Guide to Developing a Procurement Strategy

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Guide to Developing a Procurement Strategy
Guide to Developing a Procurement Strategy

The Procurement Strategy seeks to improve all procurement related activities that enhance the competitiveness and efficiency of your organisation – and contribute to creating an agile environment whilst anticipating and proactively responding to market demand.

A sound Procurement Strategy is made up of multiple elements that seek to improve the efficiency of the entire organisation where procurement can be a value contributor. A sound Procurement Strategy also ensures the proactive management of quality, services, and costs against budgets. The Procurement Strategy elements listed below are not exhaustive, but illustrate (based on the type of organisation) how a procurement professional is able to create an continuous improvement culture embedded within the implementation of each of these elements.

Where can you apply these Procurement Strategy Elements?

  1. A Procurement Strategy does not exist;
  2. A Procurement Strategy exists but is not linked to other departments;
  3. A Procurement Strategy exists but is not linked to the overall organisational strategy;
  4. A Procurement Strategy exists but does not include some of the elements listed below;
  5. A Procurement Strategy exists but its implementation and success is not being measured via Performance Management Frameworks.

Note that each organisation should have a Procurement Strategy drafted and revisited annually or semi-annually if your business operates within a very competitive environment. Let’s explore some of these Procurement Strategy elements at a high level, layers of complexity may differ within each organisation. Here are these elements in no particular order (we don’t want to give the formula away too easily)!

Governance Framework

The Governance Framework should be established in conjunction with internal procurement capabilities, strategic objectives and other elements outlined below. For the optimal Governance Framework, the main nine models are (1) top-down, (2) bottom-up, (3) centralised, (4) decentralised, (5) in-sourced, and (7) outsourced, (8) hands-on, or (9) consultative. Of course there are many varying degrees within each model that will ensure an efficient Procurement Strategy is implemented and there are many combinations possible.

Procurement Skills

The Procurement Strategy an organisation can adopt is dependent to the available ‘procurement skills’ contained within that organisation. These skills can be made available via full-time employees, part-time staff, contractors, consultants, and off-shore resources. The level of skills can be from beginner to advanced which will dictate what can be achieved – and how quickly. For example, “negotiation” is a common skills, but there is a difference between haggling for a lower price and being an advanced negotiator who uses market knowledge, market forces, techniques such as zero-base pricing, commodity price fluctuation analysis, cost analysis, price analysis – so on and so forth, as part of their negotiation suite of skills.

Procurement Gap Analysis

The Procurement Gap Analysis seeks to uncover all areas of potential improvements. Affinity Studies Workshops are good team exercise practices, along with 360 degrees survey and bottom-up / top-down interview techniques. Once the Procurement Gap Analysis has been completed its findings are confirmed with all participants from lower rank staff members to CxOs and prioritised on multiple dimensions such as value, savings, efficiencies, dependencies, risks etc.

Functional Department Engagement

A procurement department, to perform at its best, cannot act independently. Forecasts and upcoming activities regarding Marketing, Manufacturing, Enabling IT Systems, Research and Development, Human Capital Asset Management, Finance & Budgeting, Sales are all areas that must be shared, considered and documented within a Procurement Strategy. As such an ongoing dialogue must occur at all times and Procurement must be included in project conversations. You would be surprised to hear that the BvW Global team has, on many occasions, introduced the Procurement staff members to another part of a client  organisation. Email communication exchanges do not suffice. Marketing activities and new product introductions are typical meetings Procurement must be involved with as they will better understand how to strategically source suppliers and materials required for a new product.

Procurement Plan

A procurement plan is a to-do list of activities that have been established during the Procurement Gap Analysis. It also includes elements such as timeframe, business cases with anticipated benefits, resource allocation, in-sourced team or hiring contractors and/or consulting resources. Each element should have specific objectives and performance measures, all set against a specific budget that will allow a team or teams, to perform these individual projects. In the event of a large change management initiative, a Transformation and/or Program Management Office may need to be established, and be responsible for the successful delivery, implementation, and internal staff adoption of these projects.

Knowledge Management Centre

The Knowledge Management Centre (would have been assessed during your Procurement Gap Analysis) can be viewed as your internal ‘Knowledge Repository’ that specifically address the needs and requirements of all staff members – and contains all the Policies, Guidelines, How-To’s, and Templates required to educate and enable staff to perform tasks, adhere to policies, and accelerate the decision making process within the organisation. The objective is to find the needed information within a few clicks only.

Communication Plan

Communication is the delivery of “valued content” and is necessary to the creation of value that contribute to a positive environment within the organisation, and that self-improve over time. Communication between team members, across cross-functional teams, customers, buyers, and other stakeholders contribute to the wellness of the organisation. Communication, or the processing of information follow a simple, yet powerful three-steps model, (a) an input, (b) a value-add, and (c) an output. That information needs to be precise and travel within the organisation without being distorted or misinterpreted. A thorough Communication Plan establishes the guidelines and nomenclature that must be applied to create an internal common language within an organisation, and one that is understood (and translated) across multi-disciplines (e.g. Procurement vs. IT vs. Finance vs. Marketing etc).

