Strategic procurement is an essential topic for businesses across the globe. In the present day and age, every organization wants to develop an effective procurement strategy to help ensure success and maximize its value contribution.
Once they have a strategy, companies also get a reference point- that must be updated at least once per year - to ensure the procurement framework is aligned perfectly with their overall organizational goal—this critical need paved the way for the concept of strategic procurement.
Strategic procurement is an enterprise-wide process. This long-term plan starts with taking inputs from each and every functional area and department of an organization. Strategic procurement harnesses the power of this data about suppliers, the market, pricing, transactions, and other key facets to determine:
Strategic procurement then incorporates technology to make sense of this data and simplify, automate, and streamline processes. With strategic procurement in place, users can access valuable and actionable information at their fingertips.
Fueled by data and powered by technology, strategic procurement helps companies get as much value as possible from available resources.
Traditionally, procurement functions were managed by extensive and complex processes, but now, a changing business and technological landscape demand an adaptive function, especially in the current COVID-19 times when widespread disruptions have forced companies to reimagine every aspect of their business, including procurement. Hence, the future for procurement lies in being digital, data-driven, and automated.
But what strategic procurement really means, and what makes it so crucial for businesses?
Strategic procurement is a collective term used to encompass different procurement processes that support an organization's long-term development.
But what processes are we referring to here?
To understand the processes covered under strategic procurement, let us take a step back to look at how procurement is categorized under the headings of processes.
There are two types of procurement processes: upstream and downstream.
In this stream of flowing goods and services, the upstream procurement covers everything between sourcing and contract awarding. In contrast, downstream procurement means everything that happens after the contract is awarded. That said, every activity that occurs in the upstream processes tends to impact the downstream significantly.
Strategic procurement is a continuous and organization-wide process that helps create value through upstream activities like:
For a long time and even today, procurement has managed these upstream processes via Excel sheets and fragmented databases, communicating through which is neither easy nor efficient. These pressing challenges arose the need for transforming upstream procurement processes to provide better visibility, market intelligence, and collaboration across the teams, thus making them proactive and agile.
If strategic procurement is for upstream, operational procurement is for downstream processes. As mentioned earlier on the page, downstream processes are related to the product or service's actual order or service (P2P or purchase-to-pay). Thus, it involves transactional and repetitive tasks that take time but carry low strategic significance.
Digitization of downstream procurement helps provide consistency and accuracy to these repetitive tasks while improving productivity and compliance.
Organizations undergo massive operational and strategic changes with strategic procurement to drive value, simplification, and ease. Later, this translates to upgrading the procurement processes and making them more attractive for stakeholders.
Following are the key players of strategic procurement:
A long-term plan to ensure cost-effective purchases of goods and services from competitive suppliers at the agreed quality, time, and terms.
It means clustering your spend into areas with the same supplier markets. Such categorization helps you analyze the costs and dissect your needs for uncovering savings, risk management, and other opportunities.
In short, it is analyzing the organization's spending patterns to find and select the best suppliers that align with your business goals. Thus, ensuring efficiency throughout the supply chain.
It is integral to procurement as it lays the foundation of a company's relationships with its suppliers. As the name suggests, with contract management, companies manage the contract creation, analysis, implementation, and follow-up to reduce overall cost and improve their performance.
This activity takes into account the management of relationships between a company and its suppliers. This significant step helps companies foster a deeper collaboration with their suppliers and build an ecosystem that leads towards the larger organizational goal.
In the journey towards intelligent procurement, data and analytics are foundational to any procurement function. This foundation enables procurement professionals to get easy, secure, and quick access to data that was siloed and stored in disparate data sets across the organization and draw meaningful insights.
The process of collecting, categorizing and maintaining spend, contract, and supplier data to get synchronized and organized information in one place.
In simple terms, advanced analytics make the diverse procurement data useful by cleaning, enriching, and transforming the data into meaningful insights that aids companies in decision-making.
Data, analysis, and insights are just one part of the story; the way you prioritize, plan, and execute initiatives makes the real difference. To tap into procurement innovation and expertise, companies must make use of specific procurement enablers to improve and reinforce each step of the aforementioned strategic procurement activities. These are:
A cloud-based solution that offers an intuitive and user-friendly interface to make every step of your strategic procurement efforts easier, smarter, and sustainable.
Enabling value while considering the organization's culture to follow the right kind of processes, practices, and decisions.
To make sure you connect the right initiative to the right task and the right people. Thus, helping you complete tasks on time and visualize the progress all along.
We often hear that procurement deserves a seat at the table; it does, but if procurement for you is only about doing tactical work that does not contribute to the organizational objectives, it does not deserve that seat.
It is important for procurement to turn strategic to become a part of the solution that moves the entire organization forward.
To understand the importance of strategically driven procurement, let us look at this research from Mckinsey and Company:
As per this research, in the five years immediately following the 2008 global financial crisis (GFC), the total return to shareholders (TRS) for companies with top-quartile procurement capabilities was 42 percent higher than for companies whose procurement operations were in the bottom quartile.
The COVID-19 pandemic and the subsequent disruptions across the industries have underscored the need for procurement transformation. According to an Accenture report, 94% of Fortune 1000 companies saw supply chain disruptions, and 75% had negative or strongly negative impacts on their businesses due to the pandemic.
