Does your company have a strategic procurement?

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Key words:  #TCO #solidbasisfornegotiation #centralizedpurchasing #expandsupplierbase #optimizeprocurementprocesses #optimizeprocurementmethods #standardizationrawmaterials #standardizationproducts #standardizationservices

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. 

The main ways of strategic procurement:


1. Centralized purchasing 

It is a basic strategic procurement method to increase the bargaining power and reduce the unit procurement cost through the concentration of procurement volume. Centralized procurement planning and management of productive raw materials or non-productive items reduces the variability of purchased items to a certain extent, improves the standardization of procurement services, and reduces the workload of later management. But have to say that centralized procurement has also increased the difficulty of communication and coordination between other departments.


2. Expanding the supplier base 

By expanding the scope of supplier selection, introducing more competition and reducing procurement costs. This is why large multinational companies have set foot in China one after another, and using China as a raw material procurement center and manufacturing center. However, for some core production and service organizations of raw materials and product companies, they often establish long-term relationships with a small number of strategic partners, while protecting the proprietary nature of core technologies, it is also convenient for joint development of new products / services Improvement. 


3. Optimize procurement processes and methods 

After optimizing the two purchasing factors that objectively affect the cost of procurement, the space for further cost reduction shifts to soft management optimization. For example: Introduce competition through bidding; make full use of the game mechanism between suppliers in open tendering; and choose the supplier that best meets its own costs and benefits; and reduce procurement processing costs through electronic procurement; the economic batch calculation reasonably arranges the purchase frequency and reduces the purchase cost and storage direct and indirect costs in batches; and makes selective purchases of services and raw materials provided by suppliers.


Believe that any service provided by a supplier is price-included, either directly or indirectly. Therefore, companies can subdivide them, try to be transparent about all price factors, and then select the required raw materials and supporting services to reduce the overall procurement cost. 


4.Standardization of raw materials / products / services 

At the product and service design stage, full consideration will be given to the operating costs of future procurement, manufacturing, storage and transportation links, improving the standardization of raw materials, processes and services, and reducing subsequent costs caused by differences. This is a kind of strategic procurement with higher technical content, which fully reflects the optimization of the overall supply chain, and often has higher requirements for technical feasibility.      

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