Strategic procurement is the process of establishing the fastest supply channel of the business at the lowest Total Cost of Ownership (TCO) based on the market cycle of the product, rather than the simple transaction of obtaining the currently required raw materials at the lowest purchase price. Strategic procurement fully balances the internal and external advantages of the enterprise, with the purpose of reducing the overall supply chain cost, covering the entire procurement process, from the description of raw materials to the full management of payment. It includes the following important principles:
1.Total Cost of Ownership consideration
——The basic starting point of strategic procurement
The optimal cost is often misunderstood by many companies as the lowest price, which is wrong. The purchasing decision affects the subsequent raw material transportation, deployment, maintenance, replacement, and even the replacement of long-term products. Therefore, it must have a vision of overall cost considerations, and must design key cost links and other related long-term potentials in the entire procurement process. When evaluating the total cost, you may try to consider the following simplified method first:
Total cost of ownership = price + cost of use + management cost.
*price including current price, long term price…
Cost of use including: quality, transportation, warehousing…
Management cost including: supplier developing, negotiation, daily management, risk control,
Continue supplier evaluation…
2.Establish a solid basis for negotiation - facts and figures
Negotiations are not simply price reductions, but based on a thorough understanding of the market and itself and long-term expectations. Total cost analysis, supplier evaluation, market evaluation, etc. provide powerful data for negotiations, help companies understand their own bargaining advantages, and thus master the entire negotiation process and initiative.
3.Strategic cooperation relationship
The win-win concept is also an indispensable factor in strategic procurement. Many advanced international companies have established supplier evaluation and incentive mechanisms, long-term cooperative relationships with suppliers, and mutually beneficial cooperation benchmarks. This is very important for Chinese suppliers, because they evolve more quickly than western suppliers. (Another blog will be posted soon: why still Chinese metal suppliers?)
4.Checks and balances
Both companies and suppliers have their bargaining advantages. If they have a good understanding of the industry, business strategy, operation, competitive advantage, and capabilities of the supplier, that can help companies to improve their current position of checks and balances. More and more companies are paying attention to strengthen supplier cooperation, leverage suppliers’ strengths, and improve the overall productivity of supply chain which finally contribute to the overall competitiveness in their own industry.
Please stay tuned for section 2…