When you’re shopping for a new car, what do you look for? Durability? In-dash navigation? The newest safety features?
Chances are high that you don’t even ask if the vehicle runs. Why not? Because while it’s the single most important quality in a car, it’s also a basic expectation. Even if a car had all the other bells and whistles, you wouldn’t consider it if the engine wasn’t working.
Think of your company’s procurement strategy the same way: Although saving money is important, it’s also the table stakes. What about gaining access to high-quality suppliers, reducing risk, and saving time? It’s those “features” that should be the true focus of your procurement strategy.
Build Your Best Procurement Strategy
Procurement requires you to balance existing supplier relationships with supply chain risks and fluctuating pricing with time expenditures. Compare direct sourcing options with indirect channels like group purchasing organizations, which leverage buying power to obtain bulk discounts from suppliers.
To develop a procurement strategy that goes beyond saving money, GPO UNA suggests asking yourself:
“Am I set on certain suppliers?”
This question strikes at the heart of why price shouldn’t be the only consideration in your procurement strategy. A CapitalOne study published this past January showed that product quality, at 40%, is the top reason consumers stick with certain brands; just 12% of respondents pointed to price. If a certain vendor’s product really is better, it may be worth paying a premium.
With that said, consider what you sacrifice by insisting on a certain brand. If that company goes under, you may be temporarily unable to get a key product to your warehouse. Even if you never need to find an alternate supplier, there’s another drawback to a brand-loyalty-above-all procurement strategy: You have to negotiate and manage every contract.
GPOs handle the research, price negotiation, relationship-building, and communication, but they may not have the specific supplier you want in their portfolio. If not, ask yourself whether sticking with that brand is worth the extra legwork.
“How much leverage does my company have?”
Speaking of contract negotiation, this second procurement strategy question centers around price and access: Do you have enough buying power? Will top suppliers even work with a company of your size, and if so, will they offer you fair terms?
Consider what happened when Whole Foods decided to tweak its own procurement strategy: The upscale grocery chain effectively shut out small- and medium-sized businesses with requirements they couldn’t meet for product demonstrations and fees they couldn’t pay for shelf space.
What if you don’t have the leverage you need to include national brands in your procurement strategy? Either look elsewhere or partner with other buyers to make your purchase worth the supplier’s while. Small- to mid-sized companies can do so by joining a GPO; larger firms can make internal arrangements. For example, one aircraft manufacturer whose business units were independently purchasing components from a major supplier consolidated and threatened to cut off its orders unless the vendor acquiesced to its pricing and delivery demands.
“How much time am I willing to spend?”
As your company grows, the sheer scale of your supplier relationships will make procurement more time-consuming. Consumer packaged goods group Procter & Gamble has more than 75,000 suppliers; Walmart has at least 100,000. Managing that many contracts takes dozens, if not hundreds, of employees’ time.
The problem with a complex procurement web isn’t just that it takes a small army to negotiate, either. After a scandal in which horse meat was discovered in European consumers’ “beef” instant meals, one food producer admitted to having 1,000 vendors for a single lasagna line. With so many suppliers, he simply didn’t have the time to vet each one for quality or safety.
GPOs can save companies between 20% and 80% on common supplies, but their greatest value might be the time they save. GPOs free procurement teams from administrative tasks, letting them focus on bolstering critical supplier relationships.
Buying a car is complex, but it’s far simpler than managing a company’s purchasing activities. Whether you decide to go it alone, do it indirectly through a partner, or take a hybrid approach, remember that price is only one piece of a strong procurement strategy.