Even in the midst of these challenging times, organizations that had the right procurement processes and technologies in place were able to mitigate the risks and stay agile, proactive, and profitable. The fact is, through these disruptions, the pandemic has just highlighted the flaws or weaknesses in the way companies perceive and do procurement.
Besides driving the post-pandemic recovery, strategic procurement goes a step further to redefine procurement completely and help organizations stay competitive for years to come.
Bob Derocher, principal and leader of the strategic sourcing and procurement practice at The Hackett Group, said, "Companies recognize that procurement is no longer limited to a back-office function and that they will lose a competitive advantage if procurement is not making a strategic contribution."
The goals of procurement functions in an organization are usually the same, but what sets strategic procurement apart is the way it leverages procurement insights from spend data, suppliers, and markets to identify new scopes of long-term value creation.
However, the strategic goals might differ from organization to organization; in order to understand the impact of strategic procurement, understanding its major goals is essential.
Following are the major objectives of strategic procurement:
A solid procurement strategy is important for the business and the procurement function. However, the process of creating a successful strategy is not always straightforward. Usually, the procurement strategy depends on a number of factors such as timeline, budget constraints, potential risks, and more.
The procurement strategy and processes should support the company's overall strategies and focus on alternatives like reducing costs, mitigating risks, and increasing corporate social responsibility. According to a recent study by Deloitte, cost reduction is the top priority for CPOs from a strategic perspective.
A solid procurement strategy will identify savings opportunities, reduce maverick spend and ensure policy compliance. Below we have listed eight steps for developing a successful strategy.
The procurement strategy should always be documented, which may include the following elements:
In procurement, there is a saying, "what you cannot measure, you cannot control"; holds true as ever and for every other function as well. Process improvement is only possible when you are consistently tracking the outcomes.
Even though key performance indicators are unique to every company, we share a list of strategic procurement metrics or KPIs that are most commonly used to monitor how the various procurement functions are performing.
Here are the 7 most important KPI (key performance indicators) for strategic procurement:
These KPIs focus on keeping the cost down and being smarter with spending.
Purchase price variance
Spend under management (%)
Contribution to total spend
Contract prices and compliance
Contract Loyalty (%)
Contract coverage ($)
Number of suppliers and supplier spend
Quality performance rating
Procured suppliers (%)
Total Procurement ROI
The use of KPIs is widespread, yet many companies struggle to get a high benefit from them. The reason being: KPIs as just a tool to rate performance on an operational level. In such a setup, companies miss the vast benefits they can get by linking KPIs to their overall strategic objectives.
What do linking KPIs to strategic objectives mean?
Simply put, it means aligning KPIs or performance measures correctly with one another and to the things that matter the most to your organization, like your mission, strategy, or purpose.
Such a KPI framework makes sure everybody in the organization sees the relationship between KPIs and their contribution to organizational success. Thus, helping each team take a closer look at the overall company strategy and focus on the most potent influences for data-driven decision making. Still, keeping control and track of these KPIs does not look like an easy task. But with the right procurement solution in your arsenal, you can keep visibility and analytics on top of these KPIs and monitor them with ease to ensure the success of your procurement efforts.
By providing information transparency and business intelligence capabilities, strategic procurement helps businesses create a competitive advantage over their competitors and gives them a new and easy way to stay informed and fast decision-making with clearly demarcated roles and responsibilities.
It would not be an overstatement to say that strategic procurement is a panacea for corporate success. However, it is pretty obvious that the way it overhauls key business functions, implementing it would not be possible without friction.
While procurement professionals agree upon the importance of strategic procurement, a significant chunk of procurement organizations still find it difficult to implement it.
So, what is the catch?
One of the biggest roadblocks to strategic procurement implementation is the general lack of awareness of the advantages it can bring to an organization. In simplest terms, a broad majority of procurement leaders are well aware of technologies and innovation in the procurement space. Still, sadly, only half of them understand why it is crucial to their success.
Furthermore, the challenge of overcoming the inertia that keeps procurement away from digitization comes as a close second on the list of challenges. This appears to be a particularly problematic issue for smaller or resource-scarce organizations, which, in addition, lack the appropriate skills set and knowledge to drive a procurement strategy.
We live in an era of constantly changing and disrupting technologies. And change brings along challenges and complexities, which demand forward-looking companies to foster innovative procurement practices. Again, the results strategic procurement initiatives can bring to an organization are astounding.
A strategically driven procurement helps in:
Building a strategically driven, digital procurement organization is, therefore, a competitive necessity for most businesses. But implementing these changes to procurement is no small feat and require time and significant investments. Fortunately, amidst these challenges is the omnipresence of technology and the assurance of the results it can bring. If change is uncomfortable and competition is the battle zone, technology acts as a comfort factor that helps you overcome the common procurement challenges and gives your organization a head start.
Embracing a comprehensive, cloud-based solution like Ignite Procurement enables companies to overcome these challenges and offers a number of modules to help organizations streamline their procurement processes and steer towards strategic procurement success.
We empower organizations to unlock the full power of strategic procurement.
Ignite Procurement’s value comes from being a best-of-breed spend management platform with industry-leading technology and expertise.
Ignite Procurement supports your strategic procurement efforts through Procurement Analytics, Data Management, Category Management, Contract Management, Supplier Management, and Initiatives and Tasks Management.
From procurement professionals to business owners, Ignite Procurement helps organizations beat their everyday challenges.
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