How can strategic procurement management be leveraged by businesses to overcome economic and financial challenges?
Summary
When planning out the future direction of your organisation’s procurement function, it is vital to look at what conditions have led to rising economic and financial challenges for businesses and into any opportunities that can be leveraged by first understanding what processes make up strategic procurement management and then integrating them for maximum effectiveness and returns.
Next, it is important to look at how strategic procurement management can assist in overcoming challenges as this allows organisations to align all of their efforts toward achieving success in procurement by initiating strategic management.
Many organisations face various economic and financial challenges that affect their performance and profitability amid the current volatility and uncertainty within business environments.
Management of costs and maximisation of returns present the most promising methods for organisations to overcome these challenges. As a vital function in any business, optimising procurement can deliver impressive results on this front as it controls the quality, cost, and availability of the inputs needed for production and service delivery.
Hence, adopting strategic management in procurement is a highly effective measure that most businesses strive to implement with the aim of surviving and sustaining growth in the current economic climate.
Read on as we explore how following a strategic approach to manage procurement within organisations works and how it can allow business operations to overcome oncoming challenges and pave the way for unhindered growth and continuity.
What conditions have led to rising economic and financial challenges for businesses?
- Looming global economic slowdown: Analysts as well as economic indicators predict economic conditions to worsen in the short term; this is especially significant in Europe with economic contractions forecasted for many countries. Uncertainty surrounding the global economy has hampered investment and business growth.
- Heightened geopolitical tensions and trade restrictions: Armed conflicts and trade wars have resulted in a barrage of sanctions, regimes, and trade restrictions that have made a considerable number of vendors inaccessible to customers and vice versa. These restrictions have complicated sourcing for organisations.
- Volatile supplier markets: The rapidly rising rates of inflation and wildly fluctuating exchange rates have caused much uncertainty within global supply chains and have resulted in a higher degree of risk for both organisations and their vendors when engaging in global sourcing and procurement activities.
- Growing competition: Increased pressure from customers, stakeholders, and regulators, and the pressing need to ensure survival have pitted organisations in more fierce competition to gain any possible edge in the market that enhances survivability. Apart from pricing, demands for higher quality and compliance further increased the level of competition.
- Limited budgets and resources: Retained earnings of most organisations have been exhausted in maintaining business operations over the last few years where the pandemic impacted profitability and cash flow. This has left businesses with limited budgets and a lack of resources to invest in growth.
What processes make up strategic procurement management?
Integrating strategic management into procurement processes mainly involves incorporating the following four key elements into the procurement function:
- Strategic sourcing
This is the process of identifying, evaluating, selecting, and managing the best suppliers for each category of goods and services. It aims to optimise the total cost of ownership, which includes not only the purchase price but also the quality, delivery, service, risk, and innovation aspects of the supplier relationship.
Strategic sourcing also involves developing long-term partnerships with key suppliers based on trust, collaboration, and mutual benefit.
- Category management
This involves grouping similar or related goods and services into categories based on their characteristics, importance, and impact on the business. It aims to develop and implement category-specific strategies that address the specific needs, opportunities, and challenges of each category.
Additionally, an effective category management strategy requires forming cross-functional teams that coordinate and align procurement activities with other business functions, such as finance, operations, marketing, and sales.
- Supplier relationship management
This refers to the holistic management of the interactions and relationships with suppliers across the entire procurement lifecycle. It aims to enhance supplier performance, innovation, and value delivery through effective communication, feedback, recognition, incentives, and improvement initiatives.
Moreover, supplier relationship management encompasses monitoring and managing supplier risks, such as quality issues, disruptions, compliance breaches, and reputational damage.
- Procurement performance management
This is a process geared towards measuring, analysing, and improving the efficiency, effectiveness, and value of procurement activities. It aims to ensure that procurement objectives are aligned with business goals, procurement processes are optimised and standardised, procurement resources are utilised optimally, and procurement outcomes are tracked and reported.
Furthermore, establishing key performance indicators (KPIs), benchmarks, and best practices for procurement also form part of procurement performance management.
How can strategic procurement management assist in overcoming challenges?
Cost optimisation
Strategic approaches in procurement management can enable organisations to reduce their total cost of ownership by analysing their spending patterns, identifying savings opportunities, consolidating their spend categories, rationalising their supplier base, standardising their specifications, and implementing best practices, such as category management, demand management, and spend management.
Instituting strategic management of procurement can also help organisations negotiate better prices and terms with their suppliers, leverage economies of scale and scope, and optimise their inventory levels and logistics costs.
Risk reduction
Businesses can mitigate various risks associated with their procurement activities, such as supply chain disruptions, quality issues, compliance violations, fraud, and reputational damage by taking a strategic approach to procurement management. Implementing strategic management in procurement functions positions organisations to identify and assess potential risks, and implement risk mitigation strategies such as supplier diversification, contingency planning, contract management, supplier audits, and performance management.
In addition, a strategic approach can also enable businesses to monitor and swiftly respond to emerging risks such as market changes, environmental issues, social issues, and geopolitical issues.
Value enhancement
Taking a strategic approach to procurement management can enable sustained increases in the value generated for organisations from their procurement activities by focusing on the total value proposition rather than the lowest price.
Strategic management policies are useful for allowing organisations to better collaborate with their suppliers to create value through joint initiatives such as co-development, co-design, co-innovation, co-marketing, and co-delivery.
Initiate your strategic procurement management journey guided by insights from a strategic procurement maturity assessment
Procurement functions require a myriad of strategic management approaches based on the organisation and the nature of the operation. Therefore, getting relevant insights is crucial to shed light on the organisational procurement process and identify the ideal way forward.
Conducting a strategic procurement maturity assessment is the most reliable way to kickstart any strategic management initiative as it enables informed decision-making and offers a higher degree of success in this endeavour.
