PURCHASING AND PROCUREMENT STRATEGY

The term purchasing and procurement strategy is a long-term plan to obtain the
necessary supplies cost-effectively from an efficient list of suppliers who will comply
with procurement terms and deliver on time. In general, a purchasing strategy depends
on many factors, such as purchase schedules, available budgets, total cost of
ownership (TCO), possible risks, and so on. A robust strategic procurement approach
may cover at least five basic areas, including procurement management and contract
management, process management, supplier management, transaction management,
organization.

First, Procurement and contract management typically includes the selection of

suppliers, procurement of goods and contract negotiations, and companies may take
these characteristics into account when evaluating strategic procurement capabilities:
companies with traditional procurement and contract management practices often
have the following characteristics: local suppliers with multiple sources and minimal
purchasing power; Companies with emerging procurement and contract management
practices often have the following characteristics: the usual use of domestic suppliers
with multiple or dual sources, some cross-functional procurement practices, focusing
on the lowest delivery costs, annual contract negotiations, bidding to obtain good
prices, and reliance on suppliers for cost data and basic cost analysis. Companies with
advanced procurement and contract management practices typically establish supplier
relationships, conduct global assessments or negotiate procurement, decide on a single
purchase of standard materials by a formal, cross-functional material group, leverage
the procurement of critical goods, focusing on overall value and overall cost
management, and use multi-year contract agreements with service levels. Companies
with world-class procurement and contract management practices typically use
strategic procurement for most or all of their materials, adopt a multi-faceted
approach to procurement, establish strategic alliances, select suppliers based in the
same location, coordinate and coordinate supply chain activities, establish lifecycle
procurement agreements, network-based negotiations (e.g. on-going bids/ask supms,
reverse auctions), and manage their own expenses, suppliers, and material data.

Second, Supplier management typically includes process such as supplier relationship

management, supplier development, and supplier performance management. When
evaluating strategic sourcing capabilities, companies can consider the following
characteristics. Traditional supplier management behaviour usually includes a large
number of dispersed suppliers with few specific relationships; emerging supplier
management behaviour typically includes preference for suppliers with limited
relationship structure, supplier evaluation systems and two-way communication,
product certification from key suppliers, on-site inspection, survey, review of
suppliers, and limited joint suppliers. Advanced supplier management typically
includes formal supplier certification, service-level agreements, including codes of
conduct and formal evaluation, and understanding of supplier cost composition.
World-class supplier management behaviours are usually self-certified by suppliers,
key vendor account management, strategic relationships and in-business supply
networks, systematic behavioural assessment feedback, simultaneous two-way
communication, and definition of supplier rationalization procedures.

Third, Processing management typically includes the following procedures: design

management, component/product standardization, cost management, capital usage
performance. In evaluating processing management capabilities, enterprises may take
these characteristics into account: enterprises with traditional processing management
practices often do not have the involvement of suppliers in design and manufacture as
required. Companies with emerging processing management practices often exhibit a
supply-to-buy joint processing movement, with suppliers providing higher value-
added content; Merchants with advanced processing management practices often have
interactive (design/procurement/re-design) procedures with technology transfer
forums; Companies with world-class processing management behaviour sit in the
supply-buyer design team to jointly design and share full design responsibilities with
suppliers, coordinate design with suppliers over the network, and share content
management and decision support tools.

Forth, Transaction management usually includes requesting orders, placing purchase

orders, tracking orders, and receiving orders. In evaluating transaction management
capabilities, companies can consider these characteristics: traditional transaction
management practices are often paper-based, including requiring multiple layers of
approval, requiring the buyer to select a supplier, purchasing products for delivery,
paper catalogues, tracking by phone or fax. Emerging transaction management
behaviour softens with technical point solutions, which are related to purchase and
planning, place orders online, and track through EDI. Advanced transaction
management practices typically use internal integration systems/technology, check
items online and request orders, pre-approve purchases, and check shipments through
the supplier's website. World-class transaction management behaviour typically
includes electronic contact with suppliers, real-time coordination, electronic
acquisition capabilities, dynamic online trading engines and catalogues, and visually
coordinated orders.

Lastly, Organizational structures and the ability to support strategic procurement

procedures include organizational design, behaviour planning, code of conduct, and
cost measurement. "In assessing organizational competence, firms may consider the
following characteristics: companies with traditional organizational structures and
competencies often focus on functional and narrow job descriptions, and the
organization's charter revolves around a formal buying organization that measures
performance against internal criteria." Companies with emerging organizational
structures and capabilities tend to have commercial-level buying behaviours, matrix
organizations, some commodity procurement plans, formal behavioural management
procedures and norms, succession and career plans, and shareholder awareness.
Merchants with advanced organizational structure and capabilities often have
procurement strategies that are linked to the entire business strategy, strong
administrative-level support, central coordination and local procurement management,
and cross-functional coordination. Companies with world-class organizational
structures and capabilities have a global supply chain vision, pre-emptively change
management processes, business-oriented functions and procedures, focus on
innovation, and strong communication and change management capabilities. It is the
companies that can win in the global economy to constantly assess their behaviour to
ensure that they are not at the forefront. Strategic procurement is an important element
of today's competitive business environment. Using the assessment criteria outlined
above can help identify areas for improvement.