aligns with the organization's goals and objectives and aims to optimize the supply chain, reduce costs, and improve quality while maintaining ethical and sustainable practices.

Strategic procurement creates value for the organization and its customers in the following ways:

Reducing Costs: This is done by identifying and negotiating with the best suppliers. This can be achieved by consolidating supplier relationships, implementing strategic sourcing practices, and optimizing the procurement process. This can increase customer satisfaction and loyalty, leading to increased sales and revenue.

Improving Quality: Strategic procurement focuses on ensuring that the goods, services, and works procured meet the required quality standards. This is attained by implementing quality management systems, supplier evaluation processes, and continuous improvement programs. Again, this can lead to increased sales and revenue.

Mitigating/Eliminating Risks: Risks associated with procurement activities, such as supply chain disruptions, legal and regulatory compliance, reputational risk, etc. are mitigated or eliminated by implementing risk management frameworks, conducting due diligence on suppliers, and developing contingency plans, all these are an integral part of a strategic procurement program.

Enhancing Supplier Relationships: The practice of strategic procurement focuses on building long-term, collaborative relationships with suppliers. This can be achieved by implementing supplier performance management systems, fostering open communication, and engaging suppliers in joint value-creation initiatives.

Enabling Faster Time-to-Market: As a direct result of procuring goods and services of the required quality in shorter periods of time, Strategic procurement helps organizations to shorten product development cycles and enable faster time-to-market. This can increase customer satisfaction and loyalty, leading to increased sales and revenue.

Facilitating Innovation: Strategic procurement helps organizations access new technologies, products, and services, which can drive innovation and differentiation thus enhancing the organization's competitive advantage and increasing customer satisfaction and loyalty.

My more than 30 years of experience in international procurement have taught me that implementing a strategic procurement program is not always easy, remember, changes always bring some resistance, but when properly and fully implemented the benefits are countless for the organization.

When engaging in an implementation project I like to use the time-tested and reliable SEVEN-STEP ?process. This process involves the following stages:

Define the Procurement Strategy: This should align with the organization's goals and objectives and involves identifying the key procurement objectives, determining the scope of procurement activities, and developing a procurement plan.

Conduct a Spend Analysis: The second step is to conduct a spend analysis, which involves analyzing the organization's spending data to identify cost-saving opportunities. This can help to prioritize procurement activities and inform the development of a sourcing strategy. This step is also useful to establish product categories which are essential in strategic procurement. Product categories are fundamental as NOT ALL PRODUCTS must be treated the same way from a procurement point of view and therefore a different procurement process is recommended for certain groups of products. Not establishing product categories and trying to purchase everything with the same process simply constitutes mismanagement of resources.

Conduct Market Research: The third step is to conduct market research, which involves identifying potential suppliers and assessing their capabilities, pricing, and quality. This can help to inform the development of a sourcing strategy and supplier selection criteria and will show the way to potential strategic alliances with suppliers.

Develop a Sourcing Strategy: The fourth step is to develop a sourcing strategy, which should align with the procurement strategy and consider the results of the spending analysis and market research. This involves identifying potential suppliers, developing selection criteria, and determining negotiation strategies.

Select Suppliers: The fifth step is to select suppliers. This means evaluating potential suppliers against the selection criteria and negotiating contracts. This can help to ensure that the organization procures goods and services from the best suppliers.

Manage Supplier Relationships: The sixth step is to manage supplier relationships. This implies monitoring supplier performance, resolving issues, and fostering collaboration. This can help to ensure that the organization maintains a strong and productive relationship with its suppliers.

Continuous Improvement: The seventh and final step is to continuously improve the procurement process. This involves monitoring and evaluating the procurement process, identifying areas for improvement, and implementing changes to enhance performance and create value for the organization.

As I already mentioned, this process works. Some organizations introduce some variations but in general, the spirit and areas covered in the seven-step process are very much the same and the results are equally impressive.

Strategic procurement can also drive sustainability by integrating environmental and social considerations into the procurement process, selecting sustainable products and services, engaging suppliers to adopt sustainable practices, and considering the entire life cycle of products and services.

Here are some ways in which strategic procurement can drive sustainability:

Sustainable sourcing: Sourcing products and services from suppliers that meet specific environmental and social criteria. This includes criteria related to carbon emissions, waste reduction, energy efficiency, social responsibility, and ethical practices. By selecting suppliers that align with their sustainability goals, organizations can drive positive environmental and social impacts.

Green procurement: Organizations can use strategic procurement to select products and services that are environmentally sustainable, such as those that are energy-efficient, have a reduced carbon footprint, are made from recycled materials, or can be recycled at the end of their lifecycle. This can reduce the environmental impact of the organization's operations and products.

Supplier engagement: How? Encouraging suppliers to adopt sustainable practices. This, if done properly, can create a positive ripple effect throughout the supply chain, driving sustainability improvements across multiple organizations.

Lifecycle thinking: Organizations can use strategic procurement to consider the entire life cycle of a product or service, from design to disposal. This can include factors such as resource consumption, emissions, waste generation, and social impacts. By considering the full life cycle, organizations can identify opportunities to reduce their environmental and social impacts, while also creating value for themselves and their stakeholders. I recommend you review our issue of Jan 23, 2023, on OPTIMIZING PROCUREMENT: A TOTAL COST OF OWNERSHIP (TCO) PERSPECTIVE to expand on this point.

Strategic procurement is a critical process for organizations seeking to create value for themselves and their customers. It involves developing a procurement strategy that aligns with the organization's goals and objectives and implementing a process that involves spend analysis, market research, supplier selection, and relationship management.

By focusing on cost savings, quality improvement, risk mitigation, and supplier relationship enhancement, strategic procurement can help organizations to improve their competitive advantage and create value for their customers.

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