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Strategic Procurement Management

By
Bagaya Ramathan
(BPLM (Hons) KYU, PGDMATHE (IUIU), Msc. PSCM (MUK)
Faculty of Management Studies
Islamic University in Uganda-Kampala Campus

Strategic procurement management is the process of planning, implementing, evaluating, and

controlling strategic and operating purchasing decisions for directing all activities of the
purchasing function toward opportunities consistent with the firm's capabilities to achieve its
long-term goals.

Strategic procurement is a methodology used in many organizations to realize the greatest

amount of benefit to the company while still effectively managing the costs associated with the
acquisition of raw materials and operational components. As opposed to tactical purchasing,
which tends to see the purchasing process as somewhat distanced from other functions within the
corporate structure, strategic purchasing attempts to promote the most efficient use of all
materials throughout the company. The goal of strategic purchasing is to increase the bottom line
of the company through the most judicious use of purchasing approaches and strategies.

One of the ways that strategic procurement takes place is through the analyzing how money is
spent for purchases currently. The idea is to determine if there is any way to enhance the
purchasing process through adjusting the guidelines associated with requisitioning materials or
placing orders with suppliers. Often, this type of spend analysis will reveal one or two small
ways to make the process more efficient and possibly save the company time and money.

Strategic procurement management also involves building rapport between purchasers and
suppliers. Working together, it may be possible to streamline the advance time needed to process
an order with the supplier, thus reducing the need to maintain a larger inventory. Depending on
the volume of business done by the company with the supplier, it may also be possible to find
ways to expedite delivery as well.

The use of strategic planning also means automating as much of the planning process as possible.
Tasks that are routine can often be set up for completion by software or other automatic means.
This frees purchasing agents to focus on other aspects of the purchasing process and thus
increase the chances of using available resources with more efficiency.

In the end, strategic purchasing is all about redefining buying habits, processes, and behaviors so
that the company enjoys the most benefit. From this perspective, strategic procurement
management is not an event, but an ongoing process that involves the interaction of purchasing
professionals with suppliers, and the management arm of the organization.
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Strategic procurement can be approached from three main dimensions namely: Development and
management of key suppliers, internal operation of procurement function and coordination of
purchasing with other functions within the firm, and efforts to meet or exceed customer
expectations.

It is seen as one of the critical function of an organization with the potential to; save cost,
improve operational efficiency, access to trusted suppliers, and improve in quality of product or
service, sharing of best practices among others (Magnus, B. 2006). The representation of the
strategic procurement can be described in terms of its environment and structure, and what
activities take place in the supply link. General performance indicators of the supply link in
terms of time, quality, flexibility and cost are used to measure efficiency and effectiveness. The
efficiency in the supply link explains how well the resources are utilized. Since resources are
scarce, it is in everyone‘s interest in the organization to maximize the utilization of the resources.
The effectiveness of the supply link explains how well the objectives are achieved (Arun, K. and
Linet, O. 2005).

Tactical Procurement Management

Tactical procurement is typically a subset of activities and processes within the strategic
procurement management approach. It focuses on operational purchasing requirements based on
information from a limited environmental scan (Lysons and Farrington, 2006)

Tactical procurement management relates to the management of procurement activities such as

drafting specification (of goods, works and services); selecting and contracting of suppliers
(Obanda, 2010). It is majorly constituted of pre-procurement and actual procurement activities.
The pre-procurement or pre-bidding activities are those activities performed by organizations in
preparation for a given procurement. These include, needs assessment, procurement planning,
drafting solicitation documents, budgeting; confirmation of funds, determining procurement
method and conducting market research, among others

While actual procurement relates to those activities involving the actual contracting of a bidder.
They include; conducting preliminary evaluations, financial evaluations, technical evaluation,
negotiations, award of contract and debriefing unsuccessful bidders. In Uganda, the tactical
procurement function is clearly documented under the PPDA Act (2003) in order for each and
every public entity to follow as a mechanism of promoting compliance and effective service
provision.

According to KPMG International (2012) and Hunja (2001) procurement in most public sectors
organizations is largely tactical in nature, whereby the focus is normally on supplier selection
and contract award (New Zealand Government, 2010). This is because the tactical procurement
level is the most sensitive in the procurement process, since it is what determines the quality of a
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bidder to be contracted. If the tactical procurement process is poorly managed for example, there
is a high possibility of having poor services delivered and the reverse is true.

In Ugandan public procurement, the tactical procurement level is usually given high considerable
attention and involvement of key stakeholders or actors as early as possible in order to ensure
joint planning and implementation of required tasks. This helps minimize risks of delay, and
procurement of substandard items thus effective service delivery management.

Strategic procurement management involves countering the negative effect that bar procurement
operations from achieving efficiency and effectiveness in service delivery management. Such
interventions majorly take a form of; collaborative business management, supplier development
and market analysis (Online) forecasting in order to promote visibility and accuracy in supply
chain management, hence effective service delivery and organization performance (Pay Stream
Advisors, 2013).

