Back to Basics – When is strategic procurement not strategic?
Whether you’re a procurement pro with decades of experience or you’re just starting out in the profession – everyone should take some time to get back to the foundations of what we do. In our ‘Back To Basics’ series, we’ll be doing just that – deep diving on the core ideas and activities that underpin Procurement to get you thinking and learning. First up – strategic procurement.
Evolving from Purchasing to Procurement means a greater focus on strategic activities. But are you as strategic as you think you are?
Largely thanks to the events of the past few years, most people will now understand the basics of what you do if you say you work in procurement.
It’s certainly not always been that way, and the profession has come along a long, and not always smooth, path from the days of the ‘Purchasing’ department.
Many of the profession’s leaders will have started their careers in purchasing or buying, existing as a largely transactional function that existed to churn out orders on behalf of key business stakeholders. In fact, as recently as the early 2010s, one of procurement’s main professional bodies, CIPS, didn’t even use the word ‘procurement’ in its name.
And while the evolution of procurement has allowed for greater focus and recognition, there’s still plenty of work required to ensure all stakeholders understand how procurement fits into the entire organisation and what it can deliver. Not only this, but the profession also needs to ensure that our new starters have all the necessary foundations in place to help them grow in their roles.
With this in mind, we have picked out some key terms, concepts, and pitfalls that you will come across in your career. It might be titled ‘Back to Basics’, but this series is just as applicable to the new start as it is to the experienced professionals among us.
First up – Strategic Procurement.
Transactional vs Strategic – What are they?
We can already hear the groans. Could there be two more contentious terms in procurement to define daily activities?
There’s no agreed definition of the terms, they are frequently misinterpreted, often the subject of (heated) debates, and can create unnecessary barriers to more cohesive work and better results.
If your team is anything like mine, then you would cheerfully consign both terms to the scrapheap and start again. But bear with me, as I believe there is good reason to keep using them, with a couple of important caveats (more on this later).
Transactional Procurement (AKA Tactical Procurement; Operational Procurement) is, in essence, purchasing. It is the process of taking an order from a requirement or requisition, placing an order with a supplier, and ensuring it is delivered on time. Transactional procurement can provide cost savings, but is unlikely to add value – a key distinction.
Strategic Procurement (AKA Strategic Sourcing) is much more about the creation of value for the organisation. It’s data driven, aiming to reduce risks by creating better supplier relationships and greater alignment with organisational goals. Crucially, the focus is on long-term outcomes, rather than short-term actions.
Why is this so important?
With the increasing focus on procurement and increased expectations on what the profession can, and should, deliver for the business, professionals need to understand where their focus should lie.
Transactional activities tend to be labour intensive, manual processes, many of which procurement teams will try to automate as much as possible.
Strategic activities have the same time and resource investment, but have a greater pay-off when it comes to adding value, creating new opportunities and building supplier relationships.
When resources are more limited or constrained, it’s key for procurement teams to understand the difference between these tasks so they can focus in the right areas.
What are the key steps?
As we will come to shortly, there are some common misconceptions associated with both of these terms, and even the most seasoned professionals can get them mixed up.
The key steps for assessing which are transactional and which are strategic tasks can be considered against the following points:
- Short-term (Transactional) or Long-term (Strategic)
- Cost Savings (Transactional) or Value Adding (Strategic)
- Supplier Relationships – Arms’ Length (Transactional) or Collaboration (Strategic)
- Repetitive tasks (Transactional) or Individual tasks (Strategic)
- Can the task be automated partly or fully (Transactional)? Or does it require human input (Strategic)?
Common misconceptions – When is strategic not strategic?
That seems fairly clear cut, so why do these terms so often cause such a visceral reaction?
In many cases this stems from a misunderstanding of what is included in each, as well as a heavy blurring of lines between the two when it comes to activities and responsibilities.
And, not infrequently, procurement professionals’ own belief that they are much more strategic than they actually are. So, you think you’re strategic? Let’s find out.
An easy one to start with. Running RFxs might be a good way to get information, interests, or costs from suppliers while likely making some savings, but they’re not a strategic activity.
If you’re looking to be strategic, your focus needs to be on long-term value, rather than short-term savings.
Material Requirements Planning (MRP)
Traditionally, a task to help plan when parts will be used so you know when to buy them, as well as a way of differentiating between project and non-project specific parts. But it’s just not strategic – it might not even be done by the procurement team, and it doesn’t add strategic value.
This is certainly one where lines are blurred. Daily communication or meetings with suppliers aren’t necessarily strategic, as it largely depends on the type of relationship you have.
It’s definitely a key activity, but it only moves away from transactional when it feeds into Strategic Relationship Management (SRM) activities and long-term collaboration.
Order MOQs and Consolidation
Making life easier for you and your suppliers, reducing administration and associated costs, and ensuring that you’re getting the right price breaks on quantities – that’s strategic, right? Sorry again…while there are a lot of benefits to this approach, and your suppliers will appreciate it, we’re still not in value-adding territory.
Min/Max Stock and Forward Buying
This has all the hallmarks of a strategic activity, but in most cases it becomes a repeat or standard task, placing it in the transactional camp.
It’s well worth doing, especially when supply chains are at risk of disruption. And this is where it plays a strategic role, when mitigating against future risks, such as material scarcity.
Are there best practices to follow?
When it comes to assessing and embedding strategic procurement, there are a few areas of best practice that can be followed.
These will take time to set up, but once they’re in place, they can be used to refresh the strategic process on an on-going basis.
- Analyse spend – understand what the major spend areas (products/services) and suppliers are, and have been in previous years. Highlight any consistent spend areas and critical suppliers from this for further assessment.
- Analyse suppliers – using tools such as the Kraljic Matrix can help to categorise products that the organisation buys, and how they should be managed. This will also help to identify any areas where poor relationships may hinder continuity of supply.
- Analyse the supply market – using tools such as Porter’s 5 Forces, analyse how your key markets look, understand where there are alternative sources of supply, or if suppliers hold a monopoly. This will inform whether or not there might be the appetite on the supplier’s side for SRM.
- Define your process – set up a clear and consistent process, with fully defined roles and responsibilities. Select a smaller number of suppliers to begin with, and then build on this once strategic relationships are in place.
Differentiation – not an either/or decision
As you can see, it’s not cut and dried when it comes to differentiating between strategic and transactional activities. And yet, do we really need to?
The answer is both yes and no.
Consider Procurement (Strategic) and Purchasing (Transactional) as the inside of a clock. Both sides are like the cogs in the inner workings, but this doesn’t mean that they are the same or have the same impact. It does, however, mean that you need all of these cogs working together, all of the time, in order to correctly tell the time.
Good procurement organisations and teams understand the difference between the two and ensure that roles and responsibilities are well defined. This ensures that things run as smoothly as possible and all the key activities, both strategic and transactional, are carried out in the most effective way possible.
Do you have first hand experience of strategic vs transactional roles? How did you resolve any conflict?
We’d love to hear people’s thoughts and experiences as we go through this series and help shine a light on the topics that our professional network sees as crucial throughout our careers.
Find more Back To Basics news, insights, and best practises at Procurious.com
Read more at Procurious.com:
- Is Procurement Just Another Part of the Supply Chain?
- From Tactical to Strategic: 5 things you need to consider
- Harnessing The Value Of Strategic Suppliers
- Creating a Strategic Procurement Function
- Strategic Procurement: A CFO’s Guide To Getting There!
- The Importance of Strategic Thinking
- Strategic Similarities of Football and Procurement