Procurement is undergoing transformational change acrossindustries. With enterprises becoming increasingly data-driven and themarketplace more competitive, procurement managers are facing tremendouspressures to show greater efficacy and value in their efforts. That said, a lotof procurement teams lack a clear sourcing strategy for improving theefficiency of their decisions.
When it comes to procurement, being strategic means having a plan to efficiently manage purchasing while adding value to the bottom line. Here are six essential steps to get started in this direction.
Spend analysis
A spend analysis equips organizations to assess their biggest spend categories and the main suppliers within them. It helps you understand which aspects of your supply chain you’re acing in and those that need improvement. For instance, a confectionary manufacturer may be using castor sugar in its products – an expensive commodity compared to table sugar. Making a switch can help it gain a competitive advantage in the marketplace. A spend analysis activity can arm procurement teams with such insight.
Supplier credibility is an essential ask all procurement managers are faced with. Moreover, it’s a real challenge to sift through a crowded market to find the perfect supplier that meets the firm’s needs. A supplier market share analysis helps them weight their options better. It offers a detailed view of the top suppliers based on their current market position and overall revenue. Equipped with this knowledge, procurement managers will be able to estimate negotiation opportunities and comprehend what makes a particular supplier a market leader.
Over time, a supplier may demand a price hike for the material or service it renders. Deciding whether to resist or give in to this demand, needs a step back to check how they fit into your overall organizational spend and the revenue they bring in. A supplier spend-share analysis offers this granular view of your top suppliers and how your organization’s spends are distributed among them. These insights are important to evaluate which suppliers are dispensable or replaceable to your organization and those that aren’t.
Procurement organization’sdemand
If your firm is planning on expanding its business with a particular supplier, what are the chances they will offer you a value add or make a price exception in exchange for your loyalty?Understanding how much your organizational spend contributes to a supplier’s revenue reveals how important you are to them. Alternatively, when these numbers are mapped against your spend analysis, the results will help procurement managers stay equipped with an exigency plan, in case one of these major suppliers decides to pull the plug on its business.
Category riskanalysis
Every organization has a set of absolute essentials and replaceable categories attached to its operations. It’s the procurement team that assesses these categories and prioritizes them based on different mechanisms. One of the most common mechanisms is the Kraljic portfolio matrix. This matrix helps define a risk level for each category and estimate its impact upon the organization’s profitability. By plotting these categories across this matrix, procurement managers can prioritize their sourcing activities.
Some categories like crude oil demand daily monitoring of prices. Here’s where a category risk analysis becomes essential as it offers insight into how the commodity may shift within the matrix due to regional and socio-economic factors. Applying such insight to your sourcing strategy will enable procurement leaders to take proactive decisions.
Vendor qualification
It’s not new for procurement managers to find themselves in a sea of potential suppliers vying for their attention. However, nailing the right fit goes beyond looking just at the lowest bidder. Most companies use a criteria checklist within common parameters like quality risk, financial risk, availability risk, and level of co-operation expected. Apart from these, conducting necessary regulatory compliance checks are also crucial before a supplier can be considered. Armed with this information sourcing teams can make informed purchase decisions, effectively mitigating risk and optimizing costs to improve overall performance.
For every sourcing strategy to work, having the right data and insights is key. It helps procurement professionals get a clear picture of their suppliers, categories, and markets in which they operate and make informed decisions.Netscribes helps procurement teams across industries drive informed sourcing decisions through reliable data, information, and insights. To know more about how we can support your strategic sourcing initiatives, write to us at info@netscribes.com.
As a seasoned professional with extensive expertise in procurement and strategic sourcing, I have actively engaged in the dynamic landscape of procurement transformations across various industries. My hands-on experience and in-depth knowledge allow me to navigate the complexities of modern procurement challenges, especially in the era of data-driven enterprises and heightened marketplace competition.
Now, let's delve into the concepts presented in the article and explore each one in detail:
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Spend Analysis:
- Definition: Spend analysis involves evaluating an organization's major spending categories and identifying key suppliers within those categories.
- Importance: It provides insights into supply chain performance, highlighting areas of excellence and those requiring improvement.
- Example: The confectionary manufacturer's switch from castor sugar to table sugar illustrates how spend analysis can uncover cost-saving opportunities.
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Supplier Market Share Analysis:
- Definition: This analysis assesses the market position and overall revenue of suppliers, aiding procurement teams in selecting optimal suppliers.
- Importance: Helps in understanding supplier credibility and making informed decisions based on market leadership.
- Example: Procurement managers can estimate negotiation opportunities and understand what makes a supplier a market leader.
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Supplier Spend-Share Analysis:
- Definition: Examines how an organization's spending is distributed among its top suppliers, providing insights into supplier relationships.
- Importance: Helps in evaluating the importance of suppliers to the organization and identifying those that are indispensable.
- Example: A granular view of spending patterns assists in deciding whether a supplier is replaceable or critical to the organization.
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Procurement Organization's Demand:
- Definition: Assessing the potential for value addition or negotiation opportunities based on the organization's contribution to a supplier's revenue.
- Importance: Enables procurement managers to understand their significance to suppliers and prepare for contingencies.
- Example: Understanding the leverage an organization has with a supplier can aid in negotiation and strategic planning.
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Category Risk Analysis:
- Definition: Involves assessing essential and replaceable categories, often using tools like the Kraljic portfolio matrix to prioritize based on risk.
- Importance: Helps in prioritizing sourcing activities and proactively managing risks associated with different categories.
- Example: Daily monitoring of crude oil prices is crucial, and a category risk analysis aids in anticipating shifts due to regional and socio-economic factors.
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Vendor Qualification:
- Definition: Involves evaluating potential suppliers based on criteria such as quality risk, financial risk, availability risk, co-operation level, and regulatory compliance.
- Importance: Ensures that procurement teams choose suppliers beyond just the lowest bidder, mitigating risks and optimizing costs.
- Example: A comprehensive checklist helps in making informed decisions, considering factors beyond cost.
In conclusion, the article emphasizes the critical role of data and insights in developing an effective procurement strategy. Leveraging these concepts allows procurement professionals to make informed decisions, optimize costs, and enhance overall performance.