In the private sector, because of the high desire to obtain competitiveness, strategic procurement
is more rigorous in nature than the public sector. For this matter, a combination of approaches or
strategies have been devised, which include, supplier development approaches, and collaborative
business but also incorporating of modern business management practices such as e-
Procurement. This has increased efficiency in the operations of many firms leading to improved
service delivery management.

CHARACTERISTICS OF STRATEGIC PROCUREMENT MANAGEMENT

i) Spend Analysis: procurement officers examine the amount of money they spend in each
category of goods and services and use this analysis to identify opportunities for
improvement.
ii) Supplier Relationship Management: procurement officers measure supplier performance
and regularly spend time meeting with their most important suppliers to implement
improvements.
iii) Technology Implementation: procurement officers frequently update and add technologies
that measurably reduce costs, decrease cycle time, and make the purchasing process more
efficient.
iv) Developing Project Plans: procurement officers use project management practices to map
out both recurring activities and one-time projects.
v) Enterprise-wide Contracts: procurement officers consolidate spends across all parts of their
organizations and enter into contracts with a limited supply base to serve the needs of the
entire organization.
vi) Forecasting: procurement officers regularly document changes that they foresee in price
levels, availability, and markets to ensure a competitive advantage for their organizations.
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vii) Involvement in Specification Development: procurement officers involve themselves in the

early stages of specification development, lending specialized knowledge in material
availability, cost drivers, standard parts, and reliability of supply.
viii) Development of Productivity Tools: procurement officers develop tools (e.g., RFP
templates) so repetitive tasks can be done more quickly and error-free.
ix) Supplier Development: procurement officers don't blindly accept the suppliers and
products that are currently available. They work with suppliers to develop new capabilities or
products that will improve cost or quality.
x) Work Responsibility Refinement: procurement officers constantly identify ways to
automate, delegate, or eliminate tactical, non-value-added work.

STRATEGIC PROCUREMENT MANAGEMENT TOOLS

Uganda spends over 55% of her budget on public procurement (PPDA 2012). Procurement is
therefore central to achieving efficiency in public expenditure and service delivery. It is therefore
imperative for procurement officers to adopt strategic procurement management tools in order to
achieve the strategic outcomes (accountability of the government to public). Below are the
strategic procurement management tools which can aid PDEs in decision-making

i) Spend analysis; when used at a strategic level this is a powerful and invaluable tool for
identifying and manipulating detailed spend data by, for example, category, provider, cost
unit and time period and combinations/permutations of these. This information is the key
foundation for other strategic procurement decisions such as category management, and
supplier relationship management. It forms an important part of resource mapping and
planning as it allows PDEs and their funding partners to identify where financial resources
are being allocated currently, and commitments in the future. Spend analysis will be
particularly useful if carried out regularly and the information is kept up-to-date at a
management level.

Spend analysis allows PDEs to identify, for example, their key providers, key spend areas,
how many providers may be delivering the same goods/services, and peaks and troughs in
demand. It provides management with information on opportunities for improving value for
money and potential quick wins. It is also a building block for forecasting need and spend

ii) Collaborative procurement; PDEs should seek opportunities to collaborate on procurement

activities at the widest possible level, internally and externally, sub-regionally, regionally or
even nationally. Collaboration in this sense means working together to procure similar
requirements for multiple user departments or PDEs at the same time. This will usually
mean setting up a framework from which requirements can be called-off as and when
necessary by any partner division/organisation.

iii) Procurement strategy and plan; under this PDEs should have a corporate procurement
strategy and plan produced by the Procurement Disposal Unit (PDU). This should take
account of the procurement activities across the organisation and should be linked to work
within needs of the user departments. The strategy would include elements such as:
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 Overall aims of developing the strategy and how these will be met in broad terms
 Forecasts and priorities
 Resources and skills – what is required and how will it be made available
 Key providers and how these will be managed
 The use of e-Procurement and how this will be extended
 How developments in the market will be monitored and acted upon

The plan would support the strategy and provide timescales for significant procurements as
well as detailed targets with owners and timescales. The targets should drive continuous
improvement.

iv) Category Management; Category Management is a process of identifying categories of

goods or services and managing these as business units so that value for money is
maximised. It comprises a wide number of tools and techniques. This should be carried out
at a strategic level and should be repeated regularly to take account of changing priorities,
demand and markets.

Categorisation will also be impacted by, for example, opportunities for collaborating with
other PDEs, future business requirements, market forces and the resources available. Once
the categorisation has been agreed, a wide range of tools exist to identify and deliver the best
strategy for dealing with a particular category. The level of resource applied will be in line
with the possible benefits that can be achieved. Challenging and managing procurement
activities in this way will ensure that resources are focused where they will achieve the
greatest value for money.

v) Supplier Relationship Management (SRM); Supplier Relationship Management is an

important element of Category Management but is worth highlighting in its own right. It
should be an on-going activity applied to all current, significant suppliers

SRM recognises that different relationships will be required with different

suppliers/providers. The type of relationship will depend largely on the criticality and/or
value of the goods or services they supply, and factors such as the number of suppliers in the
market, and the global availability of a requirement.

