Why use a formal strategic procurement process?
Experience shows that the 7-step strategic procurement process developed in 2001 has stood the test of time, and that constant change and real-time innovation have become best practices. The main purpose of strategic procurement is to reduce the total cost of the product life cycle and achieve value-added creation. Other reasons include improving the procurement process, supplier performance, and minimizing risk.
The following is a summary of the "7-Step Strategic Sourcing Process" and then explains each step.
Step 1 Category management
Knowing all about a particular category is the first step in the strategic purchasing process. This means category definition and analysis of specific materials. What is the quantity, type, and size currently in use. Who are the users, where they are, what processes are used and who else is involved in the supply chain. The data must be recorded in as much detail as possible and changes may need to be made.
Step 2 Supply market analysis
Identify potential new global and local suppliers. Study the cost elements of a product or service and analyze the risks and opportunities in the supplier's market. Should Cost calculations must be performed on key raw material prices and other variables (such as labor and transportation), as well as calculations of supplier cost drivers.
Step 3 Develop a purchasing strategy
As you develop your purchasing strategy, decide where to buy your products while minimizing risk and costs. A cross-functional project team must be used. The strategy will depend on what real alternatives there are to current suppliers, how competitive the supplier market is and, importantly, how open users are to new suppliers.
Step 4 Select the procurement process
The most common method of procurement is to use a "competitive bidding" process to tender. It includes product or service specifications, delivery and service requirements, price details, and legal and financial terms and conditions. Evaluation criteria are usually specified.
Step 5 Purchase negotiation and selection of suppliers
During the first round of negotiations, after reducing the bid price to an effective bid price, many suppliers requested clarification and provided more details when needed. A good strategic purchasing strategy is to conduct multiple rounds of negotiations to screen out a candidate list. The final selection is usually done by the project team and signed in accordance with the approval process.
Step 6 Implementation and integration
Notify the suppliers of the business and ensure their participation in the implementation process. Implementation plans vary depending on the degree of change. The communication plan in the strategic purchasing strategy will include any improvement in specifications or processes, changes in delivery or service requirements or prices.
Step 7 Benchmarking and tracking results
This is a key element of the procurement management process. This is the beginning of a continuous cycle, starting with the current state of the benchmark product or category, monitoring the results and ensuring full value is realized. Go back to step 1, check the supply market again, and restart the process in a changing market.