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A Guide to Procurement Strategies for Executives

Procurement strategies are critical for driving cost savings, efficiency, and value within medium to large organisations. However, one common misunderstanding among executives is the difference between operational models like category management and actual procurement strategies.

Category management is an operational approach that organises procurement by spend categories, enabling teams to implement strategies more effectively. It’s not a strategy in itself but a framework that supports strategy execution.

Strategies, on the other hand, focus on achieving specific goals, such as reducing costs, improving value, or mitigating risks.

This guide explores the various procurement strategies available, with a deep dive into cost reduction approaches, including supplier rate reductions, demand reduction, and inefficiency identification. By the end, you’ll have a clearer understanding of the options available and how to align them with your organisation’s goals.

Understanding Procurement Strategies

Procurement strategies are tailored approaches to achieve specific organisational objectives. Key strategies include:

  1. Cost Reduction Strategies:
    • Focus on lowering procurement-related expenses through supplier negotiations, waste reduction, and smarter demand management.
  2. Demand Management Strategies:
    • Aim to control and optimise procurement demand to reduce unnecessary spend and avoid over-purchasing.
  3. Value Creation Strategies:
    • Foster innovation and partnerships with suppliers to create mutual benefits, such as co-developing new technologies or improving ESG outcomes.
  4. Risk Mitigation Strategies:
    • Address vulnerabilities in the supply chain, diversify suppliers, and secure access to critical resources.
  5. Sustainability and ESG Strategies:
    • Align procurement decisions with environmental, social, and governance commitments to meet both compliance and corporate responsibility goals.

A Closer Look at Cost Reduction Strategies

Procurement costs are the result of rates x volume (demand). Therefore, the two primary levers for reducing costs are:

  1. Reducing rates.
  2. Reducing demand.

A third approach focuses on inefficiencies in the supply chain, which often present untapped opportunities for cost improvement.

Many organisations focus on rate reduction, as it’s the easiest to measure and offers immediate results. However, this approach rarely delivers significant cost improvements in the profit and loss statement unless you’re buying fixed quantities of goods (e.g., in a manufacturing context). Suppliers often recoup their losses by increasing volumes or swapping products or services.

Demand management is harder to implement, especially for procurement teams, as they don’t control orders. For example, in most Australian organisations buying services or variable goods, the outcome is more complex. Consider waste removal: the total cost isn’t just about the price per bin emptied but also about the size and number of bins, their location, and frequency of collection.

For many Australian organisations, inefficiency identification is the most effective approach. This strategy examines multiple levers to uncover inefficiencies that increase costs. For example, a global mining company saved 50% ($2 million per month) by identifying inefficiencies in one contract that had crept in over time.

Therefore, here are the three most common cost reduction strategies:

1. Supplier Rate Reduction

  • Approach: Negotiate lower rates or consolidate suppliers to achieve better economies of scale.
  • Consideration: Effective for short-term savings but must be balanced with maintaining supplier relationships and ensuring long-term value.

2. Demand Reduction

  • Approach: Reduce unnecessary procurement by optimising usage or rethinking consumption patterns.
  • Example: Adjusting inventory levels or standardising purchases to eliminate over-ordering.
  • Outcome: Drives cost savings without compromising operational output.

3. Inefficiency Identification

  • Approach: Examine supply chain processes to uncover wasteful practices or inefficiencies.
  • Example: Streamlining workflows, automating processes, and addressing operational bottlenecks.
  • Outcome: Provides significant, sustainable cost improvements.

Conclusion

For most Australian organisations, achieving meaningful cost savings requires a nuanced approach. While rate reduction offers quick wins, inefficiency identification and demand management often deliver more substantial, long-term benefits.

Want to explore how these strategies could work for your organisation? Call or email us at to discuss your procurement challenges and uncover tailored solutions. Let’s identify real opportunities to reduce costs and create sustainable value for your business.