Building and maintaining a house shares many similarities with establishing and sustaining strategic procurement in an organization. In order to build a house one must first select the site, materials, and then oversee construction. Strategic procurement requires disciplined organization commitment to ensure implementation and lasting success. With the constant pressure that companies face today to decrease costs, increase quality, and better relationships, leveraging strategic procurement as a tool to drive results is important. Company strategy, both in the short- and long-term, should be directly aligned and supported by procurement goals. Organizations that have the right outlook, mindset, and metrics for strategic procurement develop a competitive advantage and deliver superior financial and operational results over the long-term.
Procurement is dynamic by nature due to the ever changing economic, regulatory, and competitive variables that often hinder available time needed to assemble and execute strategic plans. Many organizations today focus on short-term tactical procurement cost reduction initiatives. Organizations that focus only on tactical procurement cost reduction initiatives risk becoming noncompetitive compared to companies that align procurement strategy and processes to support organizational strategy. Over time, organizations that do not align their procurement strategy to support their organizational strategy rapidly lose market share to competitors that align their operations to support their strategy. Key challenges that affect strategic procurement implementations include clearly defining a long-term strategy, effectively managing supplier relationships, and implementing effective tracking metrics.
What is Strategic Procurement?
Strategic procurement goes beyond tactical procurement cost reduction initiatives and considers an organization’s desired long term strategy, in addition to organizing all procurement efforts to position the a company to achieve its goals. Strategic procurement is defined as the process of developing, executing, and maintaining procurement operations that support an organization’s strategic objectives. With that in mind, the critical question to ask yourself becomes, “How does my organization aspire to differentiate and compete in the market?” Organizations that answer this question by developing and executing a strategic procurement plan grow their market share, deliver superior financial results, and realize a stronger competitive advantage. As a result, innovative market-leading companies have the right strategic procurement outlook, mindset, and metrics, which position them to out-compete their competition over time.
Outlook – Long-term Approach
Defining customer value drivers: innovation, selection, availability, customization, service, quality, and cost that the organization desires to compete on is a key starting point for creating a strategic procurement plan. Supply chain structure inputs such as suppliers, manufacturing location, and distribution model can dramatically vary depending on an organization’s motivation to compete on opposing customer value drivers like availability versus customization, for example. The supporting procurement processes should also be selected based on the company’s desired customer value driver differentiators. Once a strategic procurement plan is developed, it is important to attain complete buy-in from your team to ensure implementation success. Teams must understand the negative impact of continuous task firefighting versus the positive long-term return on investment in strategic procurement. The mentality throughout the procurement team should focus on the daily steps necessary to reach organization goals.
Mindset – Supply Partner Relationship Management
Effectively establishing and then managing supplier relationships starts with a supply partner versus supplier mindset. This thinking establishes trust between both parties allowing for closer collaboration on joint strategic goals. The ability of procurement professionals to establish, develop, and enhance personal relationships with decision makers at their most critical supply partners should be institutionalized through training. Identifying supply partners by developing a preferred supplier list creates visibility across your organization to the key suppliers the organization has selected to partner with to co-create value. Converting to early supplier involvement in product development from traditional win-lose quoting and negotiating enhances your bonds with suppliers. Further, the probability of strategic procurement initiative success increases when suppliers are actively involved in jointly developing solutions to deliver customer value drivers.
Metrics – Rating & Decision Making Systems
Establishing a supplier rating system can allow your organization to track the performance of your preferred suppliers over time. Common supplier rating metrics include cost, delivery, quality, financial stability, supplier engagement, sustainability, and social responsibility. Tracking the proper metrics enables your organization to improve supplier performance and thus overall supply chain performance. It is also critical to establish a decision making system for evaluating and selecting between supply opportunities. Organizations must move beyond piece price as a sole selection criteria and utilize more robust proven analysis such as total cost of ownership and net present value to make sourcing decisions. Companies that utilize disciplined analytical tools and processes to award contracts reduce supply risk while simultaneously improving performance.
Our experience shows that organizations that commit to investing in strategic procurement outpace their competition in both the short and long-term. As with building a house, strategic procurement takes a collaborative cross functional team effort to accomplish many interconnected initiatives over a specified time horizon. You must attain complete buy in at all levels, and across functions within your company to successfully achieve strategic procurement results. Organizations that have the right outlook, mindset, and metrics for strategic procurement will not only develop a competitive advantage, but will deliver superior ongoing financial and operational results over the long-term.