What is strategic procurement: A guide to a good procurement strategy

Every business buys goods and services in order to operate, which means that even at a basic level, every business is engaging in procurement.

But is every business approaching procurement strategically?

The answer, as you probably guessed, is no. Many businesses just purchase what they need reactively, as and when they need it, without giving a lot of thought to supplier diversification, cost-benefit analyses, or risk identification.

In this article, we’ll be exploring the use of strategic procurement to receive more value from supplier relationships and ultimately build a more profitable business.

You’ll learn what strategic procurement is, what its core goals are, what the process looks like, and how to adopt a strategic procurement practice in your own organization.

What is strategic procurement? 

Strategic procurement is a comprehensive, long-term approach to acquiring goods and services for an organization in a way that emphasizes collaboration, value creation, and alignment with an organization’s broader business objectives.

Companies that engage in strategic procurement focus on building strong and strategic supplier relationships, achieving cost savings while also considering quality, risk, and innovation, and optimizing their supply chains.

The opposite of strategic procurement is traditional or transactional procurement, which is a more short-term and reactive type of procurement. Purchasing decisions under this method tend to be focused on price and cost reductions rather than overall value.

Strategic sourcing vs strategic procurement 

No conversation about strategic procurement is complete without mention of strategic sourcing.

Strategic sourcing is about selecting suppliers and negotiating contracts for long-term partnerships. It involves identifying the best suppliers in terms of not only cost, but also value, innovation, performance, and reliability, based on deep market research and competitive analysis.

Strategic sourcing is just one component of the broader strategic procurement practice, which also encompasses supplier relationship management, contract management, and procurement lifecycle optimization.

Goals of strategic procurement: 7 core pillars

Strategic procurement has seven key goals:

1. Access cost savings. Businesses benefit from long-term cost reductions through strategic supplier relationships, optimized purchasing strategies, better contract management, and value-driven negotiation, rather than being focused on short-term price cuts.
2. Improve risk management. Companies proactively address and mitigate supply chain risks, such as supplier failure or compliance with regulations, leading to more reliable supply chains.
3. Drive supplier performance. A good strategic procurement practice improves the performance of your suppliers through ongoing collaboration, performance tracking and monitoring, and focusing on development partnerships that encourage efficiency and innovation.
4. Focus on value creation. Businesses that adopt strategic procurement are less concerned with pure cost savings and more focused on creating additional value through innovation, sustainable practices, and enhanced product or service quality.
5. Business alignment. Companies align procurement activities with broader organizational goals, which may encompass ethical sourcing, corporate responsibilities, and long-term competitiveness.
6. Lift operational efficiency. Strategic procurement streamlines procurement processes to reduce complexity, cut waste, and enhance transparency across the supply chain to make it work more effectively and efficiently. 
7. Make better, more data-driven decisions. The use of spend analysis, supplier performance monitoring, and market intelligence to guide procurement strategies helps businesses make more effective decisions. Through leveraging procurement software and real-time spend visibility tools, businesses can be more agile and stay competitive in quickly changing markets.

Strategic procurement process 

Strategic procurement is all about operational efficiency. It's only natural, then, that we have a dedicated strategic procurement process to follow.

1. Needs assessment

The first step is to conduct what is known in procurement circles as a needs assessment. It's about identifying the goods or services that need to be purchased, ensuring that procurement goals align with business objectives, and establishing clear specifications for what needs to be sourced.

This stage typically includes collaboration with internal stakeholders (the people who need the thing you’re procuring) to better understand their long-term needs.

2. Market research

Once you have your requirements nailed down, it's time to dive into market research.

This stage aims to understand what the market offers and what factors influence supplier selection. It involves:

• Conducting research on potential suppliers
• Reviewing market conditions
• Analyzing pricing trends
• Anticipating risks 

3. Supplier identification

Step three is vendor identification.

Here, you identify and shortlist potential supplier options based on the criteria you’ve set out during the needs assessment phase, alongside factors like cost, quality, reliability, and innovation capabilities.

A good practice here is to consider whether any existing suppliers can meet these new demands, preventing you from having to establish a completely new vendor relationship.

4. Supplier evaluation and selection

Now that you’ve got a shortlist of potential suppliers ready, you’re going to start evaluating them through formal processes such as a Request for Proposal (RFP).

Pricing shouldn’t be the only thing you consider here. Look for value-added services, alignment with business objectives, and proof of past performance.

5. Negotiation and contracting

Having evaluated your vendor options, you’ve chosen the one you’d like to move forward with.

The next logical step, then, is to begin negotiating terms with your selected supplier. You’re not just focusing on price here (though this is important). 

Aspects such as delivery schedules, payment terms, and quality standards to which the vendor must adhere, are all things you want to agree upon in advance and get in writing.

6. Implementation and supplier relationship management

Once the agreement is negotiated and the contract is signed, you move from the sourcing process to the purchasing process.

Here, you start placing orders and setting up systems for ongoing performance and order tracking.

This is a good place to put some time into building a solid relationship through open communication and collaboration, addressing any issues quickly to maintain quality and prevent them from escalating. 

7. Performance monitoring

Step seven is more of an ongoing practice than a step, but it’s important to call out nonetheless.

Supplier performance monitoring involves tracking performance against the agreed-upon KPIs and performance standards, such as software uptime, product quality, and delivery timeframes. If there are any areas where performance needs to improve, you’ll need to bring this up with your supplier to rectify.

8. Contract and supplier review

The final stage of the strategic procurement process is contract and vendor review.

This happens as the contract expiry date approaches, or on a periodic basis for ongoing vendor contracts, such as those you have with software suppliers or consultants.

It involves reassessing current business needs, performing new market analyses, and comparing existing agreements against industry standards to establish whether the value you’re receiving and the price you’re paying are still competitive.

Strategic procurement best practices

Looking to make the jump from traditional, transaction procurement to a more strategic approach?

Here are a few important best practices to bear in mind as you make the transition:

• Align with business objectives. Ensure that the procurement practice you implement ultimately aligns with your broader company goals.
• Build strong supplier relationships. Focus on long-term collaborative partnerships that drive innovation over short-term price cuts.
• Leverage data and analytics. Use real-life data to inform decisions and optimize performance. Use demand forecasts and data to plan procurement, allowing for bulk purchases, better pricing negotiations, and improved inventory management.
• Diversify your supplier base. Avoid reliance on a single supplier to mitigate supply chain risk.
• Standardize processes. Implement clear, consistent procurement workflows that everyone can follow. Document these processes and distribute them widely, ensuring they are easy to find and access as needed.
• Manage risks proactively. Put a practice in place for monitoring supply chain risks so you can put action plans into place early.
• Use technology and automation. Streamline procurement processes, like invoice matching, using automation tools.

Drive a more strategic procurement program with BILL 

Every company engages in procurement, but only the most effective approach strategically.

One of the best steps you can take to enhance your ability to make strategic procurement decisions is to partner with a helpful and insightful tool that puts purchasing data at your fingertips.

BILL, our financial operations platform, supports procurement leaders with powerful features like:

• Cash flow forecasting
• Real-time spend analysis
• Historical sales data that you can use to create demand forecasts 
• Virtual cards to support seamless purchasing processes