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Procurement strategies: The key to optimizing corporate value creation
What is a procurement strategy?
A procurement strategy is a systematically developed action plan for optimally supplying a company with the required goods and services. It enables the purchasing department to manage supplier relationships in a targeted manner and to minimize procurement risks while maximizing added value. As part of materials management, it determines the medium-term distribution of procured goods and services to individual suppliers and serves as a guideline for the entire purchasing process.
The strategy comprises various areas of regulation such as quantity decisions (which quantities), product range decisions (which goods), quality decisions (in what quality), price decisions (at what price) and supplier decisions (with which suppliers). These strategic determinations do not relate to individual purchasing transactions, but form a framework for the company's entire procurement behavior.
Contents
Importance and objectives of procurement strategies
In recent decades, procurement has evolved from a purely operational function to a strategic success factor. While large companies and corporations, particularly in the automotive industry, were quick to recognize the enormous optimization potential offered by shorter throughput times and reduced inventories, SMEs are now also paying increasing attention to procurement as a business success factor.
The efficient procurement of raw materials, consumables and supplies, components, finished goods and services makes a significant contribution to securing the company's profit. Strategically oriented procurement pursues several key objectives:
Ensuring the supply of all necessary resources to the company is the central objective. At the same time, it is important to optimize the associated costs and to safeguard the company's economic interest in keeping these costs as low as possible. In addition, a modern procurement strategy aims to ensure quality standards, promote innovation and increasingly take sustainability aspects into account.
Types of procurement strategies
The range of procurement strategies is diverse and enables a needs-based orientation depending on the company's situation, market conditions and the strategic importance of the goods to be procured.
Supplier-related strategies
The number and type of supplier relationships is a core aspect of any procurement strategy. Various approaches have been established here:
- Single sourcing describes the purchase of a product or service from just one supplier. This strategy enables closer cooperation, better conditions thanks to larger purchase quantities and simplified logistical processing. However, there is an increased risk of delivery failures due to the strong dependence on a single supplier.
- Multiplesourcing refers to the procurement of products from several suppliers. This increases security of supply and reduces dependencies, but can lead to lower economies of scale and higher coordination costs.
- Dual sourcing is a compromise between the aforementioned strategies in which a product is sourced from two independent suppliers, often in certain ratios such as 60% to 40%. This approach combines the advantages of single sourcing (high discounts through order bundling) with those of multiple sourcing (lower default risk, reduced dependency).
- Preferentialsourcing (preferred supplier strategy) focuses on keeping the number of suppliers as low as possible and giving preference to the most highly qualified suppliers, for example in terms of quality or pricing. This strategy is often used for bottleneck parts for A materials.
Geographically oriented strategies
- Global sourcing refers to worldwide procurement that utilizes international cost advantages and quality differences. However, this strategy requires complex supply chain management and entails higher logistical and political risks.
- Local sourcing focuses on local procurement, which reduces transportation distances and times, supports the regional economy and simplifies communication. However, this can lead to higher prices than with global sourcing.
Product-related strategies
Modular sourcing and system sourcing are strategies in which a company relies on a small number of suppliers to deliver complete modules or assemblies. These are either developed jointly (system sourcing) or by the supplier (modular sourcing). The terms differ in the intensity of the cooperation. This relocation of development and production means a high level of dependency on the supplier and is often associated with a loss of know-how.
Contract-related strategies
- Framework agreements are among the most popular purchasing strategies and define long-term conditions for recurring procurement transactions.
- Call-off contracts enable the flexible call-off of defined quantities at fixed conditions over a certain period of time.
Development of a procurement strategy
Developing an effective procurement strategy requires a structured approach and involves several phases.
- Analysisof the spending situation: A detailed spend analysis provides information on spending volumes, categories and patterns. This transparency forms the basis for well-founded strategic decisions and enables the identification of potential savings.
- Market and requirements analysis:A comprehensive market analysis examines the structure of the procurement market, the number of potential suppliers, pricing mechanisms and innovation cycles. At the same time, a precise needs analysis must determine the company's current and future requirements.
- Risk analysis: The systematic identification and assessment of potential risks in the supply chain is becoming increasingly important. These risks include disruptions to the supply chain, local extreme weather events, human rights violations by suppliers and economic losses due to inefficient logistics processing or miscalculations in warehousing, such as the bullwhip effect.
- Category management: A central element of modern procurement strategies is category management, in which products and services are divided into homogeneous groups for which specific strategies are developed. The Kralijc matrix is a frequently used model for classifying product groups according to their value contribution and supply risk.
- Strategy formulation and implementation: After the analytical phase, the strategy is formulated with specific measures for various product groups or suppliers. The subsequent implementation often requires close cooperation between different departments and clear communication of the strategic objectives.
- Monitoring and adjustment: A successful procurement strategy requires continuous monitoring and regular adjustment to changing market conditions. Clearly defined key performance indicators (KPIs) make it possible to objectively evaluate the success of the strategy.
Example of a procurement strategy: automobile manufacturer
A medium-sized automotive manufacturer with an annual requirement of 100,000 units of critical electronic components implemented a dual sourcing strategy. The initial situation was characterized by supply bottlenecks and strong price fluctuations on the market for semiconductor components.
The strategy provided for 70% of requirements to be purchased from main supplier A and 30% from backup supplier B. Long-term framework agreements were concluded with both suppliers for a period of three years, which stipulated price corridors and guaranteed minimum purchase quantities.
