Strategic purchasing is defined as the process of “planning, implementing, evaluating, and controlling strategic and operating purchasing decisions for directing all activities of the purchasing function toward opportunities consistent with the firm’s capabilities to achieve its long-term goals” (Carr and Smeltzer, 1997).
As purchasing is responsible for 50-80% of external value-added for a company (varies between industries), strategic purchasing and supply management plays key roles in the company’s success. In summary, a company implements different strategic purchasing strategies to develop their channels of supply to make cost-effective purchasing decisions at the lowest total cost (not just the lowest purchase price) from efficient suppliers who will deliver high-quality products on time and at mutually agreeable terms and prices.
What is the difference between procurement, purchasing, and sourcing?
Before we delve deeper into strategic purchasing and the strategic purchasing process, there is one matter we need to address regarding the difference between purchasing, procurement, and sourcing. These terms are often used interchangeably with each other which has blurred the lines between them considerably. They are all very closely related, but each has its distinct meaning. It’s important to know the difference between them to allow for clarity or optimization of the buying decision.
Procurement is a business function concerned with acquiring vital goods and services for an organization. It is an umbrella term including the processes of both purchasing and sourcing. It involves every step of the process of acquiring goods and services including:
- Needs recognition
- Requesting goods and services
- Review and approval
- Purchase order
- Receipt for the goods and services
- Receipt for the invoice
- Paying the invoice
The purchasing process refers to the portion of the procurement chain concerned with buying a product or service from a supplier. Purchasing is the transactional portion of procurement. Procurement is the subject, while purchasing is the verb. All tasks directly related to how goods and services are ordered are purchasing – activities such as strategic sourcing and vendor contract negotiation are procurement.
Sourcing, as the term implies, refers to the process of finding the best supplier for the desired product or service. It is a subset process of procurement that always takes place before any purchase is made. When talking about strategic sourcing, it refers to the process of developing supply channels at the greatest value, not just the lowest purchase price.
What’s the difference between strategic procurement, strategic purchasing, and strategic sourcing?
The difference between procurement, purchasing, and sourcing is fairly apparent. That is not the case when talking about strategic purchasing, strategic procurement, and strategic sourcing. The lines have become increasingly blurred throughout the years, and all three are at times used interchangeably with each other. But based on our own opinion and observations of the industry, here are our definitions:
- Strategic procurement: Strategic procurement is an organization-wide process striving to optimize the complete procurement process including ensuring the timely supply of goods and services in line with the organization’s business goals, while at the same time reducing risk within the supply chain. In other words, the optimization of the complete process of acquiring goods. It is used as a direct synonym for strategic purchasing.
- Strategic purchasing: While “purchasing” is a distinct process from sourcing and procurement, “strategic purchasing” is used as a direct synonym for strategic procurement.
- Strategic sourcing: Strategic sourcing refers to the continued process of improving and re-evaluating a company’s channels of supply, aiming to create long-lasting, collaborative relations with suppliers, viewing the suppliers as crucial value partners. It focuses on the activities leading up to an actual purchase.
The strategic purchasing process
The strategic purchasing process can be very complex. Since it is an organization-wide process, it will require input from all internal departments and functional areas, as well as data and information from multiple external sources to compare with. We suggest putting together a specific strategic purchasing management team to assure the process is as efficient as possible. This team should be responsible for choosing the overall direction for your purchasing, aligned with your business strategy. Your strategic purchasing management team will then use the data gathered throughout the strategic purchasing process to develop and implement a fleshed-out strategic purchasing plan.
Down below we’ll outline the 7 steps of implementing a successful strategic purchasing and supply management strategy.
- Understanding Conduct an internal needs analysis or spend analysis
Before anything else, to be able to get started on developing your strategic purchasing management strategy you’ll need to benchmark your current performance and identify your needs and targets. This will involve gathering several different types of data including:
- Cost and value for all company activities and assets – Management costs, internal and external suppliers, process costs, etc.
- Resource levels – Labour, space, utility usage, turnover, etc.
- Technology – Age and capacity of production equipment, information, and communication equipment and software, etc.
- Intellectual property – Assets, licences, rights, patents, copyrights, etc.
- Projects – Research & development, marketing initiatives, etc.
- Inventory levels and management systems for supplies and goods
- Performance – Production, capacity, distribution, sales, returns, etc.
- Financial data – Earning & growth projections, cash flow, taxes, ROI, etc.
- Economic data – Forecasts, monetary trends, currency fluctuations, commodity indices, market intelligence, supplier market activity, etc.
- Growth projections – Sales, earnings, etc.
