Procurement Strategy: How to Build a Reliable Supply Chain

1. Procurement strategy: Definition
2. The five different procurement strategies
3. Why is a procurement strategy important?
4. What do companies need to consider when developing a procurement strategy? 
5. How to design an effective procurement strategy
6. Which tools are suitable for a procurement strategy? 
7. Procurement strategy - essential for a reliable supply chain

The procurement strategy is one of the most important pillars of a successful company. It ensures a smooth flow of money and prevents your resources from disappearing in an inexplicable way. Moreover, it promotes relationships with suppliers, leading to a more reliable supply chain.

In this article, you will not only learn more about procurement strategies and their various types. We also provide you with tips to develop an effective procurement strategy for your company.

Procurement strategy: Definition

A procurement strategy includes the plans and methods that a company uses to procure goods and services. This also includes the identification and evaluation of suppliers, the negotiation of contracts, and the management of supplier relationships. A functioning procurement strategy is meant to enable companies to achieve the best price-performance ratio while maintaining quality standards.

Depending on the company, a procurement strategy can also pursue the following objectives:

• Cost reduction without compromising quality
• End users get the best price for goods and services
• Building strong, mutually beneficial supplier relationships
• Reviewing suppliers to ensure ethical and sustainable procurement
• Analysis of risks in the supply chain to avoid unnecessary interruptions
• Creating accurate demand forecasts
• Evaluation of KPIs to measure performance and adjust strategy
• Educating the management about new opportunities

The five different procurement strategies

1. Single Sourcing: This procurement strategy is used particularly due to the associated cost savings. Here, a company selects a single supplier to purchase its products, materials, and parts. This allows companies to take advantage of bulk discounts and lower administrative costs. However, single sourcing leads to a dependence on one supplier, which can be very risky in case of delivery delays.
2. Dual Sourcing: works just like single sourcing. However, the company has not just one, but two suppliers.
3. Multiple Sourcing: is the opposite of single sourcing. This procurement strategy refers to sourcing goods or services from more than one supplier. This reduces dependence on suppliers and reduces the risk of supply shortages. However, negotiating bulk discounts with multiple sourcing is difficult. There is also a high risk of order errors, resulting in higher administrative costs. 
4. Local Sourcing: in this procurement strategy, logistics plays a major role. Here you only buy products or materials from manufacturers in your own country or region. This benefits your marketing strategy, especially if you want to be perceived as a supportive member of your community. However, it can also lead to higher costs due to less competition and possibly only small quantities available.
5. Global Sourcing: the opposite of local sourcing and refers to the procurement of goods and services from the global supply chain. This allows you to achieve an optimal price as the global competition among suppliers is high. However, you must expect high transportation costs as the goods come from other countries. In addition, you should also consider fluctuations in exchange rates and language barriers.

Why is a procurement strategy important?

The development of a procurement strategy brings various advantages, including:

• Cost savings: With a procurement strategy, you can ensure that you purchase the goods and services you need at the best possible price without compromising on quality. This leads to cost savings that can be reinvested elsewhere in the company.
• Better supplier relationships: A procurement strategy helps you build a supplier database. In this, you can maintain information about your suppliers and track communication with them. This leads to more reliable supply chains, which is especially important if your company is heavily dependent on external providers.
• Improvement of Quality: With their own procurement strategies, companies not only reduce the risks associated with poor quality products. They can also identify and avoid undesirable supplier practices. These include late deliveries and non-compliance with regulations.
• Improvement of the company's reputation and customer satisfaction: Thanks to a procurement strategy, you can fulfill the requirements of your customers faster while promoting ethical procurement practices. This not only positively affects your reputation. It also increases customer satisfaction, leading to repeat purchases and recommendations.

What do companies need to consider when developing a procurement strategy? 

Your company's expenditures: The current expenditures of your company serve as the basis for the creation of your procurement strategy. They provide you with an overview of your spending habits. This allows you to identify areas where you can cut costs.

The needs of your business: To develop a suitable procurement strategy, you need to know the needs of your business exactly. What parts, materials, or services do you need to outsource and how often do you have to purchase these? This analysis helps you align your procurement strategy with other business activities and objectives.