The quantitative results were impressive: reduction of procurement costs by 8.5% in the first year through volume bundling and improved negotiating position, reduction of warehousing costs by 12% through optimized delivery frequencies and inventory management, reduction of delivery failures by 76% compared to the previous year and reduction of throughput times in production by 15%.
The special feature of this strategy was the balance between competitive pressure (through two suppliers) and partnership (through long-term contracts). The main supplier received sufficient volume to realize economies of scale, while the second supplier was sufficiently involved to be able to ramp up quickly if necessary.
As an additional safeguard, joint development projects were initiated with both suppliers in order to coordinate the technological roadmap and promote innovation. This not only led to greater security of supply, but also to product improvements and cost reductions through joint process optimization.
Example of a procurement strategy: Chemical company
A medium-sized chemical company with an annual purchasing volume of 150 million euros implemented a comprehensive product group management strategy for its raw materials. Following a detailed spend analysis, the raw materials were divided into four categories according to the Kralijc matrix.
The following strategy was developed for a strategic product group with a high value contribution (22% of the total purchasing volume) and a considerable supply risk:
- Diversification of the supplier base: Instead of the previous dependence on two main suppliers, four qualified suppliers were established with defined quota distributions (40%, 25%, 20%, 15%).
- Risk management: Establishment of strategic safety stocks for critical materials (range: 6 weeks) and development of alternative formulations for key products.
- Partnership-based supplier relationships: Long-term development partnerships have been agreed with the two main suppliers, including joint research projects and regular innovation workshops.
- Pricing mechanisms: Implementation of index-based pricing formulas with quarterly adjustments to cushion market volatility and ensure fair prices for both sides.
The quantitative results were convincing: no production losses due to delivery bottlenecks compared to three incidents in the previous year, cost savings of 4.7% in the first year despite volatile raw materials markets, an improvement in delivery reliability from 86% to 94% and three successful product innovations from the development partnerships with additional sales potential of EUR 2.4 million.
The special feature of this strategy was the balanced combination of risk diversification through several suppliers and the targeted promotion of innovation through close partnerships with selected key suppliers. The index-based price formulas also led to more transparent negotiations and significantly reduced the effort required for regular renegotiations.
Digitalization in procurement
Digitalization has a profound impact on modern procurement strategies and offers enormous opportunities for process optimization, increased transparency and sound decision-making.
E-procurement and process automation
E-procurement encompasses the digitalization of procurement through appropriate processes and tools, such as robotic process automation. Modern e-procurement systems digitalize the entire procurement process, from the needs assessment to the preparation and implementation of award procedures, call-off of products and services through to confirmation of the delivery of goods or provision of services and invoicing.
According to a recent survey, six out of ten SMEs have already digitalized their procurement processes, while three out of ten are planning to do so in the near future. The main drivers behind digitalization are reducing costs and increasing efficiency (81%) as well as improving data analysis and decision-making (around two thirds of respondents).
Big data and analytics
Analyzing large volumes of data enables deeper insights into procurement patterns and supplier relationships. This allows trends to be recognized, risks to be identified at an early stage and optimization potential to be uncovered. Companies currently see the greatest need for digitalization in supplier management (71%) and in the order processing process (56%).
Artificial intelligence and blockchain
Artificial intelligence is revolutionizing procurement through automated supplier evaluation, demand forecasting, autonomous negotiation systems and anomaly detection. Blockchain technology, in turn, offers new opportunities for transparent and tamper-proof supply chains.
There is a strong interest in innovations that can improve efficiency and transparency in procurement processes: 85% of SMEs are open to the use of new technologies to digitalize procurement and financial processes.
Current trends and challenges
The procurement landscape is constantly changing, characterized by global developments and new requirements.
Risk management and resilience
Following the experience of significant supply chain disruptions in recent years, the strategic focus of procurement has evolved from the pure pursuit of high-performance supply chains towards secure processes and the ability to react quickly to disruptive events. The motto is: as efficient as possible, as secure as necessary.
Sustainability and social responsibility
Environmental and social criteria are increasingly being included in procurement decisions. Sustainability is already a high priority in the procurement strategy of 35% of companies, and for 41% this topic is becoming increasingly important4. The integration of sustainability practices is playing an increasingly important role in securing long-term competitive advantages.
Diversification of the supply chain
Supply chain diversification is an important trend in modern procurement strategy. By spreading procurement across different suppliers, regions and transportation routes, companies can reduce their dependence on individual sources and increase the resilience of their supply chain.
In-Sourcing
As a counter-trend to outsourcing, in-sourcing is once again gaining in importance. Companies are bringing strategically important processes and production back in-house in order to reduce dependencies and strengthen core competencies.
Cooperation and supplier management
Collaboration with suppliers is evolving from transactional relationships to strategic partnerships. Professional supplier management forms the basis for long-term value creation and joint innovations.
Conclusion
Procurement strategies are a key success factor for companies in an increasingly complex and volatile business world. A well thought-out strategy not only enables cost savings, but also strengthens the company's competitiveness, innovative power and resilience.
The development and implementation of an effective procurement strategy requires a systematic analysis of internal requirements, market conditions and risk factors. Depending on the product group and strategic importance, different approaches - from single sourcing to global procurement concepts - can be used.
Digitalization offers enormous opportunities for optimizing procurement processes, increasing transparency and making well-founded decisions. Modern e-procurement systems, data-driven analyses and artificial intelligence will become even more important in the future.
It is crucial for purchasing managers and procurement officers to regularly review procurement strategies and adapt them to changing market conditions. Strategic purchasing is increasingly evolving from a pure cost factor to a value-adding business partner that makes a significant contribution to the company's success.
