Strategic Procurement

Written by Emad Felimban

For Elite Consultancy & Training Services ( ECS ) on March 2, 2022

Strategic Procurement is a bout maintain long relationship with suppliers aiming timely supply of materials and services, reduce suppliers base, reduce cost, reduce negotiation & reduce communications.

What is the importance of strategic procurement?

Strategic procurement has a clear positive impact on supply chain overall.

In procurement or contract operation it will reduce the workload and procurement cycle/process, all major processes will be eliminated such as Identify scope/specifications, sourcing, technical clarifications, request for quotation/proposal, technical & commercial evaluation.

In inventory operation it will reduce inventory value gradually and improve material availability, inventory stock levels will be recalculated to consider the new lead time (procurement lead time + supplier lead time + logistics lead time) which has a reduction in procurement and supplier lead time and this will lead to reduce stock levels and accordingly inventory value.

In some cases (vendor managing inventory) inventory will be eliminated.

In logistics operation on time delivery will increase as supplier has the yearly forecast for operation demand and non-operation demand such as shutdown.

In warehouse operation discrepancy & claim process will be eliminated/minimized.

Examples of purchasing strategy:

· Frame agreement, fixed list of materials/services, fixed price, fixed lead time & fixed payment terms. This type is very helpful to support organization upon demand with no commitment with supplier. Usually used for general materials/services, IT, stationary.

· Vendor managing inventory (VMI), fixed list of materials, fixed price & lead time, agreed stock levels in vendor warehouse, commitment on service fee. This type can be used for manufacturer items, safety items, high demanded general spare parts.

· E- Auction, Fixed list of materials/services, provided by many suppliers. Can be used for general materials provided by many suppliers & short-term service projects.

How to select materials/services to be under strategic agreements?

· A certain criteria can be agreed to select the right material/service that can be efficient and influence Operation, spent & suppliers.

· A proper selected materials/services should lead to a good utilization in terms of received purchase orders, agreement line items, agreement value & minimize spot buying.

· Having a lot of materials/services under strategic agreement does not mean you have efficient strategic procurement.

Strategic procurement approach:

One of the best practices I experienced to follow a structure way that can lead at the end for efficient strategic agreements.

This approach has the following milestones:

· Select team and governance.

· Define objectives and scope of work

· Define governance structure (Team)

· Identify team and hold kickoff

· Agree on next steps

· Communicate internally and externally (as appropriate)

· Build baseline & understand supply market.

· Build spend database

· Understand future demand (volume and needs)

· Analyze current situation

· Identify key stakeholders

· Understand market dynamics

· Profile current and potential suppliers

· Yield measures

· Select focus areas

· Develop work plans

· Develop and quantify improvement ideas, using analytics and creativity methods

· Further engage users and suppliers to develop, refine, and syndicate improvement ideas

· Identify prioritized improvement ideas

· Develop strategy

· Develop implementation plans to execute strategy

· Execute

· Finalize implementation plans

· Negotiate with current suppliers and/or exercise tenders

· Develop KPI metrics

· Manage performance

· Track implementation progress

· Take corrective actions in case of under-performance

· Manage supplier performance

· Identify future value improvement potential

Strategic procurement is considered the future of procurement and organizations expected to switch from spot buying to strategic buying as much as they realized the benefits on operation and achieved savings