The procurement market: Without an analysis of the procurement market, an effective procurement strategy cannot be developed. This involves gaining insights about suppliers, products, services, and market conditions. This data is collected from various sources such as supplier databases, industry reports, and communication with suppliers.

To conduct a market study, you can apply the following methods:

• Port's Five Forces: useful for buyers and sellers who want to recognize their strengths in their respective industries and assess their negotiating position. 
• PESTEL analysis: helps monitor and understand macro-environmental factors affecting businesses. These include political, economic, social, technological, environmental, and legal aspects.
• SWOT analysis: It combines internal and external factors to determine the strengths and weaknesses of a company in the market.

Remember that market conditions can change at any time. Therefore, it is important to regularly conduct market research and ensure that the gathered information is always up to date.

How to design an effective procurement strategy

Assess the current procurement process: First, analyze the company's current spending habits:

• Find out which products or services you purchase and how much you spend on them.
• Determine the different business areas and departments involved in the procurement process and identify associated inefficiencies.
• Evaluate the Total Cost of Ownership (TCO) to identify any hidden costs for goods and services.
• Find out if the current procurement strategy meets your current needs and supports the company's future plans.

Set clear procurement objectives: Here, you should strike a balance between desired goals and available resources. The procurement objectives must align with the vision and global policies of the company and also be specific and realistic.

Establish procurement guidelines: In this step, new guidelines, procedures, and operational models are agreed upon and implemented. This is the perfect opportunity to rethink processes and practices and adapt them to the new procurement approach.

Tip: Don't just expect employees to follow the new guidelines. Instead, communicate the opportunities and benefits of the changes to them. Once they have been implemented, you should closely monitor the guidelines and discard them if they cause more trouble than they are worth.

Implement procurement software: Depending on the type of business, the procurement process can prove quite complex. Thus, the chance of making mistakes is significantly higher if your company does everything manually. To minimize this risk, you should use procurement tools like Supply Chain Management and Logistics software and Warehouse Management Systems. 

The former supports you in managing your supplier relationships and in optimizing your supply chain. A warehouse management system, on the other hand, focuses on monitoring and optimizing the movement of goods between different warehouses.

Ask your staff for their opinion and conduct training: Now that you have developed a strategy and set up the software, it's time to ask your team for feedback. Conduct an open conversation and provide everyone with a safe space to express their concerns. If necessary, you can organize training to improve certain skills of your staff. This is especially important when you introduce new practices and tools like procurement software.

Evaluate and refine your strategy: To assess the performance of your procurement strategy, you can monitor various KPIs:

• Costs and savings - how are costs changing and are there any savings?
• Expenditures - how effectively are you spending your budget?
• Contracts - how reliably are contract terms met?
• Suppliers - how efficient is the spending per supplier?
• Competition - what is your ROI compared to competitors?
• Processes - how efficient is each individual process step in terms of time and cost?
• Customer satisfaction - how satisfied are end customers?

Which tools are suitable for a procurement strategy? 

For automating complex procurement processes, saving costs, and minimizing errors, procurement software is indispensable. Depending on the needs of your business, you can choose between two systems: Logistics & Supply Chain Management Software and Warehouse Management Software. As already mentioned, the Logistics & Supply Chain Management Software is ideal for Supply Chain Management, while the Warehouse Management Software focuses on Warehouse Management. However, there are also systems that can do both.

The following show the best tools to optimize your procurement strategy:

Shipcloud

Sendcloud

Pickware

JTL

Alaiko

Hive

VCE

PULPO WMS

pixi WMS

Or are you just looking for a simple tool for warehouse management? Then you should get an overview of the best free warehouse management apps on OMR Reviews. Compare their features, view verified user reviews, and find a tool that suits your company.

Procurement strategy - essential for a reliable supply chain

A procurement strategy is an important part of any business. Not only does it help maximize cost savings. It also helps you build strategic partnerships with suppliers. But today's procurement strategies are not the same as they were 10 years ago. 

Nowadays, the processes are more complex than ever before on the competitive market. That's why more and more companies are resorting to procurement software to automate important tasks and minimize errors. With the right tools and an efficient procurement strategy, you ensure that high-quality goods are delivered on time. At the same time, your company can prepare for unforeseeable circumstances.