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What is a procurement strategy?
At its most basic, a procurement strategy is a structure, or series of procedures, that govern how you purchase each item your company needs. This encompasses every aspect of the purchasing process, from deciding what the company needs and when, to selecting a supplier for each item, issuing a purchase order, and ensuring your supply chain conforms to company values. In addition, your strategy should include a mechanism to ensure that you don’t order the wrong quantity of something.
Why is it beneficial to have one?
There’s an old saying, you can’t change what you don’t acknowledge. Or in this case, know about. Within the context of purchasing, this means you need to know how corporate funds are being spent. In other words, where’s the money going. If you have a lot of employees buying things on a whim, it’s hard to implement supply chain management or introduce cost optimization.
In addition, you need to be careful about risk management. Without a clear purchasing strategy, it’s too easy for people to make unauthorized or duplicate charges. When it comes time to balance the books, your accounts payable department will have serious problems keeping track of everything. From a corporate governance perspective, this is a serious challenge. It’s also one that can expose you to government scrutiny and negative stakeholder attention.
Finally, having a solid procurement strategy helps you to save money. For instance, you can purchase products from a particular supplier all at once. This can save money if the supplier is willing to give you bulk discounts. And, at the same time, it’s easier to know how much of a given item is in your inventory. Similarly, by avoiding maverick spend you can realize cost reduction, because every purchase is cleared with the purchasing department and obtained at negotiated rates.
What are some purchasing strategy types?
Of course, as with most things in business one size does not fit all. A procurement strategy that works well for one company might produce poor results for another. There are several reasons for this, including differences in business models, the level of potential supply chain disruptions, and profitability. Let’s look at some of the common ways that companies map out their procurement process.
1. Buy everything from one supplier
Also called “single source purchasing,” this strategic procurement method buys everything from the same company. Usually, this is a way to save money and make it easier for staff to do purchasing tasks. After all, if you get everything in one place, there’s a good chance that the company has a business charge account where accounts payable can just write a check every month. In addition, companies will often give discounts for large orders or offer a “package deal” for customers who commit to certain purchase levels every month.
There’s little question that single source purchasing is convenient. However, it doesn’t work for every kind of company. This approach is suitable for many SMBs or offices because most office supply stores carry everything from toner to computers and desks. For them, the improvement in procure to pay efficiency is often well worth it.
However, for a hardware heavy startup, or for most tech companies, there needs to be more supplier diversity. After all, few if any suppliers will carry both screws or wires and copy paper. Therefore, a more complex purchasing strategy is needed for this subset.
2. Supplier optimization
In this approach to strategic procurement, the focus is on getting the best products possible while focusing on cost reduction. Private citizens would call this “value for money.” When you focus on purchasing for value, you aren’t necessarily focusing on paying the smallest amount of money possible. Instead, you think about total cost of ownership.
What does this mean? Penny wise, pound foolish is a concern. Your company won’t use a supplier just because it’s the cheapest price. Instead, you ensure that the item will work for your company and, if applicable, your customers. For example, you don’t want to have a supply produce a faulty product: it hurts your company profitability in other ways. Using a sensible procurement process can minimize this risk without breaking the bank.
3. Green purchasing
Another procurement strategy is called green purchasing. This strategy tries to maximize environmentally friendly products and supplies in the supply chain. In an era when taking care of the earth is so popular, the green purchasing approach to strategic procurement is becoming more common.
Of course, it isn’t always possible to choose something that’s entirely sustainable. In this case, the purchasing decision is usually to choose the best alternative. Here, you can maximize spend on supply venders who try to use manufacturing best practices to reduce pollution. To do this, your procurement team will monitor each part of the supply chain to ensure compliance.
4. Risk management
These days, risk management is an important procurement strategy. One reason for this is that the global pandemic snarled shipping and made it hard to do supply chain management. While the pandemic was an especially bad disruption, less severe ones happen occasionally. In addition, some companies go out of business during a global downturn. For a company that orders a lot of small items, it’s critical to ensure each purchase will arrive on time to retain production capacity.
Another kind of risk management strategy is keeping in line with industry best practices. For instance, tech companies need to make sure that they don’t spend money on items that are tied to human rights violations in other countries. Either way, careful procurement keeps companies going, and reduces the chance of scandals.
5. Procurement auctions
If your company needs to maximize cost reduction, this is the most obvious procurement process. Here, your procurement department will take each purchase requisition, and then put out a request for proposal or competitive shop online, depending on the size of the purchase. Then, companies will give your chief procurement officer some competitive quotes. Finally, the purchase to pay process continues with a purchase order, shipping, and invoice processing.
When you need products and services for which there’s a lot of competition, the procurement auction is a good procurement strategy. After all, this is one place where purchasing the least expensive option that meets your minimum standards is unlikely to cause significant problems. When companies have to compete in a tight market, you frequently win.
6. Global sourcing
Finally, a common way to save money on each supply is through global sourcing. In this procurement process, your purchasing department finds the least expensive, highest-value supply source, regardless of where the supplier is located. This could mean, for example, buying aluminum sheets from China, semiconductors from Taiwan, and optical glass from Germany. While it’s often possible to buy these products elsewhere, they might be more expensive. In this case, you want the best affordable option, and you’ll go wherever you need to in order to minimize spend.
With global sourcing, it’s critical to use proper supply chain management. That’s because items will have vastly different transit and order lead times. You’ll need a procurement process that keeps these delivery times in mind, and place orders accordingly. Otherwise, the cost reduction isn’t worth the trouble.
