Purchasing strategy: the essential points to succeed in convincing your general management

The current situation is forcing procurement managers to rethink the way they manage purchases. Indeed, the latter represent on average 60% of the company's turnover. Their optimization makes it possible to reduce costs and increase the company's margins. Building a buying strategy Relevant and convincing is one of the main missions of the Purchasing Department. In addition to playing a major role in improving business performance, a good buying strategy is also the key to facilitating exchanges with management and quickly obtaining their approval for its implementation. Discover in this article the various essential points that must be found in a good purchasing strategy to better convince senior management. But first of all, What is a purchasing strategy ?

Purchasing strategy: definition

First of all, you have to differentiate between purchasing policy and buying strategy. The purchasing policy corresponds to the general objective, which is the implementation of the company's overall strategy. For example, a company can implement a responsible purchasing policy, a purchasing policy at the cutting edge of innovation or a purchasing policy that aims to improve the competitiveness of the company.

A good buying strategy should be aligned with these. It must meet specific objectives determined by the general objectives defined by management and the needs of the various internal departments.

To support a responsible purchasing policy, the purchasing department must put in place a sustainable purchasing strategy which integrates the CSR component into procurement management. Faced with a purchasing policy that aims at innovation, it is necessary to define a buying strategy which references the best solutions or the best expert partners in their field. To allow a company to remain competitive, the purchasing department must look for ways to optimize expenses by negotiating prices with suppliers.

La strategy for buying a business refers to all the actions or steps necessary to optimize the purchasing process taking into account the requirements of Quality-Cost-Delay (QCD).

• The quality should be as high as possible.
• The cost should be as low as possible.
• The time frame must be short enough to ensure the smooth functioning of the supply chain or supply chain.

La purchasing strategy takes into account various aspects, including supplier selection, product referencing, product referencing, negotiations with suppliers, the process of sending and receiving transactions, the process of centralizing purchases, etc. It is thus a powerful procurement management tool that improves organization performance and reduces financial risks.

La buying strategy can have several objectives: cost management, supplier risk management, supply chain management...

Several lever actions can be put in place to achieve the objectives set under the purchasing strategy. Among others, we can mention:

• Reducing the number of suppliers to massify purchasing volumes and obtain more advantageous pricing conditions
• The establishment of performance indicators
• The renewal of the range of products or services used internally

The purchasing manager must define specific objectives for each type of procurement (direct or indirect) in order to always ensure a balance between costs, quality and time. For each family of purchases, we can therefore have different purchasing strategies.

Who sets the purchasing policy and strategy?

The definition of the policy and the buying strategy is a mission of the purchasing manager. Being in charge of purchasing management, the latter defines and implements the purchasing policy that corresponds to the overall strategy of the company. Implicitly, it also establishes the strategy that corresponds to the specific objectives of the procurement function. To carry out this mission successfully, he must work in collaboration with the general management. The implementation of each buying strategy is subject to its approval.

How to create a relevant purchasing strategy?

To be as efficient as possible, a purchasing strategy must be defined using the following steps:

Purchasing mapping

To define a good purchasing strategy, you need a good foundation. To do this, an inventory of suppliers, the types of products purchased and the various actors involved in the purchasing process must be carried out. This operation is also called purchase mapping. It consists first of all in collecting raw data, such as the list of current suppliers (their name, their address, the items purchased from them, their turnover, etc.), then in targeting the best contacts. This information can be collected using the company's ERP or from the accounting department using the invoices received. The suppliers themselves can also provide you with this information if it is difficult to find it internally.

Once this first step has been taken, it is necessary to move on to the segmentation of suppliers according to the nature of the products and the categories of purchases. The objective of purchasing segmentation is to make a graphical representation of the quantity of purchases for each supplier and of purchases by family of items. As a reminder, there are three types of purchases:

• Class A purchases: these are also called strategic purchases. They correspond to 20% of suppliers and account for 80% of the total amount of purchases. Class A procurement suppliers are described as strategic and recurrent. They are essential to the production activity of the company.
• Class B purchases: these are so-called strategic purchases, but they are not recurrent. They correspond to 30% of suppliers and 15% of purchasing expenses. They are provided by specialty providers, such as consulting firms or intellectual service providers.
• Class C purchases: they are considered to be non-strategic. They are also called spot purchases because they are one-time purchases. They correspond to 50% of suppliers and 5% of the total amount of purchases. Without a good purchasing strategy, these purchases quickly turn into wild purchases. Indeed, these are generally small purchases, but require a large volume of purchase orders, and thus paperwork to manage. Class C purchases carry high hidden costs. This is why more and more companies are currently choosing to outsource them. Class C procurement outsourcing is one of purchasing strategies that can be adopted for this type of purchase.