Procurement Processes ‘Dictionaries’

Procurement Processes are a subset of the overall Organisational Processes. These processes are the ‘decision brains’ and connect all of the procurement activities.  Procurement Processes Dictionaries contain all information related to processes, procedures, escalations, segregation of duties, business rules and must not contain any indeterminate states – that is – a dead-end within interconnected processes that has no output. They must also have one common one objective – being customer-centric – and providing just the information necessary to perform a function, a task, or specific activities that will enhance the overall value of the organisation.

Compliance Management Plan

All organisations contain policies and guidelines. Note the two are very different. A ‘Policy’ is a set of rule a user must abide by, and contains very little flexibility (e.g. All purchase orders of a value of $10,000 must be approved by…” A ‘Guideline’ on the other hand are general directions on how to perform a set of activities. How your employees are expected to perform against them are part of a Compliance Management Plan which assesses past / present / future behaviour compliance against the Organisation’s rules. The Compliance Management Plan must be closely aligned with the Procurement Processes ‘Dictionaries.’

Enabling & Supporting IT Systems

These procurement processes are then enabled by the various IT systems an organisation must have for processes to become efficient, allow transparencies, and recorded for audit & ongoing improvement activities. The Enabling & Supporting IT Systems must also be closely aligned with the Procurement Processes ‘Dictionaries’ and skills capabilities.

Environmental and Sustainability Plan

The procurement strategy must include activities related to the environment and sustainability. These must extend past the immediate suppliers your organisation has contracts with, and also include specific activities that internal customers and other stakeholders must abide by. Sustainable procurement involves an organisation meeting a need for goods and services in a way that achieves value for money and generates benefits not only to the organisation, but also to society and the economy — while minimising damage to the environment. Broad principles of sustainable procurement include:

  • Strategies that avoid unnecessary consumption;
  • Products and services selection that have lower environmental impacts;
  • Demonstration of innovation in sustainability;
  • Adoption of suppliers that are socially responsible and adopt ethical practices.

Sustainable procurement looks beyond the up-front cost to make purchasing decisions based on the entire life cycle of the goods and services, taking into account associated costs, environmental and social risks and benefits, and broader social and environmental implications.

Procurement Skills Assessment and Training

The procurement team must continuously empower its staff and any procuring staff to perform better – and this is best done through learning. However, we recommend issuing a very comprehensive Procurement Skills Assessment that will establish a skills-baseline specific to your organisation. This is an important component to identify the training modules and levels of training required. It is also an important component to consider regarding the content for your internal Policies and Guidelines, as well as the internal processes required. For example, lower level of procurement expertise may require additional explanation or ‘additional approval gates’ to ensure that the organisation funding is spent according to the rules set up.

Innovative Supplier Engagement

BvW Global developed an entire methodology on Innovative Supplier Engagement (ISE). In short ISE refers to a collaborative buyer-seller business relationship that extends beyond the traditional Payment-for-Goods/Services approach. Under ISE, both parties seek to continuously improve, reduce costs, increase efficiency whilst reducing price for the buyer and at the same time maintaining or increasing profit margins to the seller. It’s a great WIN-WIN approach that you may want to undertake with a strategic subsets of your suppliers that are critical to the success of your organisation.

Category Management Plans

For some categories, you will need a specific Category Management Plan (CMP). The CMP focus on is on all the elements related to a spend category that is critical, strategic, or represent a very high spend. Depending on the level and complexity of spend, you may have an entire team managing a specific category. Sourcing Management Plan and Contract (Master and Local) (not discussed here) are contributors to the Category Management Plan.

Performance Management Frameworks

At BvW Global, we believe that implementing Performance Management Frameworks with data that is as close to ‘LIVE’ as possible create huge improvements within organisations. It is the only way to monitor the pulse or your organisation and address issues as they arise. Performance Management Frameworks can be set up across multi-layers of management and ‘Management by Exception’ can be triggered. Service Level and Operating Level Agreements are set up with specific Key Performance Indicators that are automatically recorded when a transaction occur. We recommend using 360 degrees Performance Management Frameworks where possible to ensure a balanced performance view between a buyer-seller commercial relationship.

HOW TO GET STARTED?

The best way to get started with documenting your Procurement Strategy is to first begin with an overall Procurement Assessment Audit/Review.

You can do so by setting up an internal team, or hire contractors or consultants such as ourselves to perform all the review activities. Working with BvW Global, we can work closely with your team to pass on knowledge along the way. The goals are to uncover all areas that can be improved but also identify what works really well (and why).

This exercise can also include a Spend and Transactions Analysis to gain additional insights for prioritisation of activities. Once the Procurement Assessment Audit/Review has been completed, the information is then strategically reviewed. All the cause and effect links will be identified, and a formal Procurement Strategy can be established with the support of all cross-functional teams, staff, and executive management.

WANT TO KNOW MORE?

Contact us for more information or discuss the benefits of a Procurement Assessment Audit/Review within your organisation and/or documentation of your Procurement Strategy.

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