7. Leverage outsourcing
If your chief procurement officer has a heavy burden (and not enough staff) then you might consider outsourcing as a sourcing strategy. In this case, you pay another company to manage your procurement process. This means that you give them a supply list and tell the company to get those items for you. Because these companies have relationships with each supplier, and service other accounts, they can often get you a great price. Plus, you manage spend through a budget and cost optimization.
On the other hand, outsourcing isn’t always that agile. And as your company grows, there’s a good chance you’ll eventually have to bring things in house. Plus, you’ll end up turning your supply chain over to outsiders. Nonetheless, as a cost reduction strategy this can be much more efficient than shopping around for each purchase or supply selection.
Choosing the right procurement strategy
Confused yet? That isn’t surprising. There are a lot of aspects to strategic procurement that you probably haven’t thought much about. Especially for a startup, you’re used to ordering items wherever you can get them, then hoping that they arrive on time. Unfortunately, this doesn’t work well in the long run. Here’s how to choose the right procurement process for your business.
1. Consider the market
Market forces will influence what you spend money on, and how much you pay, no matter what else you do. However, you can mitigate risk by considering the location of a supplier, commodities markets, and other concerns. For instance, sometimes it’s hard to ship things outside of a location. Or, there might be a shortage of raw materials. To counter this, you need a procurement strategy that can withstand these forces.
2. Analyze how you spend money
Analyzing your company spend can help choose the right procurement strategy. Sometimes, you’ll need to implement cost reduction procedures. Or you might have supply chain management trouble, leading to shortages. Managing your procure to pay process can help ensure that your company follows best practices, especially with the right purchase requisition procedures.
3. Think about company values
Sometimes, a procurement process is about more than cost reduction. This is especially true when you spend a lot of money making things for people who are environmentally conscious. Here, your supply sourcing strategy should be as sustainable as possible, even when it results in added spend.
4. Don’t neglect practical concerns
Here’s the thing: although global procurement is a great method of cost reduction (sometimes), the lead time for each supply is sometimes prohibitive even without bottlenecks. Likewise, outsourcing doesn’t work for everyone. Depending on your purchasing needs, there might also be situations where a product isn’t available from sustainable sources.
All of this is to say, never neglect practical concerns. If a supply is sure to get stuck somewhere, your money can get tied up in the procure to pay cycle. Then, it can mess up logistics and invoice processing. Having everything arrive on time and in time can be tricky. For that reason, you’ll always want your purchasing practices to match with reality.
Consider a digital procurement strategy
Hardware-centric startups often face challenges in managing their procurement processes, which can put a lot of stress on their staff. Purchasing large numbers of parts and materials on a weekly basis can lead to inventory management challenges and excessive spending. However, a well-planned procurement strategy can help ensure that the business never runs out of supplies while keeping inventory at the proper levels and managing costs.
This post provides insights and practical advice for building a procurement strategy that works for hardware-centric startups. It covers various procurement strategies, including buying from a single supplier, supplier optimization, green purchasing, risk management, procurement auctions, global sourcing, and leveraging outsourcing. The post also discusses the importance of analyzing market conditions, spending habits, company values, and practical considerations to choose the right procurement strategy.
One of the essential aspects of a successful procurement process is implementing a digital procurement strategy. The post explains how procurement software, such as Control Hub, can help streamline the purchasing process, monitor supply chains, and optimize the overall procurement process.
By following the guidance in this post, hardware-centric startups can implement an efficient procurement strategy that helps manage their inventory, reduce costs, and improve supply chain management. Ultimately, this can lead to increased profitability, greater control over spending, and a more sustainable business model.
Frequently Asked Questions
What is a procurement strategy, and why do I need one for my startup?
Think of a procurement strategy as your well-organized game plan for purchasing everything your startup needs. It covers what to buy, when to buy it, and choosing the right suppliers to keep your purchasing process efficient and cost-effective. Having a clear strategy is essential to manage your supply chain, optimize costs, and avoid unauthorized charges and messy bookkeeping. It's the key to saving big bucks and keeping your startup sailing smoothly!
Are there different types of procurement strategies, and how do I choose the right one for my startup?
Absolutely! There's a variety of procurement strategies to consider based on your unique business needs. For instance, "single source purchasing" is super convenient for small businesses, while "supplier optimization" is ideal for hardware-centric or tech startups. "Green purchasing" focuses on sustainability, and "procurement auctions" are great for getting the best price. "Global sourcing" allows you to find affordable suppliers worldwide, and "leverage outsourcing" can ease your procurement process. Choose the strategy that aligns with your values and market forces, while staying practical and realistic!
How can a digital procurement strategy help my hardware-centric startup?
Embrace a digital procurement strategy with open arms! It's like having a superhero sidekick for your purchasing process. Using procurement software, like Control Hub, can make your life so much easier. Streamline purchases, monitor supply chains, and optimize everything for maximum efficiency! With Control Hub, you'll have your procurement process under control and free up more time to focus on growing your startup and delighting your customers!
Can procurement strategies benefit startups like mine or are they just for big businesses?
Procurement strategies are a must for startups like yours! They're not just for big businesses – they're essential for startups too! With a well-planned procurement strategy, you'll never run out of supplies or money, and your startup will soar to new heights. Don't miss out on the magic of procurement strategies – they'll empower your startup to thrive and conquer the business world!
How can I implement a procurement strategy for my startup without getting overwhelmed?
Implementing a procurement strategy doesn't have to be overwhelming! Start by considering market forces, analyzing your spending habits, and implementing cost reduction measures where needed. Align your values with your procurement process, especially if sustainability is crucial for your customers. Keep it practical, matching your purchasing practices with reality. And remember, digital procurement software like Control Hub can be your secret weapon for streamlining the process and making it a breeze!