Expenditure analysis

Once the purchases have been mapped, an analysis of expenses must be carried out to accurately estimate the budget divided between the various items. This stage in the development of the strategy for buying a business requires the use of well-known methods, such as the Pareto diagram, according to which 20% of the causes are responsible for 80% of the occurrences in a company. To solve problems and optimize costs, it is therefore necessary to focus actions on these causes.

Another method used to analyze the expenses of the purchasing department is the Kraljic matrix. This consists in mapping corporate purchases and the corresponding budgets by purchasing family. There are two types of purchases: direct purchases and indirect purchases. The first include strategic purchases for the company's production activity. The latter are also called non-production purchases. They do not go directly into the production process. Nevertheless, they are essential to ensure the proper functioning of the company. This is the case with computer equipment, maintenance of premises, etc.

Once the purchases have been classified, the Kraljic matrix allows you to choose between 4 possible strategies: securing supply and consolidating internal communication for critical purchases — creating partnerships and managing the performance of strategic purchases — optimizing processes for simple purchases — issuing regular tenders and advanced cost analysis for very risky purchases

The results of the analysis of the distribution of expenses make it possible to develop purchasing strategies more relevant and more appropriate. Using procurement software, like Sourcing Force, can help the procurement manager refine and accelerate spend analysis.

The procurement audit must also be based on an analysis of supplier risks, in other words the probability that a supplier will fail at a critical moment in the purchasing process. It is best to entrust unreliable suppliers with only products that are not critical to the business and are easy to find.

Adopting the purchasing strategy

After these two steps, the development of a purchasing strategy more effective and more adapted to the company's goals is becoming obvious. Again, there is no such thing as buying strategy unique applicable to all purchases.

One good purchasing strategy consists of several different strategies depending on the purchasing families. Thus, it is necessary to distinguish between indirect purchasing strategy of that of direct purchases. The coexistence of these strategies helps the purchasing manager to optimize the performance of his department.

The strategy to adopt also depends on the maturity level of procurement management, the needs of the business and the time available. Thus, depending on all this, several strategies can co-exist, such as competitive tendering, massification, value analysis, rationalization of the supplier panel, Make or Buy analyses, Global Sourcing, LEAN procurement, etc.

These purchasing strategies specific components complement each other to form the purchasing policy that corresponds to the company's overall strategy. As such, their development and implementation are subject to the approval of the general management and must be known to all employees of the company.

A good buying strategy must therefore be effective in order to convince company decision makers.

The right strategy to convince senior management.

A good practice to make your recommendations effective is to write a strategic purchase note.

It's a summary on a simple A4 page that covers the most important aspects of your purchasing strategy, without going into overly operational considerations.

This practice should quickly give confidence to the decision-maker and improve the validation of your recommendations.

What are the key points to include in your strategic note?

Here is a list of essential points to convince your interlocutors:

• First of all, you need a table showing the figures and key elements. This includes the purpose of the purchase, budget, for whom, and by whom.
• Then, a description of the advantages that led you to select the purchasing strategy recommended. It concerns financial, qualitative, technical advantages, compatibility, etc.
• Also, total costs and several price comparison analyses are required. Decision makers need to feel that they are not going to spend more than they need to. Benchmark processes such as tenders, comparisons with historical prices or with public prices, offer the assurance of fair value.
• Next, a description of how you qualified the supplier. It proves its ability to meet the needs of your organization.
• Then, an overview of the main contractual clauses. The most important terms in most contracts include: contract duration, prices. Also, there are payment terms, delivery, warranty, remedies in case of non-performance, cancellation rights and after-sales service.
• Finally, if the purchase itself needs to be justified, you will need to explain how this expense will save future expenses and/or bring new revenue to the business.

And remember, everything has to fit on one page! Details can be attached. But a decision maker is always very busy and needs to get key information at “a glance.”

Do you need support to optimize your purchasing management? Contact BME Consulting. Through our digitization and procurement outsourcing solutions, we allow you to develop a purchasing strategy relevant and compelling.