How to create an effective procurement strategy

To create an effective procurement strategy, you need to assess your current procurement processes and find the gaps or inefficiencies. From there, you can choose the objectives that align with your overarching business goals and outline best practices for your procurement team and suppliers to follow. 

This guide covers the different types of procurement strategies, what to include, and tips for creating an effective strategy that delivers results. 

What is a procurement strategy? 

A procurement strategy is a structured plan that outlines how your business procures goods and services to get the best value and quality for money. It provides specific direction on the procurement processes that anybody acquiring goods or services must follow to ensure they align with your overall business and financial goals. 

Why are procurement strategies important? 

Procurement strategies provide a way to measure the effectiveness of sourcing and procurement. As global supply chains become increasingly complex, a procurement strategy will help your business invest efficiently in the goods or services that are crucial to core activities from competitive suppliers in a way that promotes long-term business growth.

Types of procurement strategies

Common types of procurement strategies focus on goals like mitigating risks, reducing costs or supplier management. 

Risk management 

Risk management involves identifying ways to reduce or mitigate risks when purchasing. These risks could include under or over-ordering, sourcing products from unknown suppliers or inadequate contract management. Good risk management helps streamline procurement processes and ensures you're building solid relationships with suppliers that consistently deliver high-quality products and services.

Strategic sourcing 

Strategic sourcing focuses on how your business gathers procurement data – with the goal of leveraging that data to build a more profitable supply chain. This process involves constant evaluation of your sourcing and spending, market research, and contract negotiation to ensure you're getting the best value for your business (which isn't necessarily the lowest purchase price). 

Cost reduction 

Cost reduction aims to reduce expenses and increase profit margin. It's most effective when you understand your current procurement costs and identify areas where you can save money. Some ways to do this include automating procurement processes, reducing maverick spend, renegotiating with vendors, cutting operating expenses, and looking for more cost-effective alternatives.

Supplier management and optimisation 

Supplier management and optimisation revolve around developing relationships with suppliers and vendors to improve performance. This can include setting key performance indicators (KPIs), conducting regular reviews, and providing additional training and support. This helps improve the overall quality of purchases and ensures you're getting the best possible value from your suppliers. 

Green purchasing 

Green purchasing focuses on developing processes that help your business make more sustainable and carbon-neutral purchasing decisions. This includes setting up a vetting process that looks at a vendor's sourcing and sustainability practices and working with suppliers with the strongest commitment to offsetting their carbon footprint.

Benefits of an effective procurement strategy

An effective procurement strategy has three primary benefits – reducing cost, mitigating risks and improving efficiency. 

Cost reduction 

Cost reduction can happen in multiple ways – reducing procurement costs through supplier negotiation and contract management, streamlining procure-to-pay processes using automation and data analytics, and leveraging economies of scale by purchasing goods and services in bulk. 

Risk mitigation 

Risk mitigation safeguards your business from supply chain disruptions. When dealing with third parties, there's always an element of risk, whether financial, operational, legal or strategic. An effective procurement strategy will help you identify and assess possible “risk” scenarios and plan contingencies to minimise the impact on operations. 

Improved efficiency

Improved efficiency results from identifying the gaps or inefficiencies in procurement processes and making changes that help streamline and automate them. This happens primarily by implementing procurement software that provides complete visibility of critical processes, automated workflows and AP automation. 

What to include in a procurement strategy 

There are some key elements that you can include in your procurement strategy, such as:

• Strategy statement: This is a brief statement outlining your overall procurement approach. It can comprise your objectives, target market, and key strategies.

• Desired results: This is a list of the deliverables you expect from your procurement plan. For example, you may want to reduce your costs, improve your quality, or develop new supplier relationships.

• Time frame: These are the deadlines you set for yourself to achieve your desired results. These deadlines can be short-term, medium-term, or long-term.

• Tactical plan: This is a more detailed plan that outlines how you can implement your strategy. It can include a step-by-step guide, milestones, and timelines.

• Measures: This is a list of metrics that you can use to track your progress and assess your results. This can include cost savings, quality improvements, or supplier performance.

• Dedicated tools and resources: This is a list of the tools and resources to help you implement your strategy. This can include online marketplaces, software, and training programs.

8 tips for creating an effective procurement strategy 

Here are our eight tips for creating an effective procurement strategy that aligns with your long-term business goals:

1. Evaluate current procurement processes 

Evaluating your current procurement processes involves critically assessing your existing supplier relationships, purchasing processes and procurement costs. The goal is to identify areas where you can improve. Doing this will also provide a baseline to measure your progress. 

2. Engage stakeholders 

Engaging with internal and external stakeholders is critical. It'll help you manage expectations, gather diverse insights, and ensure all the right people are on board with the proposed changes. Skip stakeholder engagement, and you run the risk of even the most well-planned strategy failing to gain any traction. 

3. Assess supplier market conditions

Assess supplier market conditions by analysing supply chain analytics and other relevant data. By analysing supply and demand, market trends, regional differences and other factors influencing price, you'll know whether you need to find alternative suppliers or substitute goods and services. 

4. Align goals and set clear objectives 

You can align goals and set clear objectives once you've evaluated your current situation and identified the areas you want to improve. Your objectives should be specific, measurable, achievable, relevant and time-bound (SMART), and support overarching business goals. For example, if your company is focused on cost savings, your procurement strategy should also outline how it will contribute to cost reduction. 

5. Define procurement policies

By defining your procurement policies and procedures, you create best practice guidelines for your procurement team and other stakeholders. Adapt your existing policies to address the inefficiencies and risks you identified at the beginning of this process. 

6. Invest in software and tools 

Investing in enterprise software and tools for automation is the most effective way to streamline key procurement processes such as supplier management, purchase order management and invoicing. It'll also help minimise errors by reducing data entry and eliminating approval bottlenecks while ensuring every purchase meets the best practices outlined in your procurement strategy. 

7. Develop procurement strategies 

Develop procurement strategies based on the insights you've gathered in the previous steps. This involves outlining key elements, like a strategy statement, desired results, timeframe, tactical plan and metrics.

8. Implement, analyse and refine 

Track your progress against your objectives to identify new opportunities to streamline your procurement processes. Revise your plan to keep it relevant and aligned with the wider organisation. 

Procurement strategy FAQs

What is an example of a procurement strategy? 

Examples of a procurement strategy include specific plans around risk management, strategic sourcing, cost reduction, supplier management and optimisation, and green purchasing. Whatever your procurement strategy goals are, they should align with overarching business goals. 

What is the difference between procurement planning and procurement strategy? 

The difference between procurement planning and procurement strategy is purpose. Procurement planning is about 'when' you'll procure goods and services. A procurement strategy digs deeper into the 'what, why, where and how' and should happen before procurement planning. 

What is the most important step in creating a procurement strategy? 

The most important step in creating a procurement strategy is evaluating your current procurement processes to see how they influence your spending practices and whether they align with overall business objectives. Skip this step, and you'll struggle to identify the gaps and inefficiencies preventing your procurement team and the wider organisation from hitting their goals.

A procurement strategy that delivers results  

Creating an effective procurement strategy relies on clearly understanding your current procurement processes and the opportunities to improve or close gaps. An ERP with a procurement module can help you implement your strategy using automated workflows that connect your procurement activities with your wider organisation. Find out how MYOB Advanced Business can do that for your business.

Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.