- Feedback from stakeholders and supplier
- Assessing the supplier’s market
Next, if you’re looking for new suppliers, assess and identify potential countries that are feasible sources of your required raw materials, components, finished goods, or services. If you have certain requirements and demands it may limit the number of suitable options. For example, if a certain raw material can only be found in one country in the world, your options will be much narrower.
- Collecting supplier information
Suppliers need to be selected carefully. The ability or inability of a supplier can be the deciding factor for the success of your operation. Conduct research into the following supplier information:
- Reputation and performance
- Financial statements
- Credit reports
If possible, inspect the supplier’s site as well as talk to both active and inactive customers of the specific supplier.
The information extracted in this step can be used just the same for initiating negotiations with your current suppliers to get a better deal on contracts.
- Develop a sourcing/outsourcing strategy
Develop a sourcing/outsourcing strategy based on the data and information gathered in the first three steps. Here are a few examples of potential sourcing strategies:
- Direct purchase: Sending an RFP(Request For Proposal) or RFQ(Request For Quote) to a few selected suppliers.
- Acquisition: Purchases from a desirable supplier.
- Strategic partnership: Sign an agreement with a selected supplier.
Which strategy is the best fit for your organization depends on various factors including:
- Competitiveness of the supplier market
- Sourcing/outsourcing organisational risk tolerance
- Your overall business strategy
- Motivation for outsourcing
- Implementing the sourcing strategy
Sourcing strategies that involve the acquisition or strategic partnerships are big, complex, and resource-heavy undertakings. The following are characteristics commonly associated with suppliers involved in the strategies of acquisition or strategic partnership:
- The supplier is in one way or another involved in the core activity of your company, for example, supplying raw material for a core product.
- The supplier is one of a limited number of suppliers with specific equipment/technology and/or skilled labour pool.
- The supplier is part of your broader business strategy.
When performing a direct purchase, a company may instead begin with an EOI(Expression Of Interest), prepare an RFP or RFQ, followed by soliciting bids from identified suppliers you’ve deemed possible as part of a competitive bidding process.
- Negotiating with suppliers
Negotiating with new suppliers
Your strategic purchasing management team needs to evaluate each response from potential suppliers and apply it to your evaluation criteria. Evaluate the proposals, quotes, or bids, and use your selection criteria and a process to shortlist bidders for more detailed proposals (EOI) or select a first and second bidder (RFP or RFQ).Once the evaluation process is complete, your strategic purchasing team will engage in contract negotiations with the specific supplier.
Negotiating with current suppliers
Enter a fact-based negotiation based on the data and information gathered from the first three steps. Compare your current suppliers with market cost data and push for a better deal based on real-life data and facts to support your claims. The more data you have, the stronger your negotiation will be.
A fact-based negotiation strategy keeps your negotiations on facts and figures rather than accusations and emotions relying on “gut-feeling”.
- Implement a transition plan or contractual supply chain improvements
Invite the winning suppliers to participate in implementing improvements throughout the supply chain. Your strategic purchasing team needs to develop a communication plan as well as a system for measuring and evaluating how the supplier performs according to your KPIs.
Incorporating a transition plan is especially important in the early stages of using a new supplier, as well as when switching suppliers.
The benefits of sourcing strategies in international purchasing
International purchasing provides a plethora of benefits that can only be enjoyed when making use of the right international suppliers. Utilizing international markets and global sourcing gives you access to world-class technologies that might not be available in the domestic market. When these technologies are employed in the production of goods and services, they may be of great value to your industry and company.
But when moving to an international setting, the complexity increases. Carefully planned sourcing strategies in international purchasing are a necessity to be able to navigate the increased complexity of the market to be able to identify the best-suited supplier for your needs.
Strategic purchasing and supply management with Prognos
Strategic purchasing relies on data to identify the most profitable areas as well as compare between suppliers to find the ideal partner for your organisation. The same data can be leveraged in negotiations to compare your supplier’s prices and market prices to make sure they are reasonable and fair.
With Prognos platforms and tools, you get access to the cost data you need to successfully implement your sourcing strategies in international purchasing and get the most out of your suppliers, with data tailored for your specific situation:
- Prognos Online gives you access to 8 000+ indices on raw materials, components, wages and currencies in an interactive online tool capable of handling and transforming the data to fit your needs.
- Prognos Tailored gives you access to interactive, continuously updated reports allowing you to dig deeper into your material, compare prices to your cost development, export graphs, or export underlying data for further analysis. The reports in Prognos Tailored are customized for you by us, giving you the time to focus on the actual negotiations rather than finding the data.
Contact Prognos to test our solutions today.