Developing a Product Procurement Strategy for Commodities

The Process of Developing a Product Procurement Strategy

To make a product procurement strategy successful, the benefits of cost reduction must be maximized by leveraging combined purchasing power to obtain volume discounts, using market experts, utilizing existing price indices, observing price trends, and forming strong, long-lasting relationships with the preferred suppliers.

Product procurement strategies require distinct strategic planning developed for each group of goods or services. It’s important to always stay updated on everything related to the specific category or group. This information includes price indices and price development/trends and can be collected in various ways. The most crucial aspect is to share and use this information internally to continuously evaluate and improve the product procurement strategy.

Steg 1: Cost Analysis

To conduct a spend analysis is the first step in integrating your organization’s product procurement strategy with your competitive strategy. Such an analysis compels your organization to analyze all goods and services being purchased and those forecasted for purchase in the near future. The cost analysis should cover all purchases across all divisions within the organization, encompassing both goods and services, and should reflect the Total Cost of Ownership (TCO) and not just the purchase price.

The result will be a complete, documented understanding of the organization’s past, current, and future purchases of goods and services

Steg 2: Industry Analysis

Examine the supply industry to identify major suppliers of the specific offering or service by market share or geographical region. Your industry analysis should take into account all different competitive dynamics. We recommend using Porter’s Five Forces for competition – buyer power, supplier power, rivalry among firms, threat of substitution, and the entry of new market players..

The result of the industry analysis should reflect a diagram of the supply industry for the specific product or service, highlighting the flow of products from key suppliers to major customers, and the role each company plays in the supply chain, such as assembler, manufacturer, or distributor.

Steg 3: Identify and Document Cost and Performance Drivers

You need a thorough understanding of relevant cost drivers and other key performance measures such as quality, technology level, flexibility, and timelines. We suggest mapping the manufacturing process and documenting all available technology options at each stage of the process to gain better insight into the various cost and performance drivers using various price indices, charts, and other information and data sources on price trends and similar factors.

Steg 4: Analysis of Supplier Roles

Segment the goods or services across a set of supplier roles to determine the type of suppliers needed and the role each supplier should have in the supply chain. This step may involve thinking in terms of sub-products or end-users, or in stages of the product’s life cycle. Regardless of the method chosen, it is essential to segment supplier expenditures to reflect the cost drivers identified in the previous step. The different cost drivers, sub-products, or life cycle stages may indicate the need for a separate procurement strategy for each sub-product or life cycle segment..

Steg 5: Verify the Adaptation of Business Processes

Once cost drivers and performance metrics have been identified for delivery or service, and when supplier types and roles have been established, the next step is to confirm whether the organization’s business processes are appropriately aligned, prioritized, and integrated. The focus is to use the analysis of cost drivers and supplier roles to adjust the priorities of business processes to accurately reflect the desired level of integration with selected suppliers.

The result will be an assessment of which business processes should be adapted to better integrate with suppliers, thus committing to a long-term collaborative relationship and creating a competitive advantage.

Steg 6: Quantification of Savings

Quantifying potential savings is essential to ensure that the product procurement strategy results in measurable savings. Use these savings targets as a measure to assess the progress of the strategy and to “sell” the resulting product strategy to higher-level management.

Steg 7: Implement the Strategy

The implementation of the product strategy should be treated like any other major project. By using a formal project management methodology with associated tools, you can ensure a successful implementation. This typically involves breaking down the planned strategy into a set of tasks that will result in achieving the targeted savings. The tasks must reflect activities, resources, and milestones to reach the savings goals.

How Can Prognos Help You Develop a Product Procurement Strategy?

Strategic product procurement heavily relies on data to identify the most profitable areas and compare products within the industry to find the perfect partner for your organization. We possess this type of data.

The same data can also be used in negotiations with suppliers to squeeze the price as much as possible so that you can achieve your savings goals.

However, manually searching, extracting, and compiling this cost data takes time. By utilizing the Prognos platform, Prognos Tailored, you gain easy access to relevant indices among our thousands of price indices where you can view current prices and price development/trends to successfully evaluate and improve your delivery channels while gaining an advantage in supplier negotiations.

Contact us for more information on how we can help you develop your product procurement strategy, to learn more about strategic procurement, or to book a demo of our solutions.