Strategic Procurement – Evolution from a Business Function to Strategic Component
The procurement function was introduced to the corporate world as an administrative task to identify suppliers and make a purchase to keep the business running. The procurement function has transformed from being a part of the administrative function to receiving recognition as a separate buying entity for strategic alignment. With the passage of time, procurement […]READ MORE >>
The procurement function was introduced to the corporate world as an administrative task to identify suppliers and make a purchase to keep the business running. The procurement function has transformed from being a part of the administrative function to receiving recognition as a separate buying entity for strategic alignment. With the passage of time, procurement function has evolved and has become a strategic task, which is undertaken to gain a competitive advantage in the market. The markets have become so competitive that even a small percentage of savings while purchasing can provide organizations with an edge over their competition. Thus, companies are turning towards strategic procurement to enhance their business efficiency and create a competitive advantage.
The What and Why of Strategic Procurement
Similar to a business plan, strategic procurement is a long-term planning process. It’s made by top level management that takes into account stated goals and needs of the procurement function in alignment with the company goals and its tactical execution. Strategic procurement deals have the capability to transform, modify or reshape the current procurement system to increase efficiency. For instance, a company may wish to upgrade the software system that uses the latest technology, incorporate automation in manufacturing or administrative purpose, or strengthen the relationship with the suppliers. All in all, it’s a superset of operational and tactical procurement.
Strategic Vs. Tactical Procurement
Strategic procurement looks at long-term plans, whereas tactical procurement is a short-term executional plan that helps in achieving the goal set by strategic procurement. Majority of the organizations are involved in the practice of giving higher emphasis to tactical procurement for short-term gains. For instance, to get the best deal, a buyer may pressurize the supplier to negotiate the prices. This win-lose situation will increase their savings in the short-term but will hamper their long-term relationship as the supplier may compromise on quality. For the same reason, strategic procurement looks to create win-win situations to create a long-term relationship with key suppliers who are involved in the value creation process.
Integrating Strategic Procurement with Corporate Strategy
As discussed, strategic procurement must always stay in alignment with corporate strategy. The corporate strategy governs all business functions to achieve the corporate vision, mission, and goals. For a majority of the companies, purchasing accounts for almost 80-90% of the total cost base; as a result, lowering procurement costs can result in massive savings. Consequently, the top management should consider integrating strategic procurement into the organization’s strategic planning process. Strategic procurement can help develop material sourcing and contingency plan, identify key suppliers, develop optimal material specification, and forecast and adjust demand schedules. However, in order to integrate strategic procurement alongside corporate strategy, the procurement function must develop to a level that is significant enough to be recognized as strategically important to the firm.
An organization may face many challenges along the way to keep the prices competitive or expand the range of service to improve customer satisfaction. Increasing competitive pressure is inevitable and can often limit growth opportunities. Thus, strategic procurement is quintessential to overcome such challenges and identify opportunities that can contribute to the firm’s success.
To get more information on strategic procurement:
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- Chemical Supply Chain Rationalization: When More is Not Always Merrier
- Tackling Volatile Commodity Prices to Improve Profitability