SRM allows procurement officers to develop strategies for dealing with suppliers to achieve
on-going value for money, and reduce the risk of poor performance or non-delivery or non-
availability. It allows the organisation to focus effort on the right suppliers and ensures they
are not being managed by their supplier.

vi) Supply/Value Chain Analysis; supply/Value Chain Analysis is the systematic mapping and
analysis of the parties (internal and external) i.e. the supply chain, involved in delivering the
inputs, outputs and/or outcomes associated with providing a requirement. It is an important
element of Category Management and Supplier Relationship Management. It should largely
be undertaken as a one-off activity once the priority categories have been identified using
Category Management. On-going reviews of progress internally and among
suppliers/providers, and action plans will also be required.
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Supply/Value Chain Analysis allows identification of linkages which provide value and
those that pose a risk. Identifying the supply chain and working with the parties to identify
areas of wasted activity, avoidable delays or unnecessary costs, as part of a wider Supplier
Relationship Management approach, can greatly increase value for money by reducing costs
and/or improving performance.

vii) Competition; competition is the process of inviting more than one potential provider to put
forward a proposal and then evaluating the proposals in a fair and equitable manner. It is
the opposite of single tender action where only one proposal is considered. Single tender
actions should be kept to a minimum, and are usually only used for very low value
procurements.

Competition provides buyers with comparative quality and cost information which allows
them to make value for money decisions, and incentivises providers to put forward a more
attractive proposal than if they knew that they alone were being considered.

A threat to the effectiveness of competition as a tool is the possible collusion of providers.

Inviting a wider number to put forward proposals, encouraging innovative proposals and
checking for any unusual trends in pricing should reduce the risk of collusion.

viii) E-Procurement; Electronic procurement is increasingly being used to streamline the

procurement process. Procurement officers should therefore consider how their organisation
might benefit. Developments include:

 Systems to manage the process for receiving and evaluating quotations and tenders (e-
tendering)
 Systems to assist with the management of contracts
 The use of e-Auctions to identify the best price offered by suppliers1
 Online e-Marketplaces which allow buyers and sellers to interface and do business – an
example is the OPEN marketplace for use by schools.

ix) Standard Terms and Conditions of Contract; Most PDEs have developed standard Terms
and Conditions of Contract for Goods, and for Services, which should be attached to
invitations to tender. Standard Terms and Conditions of Contract greatly reduce the risk of
procurement officers omitting important, core conditions, such as Intellectual Property
Rights, Default, Termination, Liquidated Damages, from the final contract

x) Framework agreements; framework agreements are pre-tendered arrangements with a

provider, or providers, by which they must deliver goods and services as and when required
over a specified period. They are a very useful tool for aggregating demand and achieving
economies of scale where there is a repeat requirement for a good or service, particularly
where these are high value and would be above the PPDA threshold.
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xi) Preferred supplier lists; where repeat requirements for median or low value supplies or
services are expected, it may be useful to set up a list of preferred providers for use across the
organisation. The list would set out potential suppliers suitable for inclusion in the
competitive process. Suppliers should be assessed against open and transparent criteria
before being included on the entity’s list of providers. To ensure equality, a system for
choosing which suppliers to compete for requirements as they arise should be set out. Also
to ensure equality the organisation should not close the list to new suppliers who meet the
criteria. Criteria for removing suppliers from the list should also be open and transparent.

xii) Sustainable procurement; this is a process whereby PDEs meet their need for goods,
services, works and utilities in a way that achieves value for money on a whole life basis in
terms of generating benefits not only to the organisation but also to society and the economy
while minimising damage to the environment. PDEs should however set out a policy on
how they intend to implement sustainable procurement.

STRATEGIC PURCHASING MODELS

Purchasing portfolio models have received much attention in the recent literature about
professional purchasing. One of the most famous portfolio models was introduced by Kraljic
(1983). He advised managers to guard their firms against damaging supply interruptions and to
deal with continuous technological change and economics growth. In his seminal paper he called
attention to the need for companies to attain more effective supply management. He proclaimed
that ‘‘purchasing must become supply management (Kraljic 1983, p. 109)

In his article he presents a figure in matrix format that classifies the ‘stages of purchasing
sophistication’ within companies. The matrix identifies four stages:
 purchasing management;
 materials management;
 sourcing management; and
 Supply management.
Kraljic (1983, p. 111) argues that supply management is particularly relevant in the case that the
supply market is complex and the importance of purchasing is high.

In the second part of his article Kraljic (1983) proposes a four-stage approach as a framework for
developing supply strategies for single products or product groups. In the first stage, a company
classifies all its purchased products in terms of profit impact and supply risk. Subsequently, the
company weighs the bargaining power of its suppliers against its own power.

Then, the company positions the products that were identified in the first stage as strategic (high
profit impact and high supply risk) in a portfolio matrix. Finally, it develops purchasing
strategies and action plans for these strategic products, depending on its own strength and the
strength of the supply market
Three general purchasing strategies are recommended: exploit (in case of buyer dominance),
balance (in case of a balanced relationship), and diversify (in case of supplier dominance). It
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should be noted that Kraljic focuses on strategic products, for the other item categories Kraljic
merely formulated a number of ‘main tasks’. Other scholars have filled this gap (e.g. Van Weele,
2000; Syson, 1992; Elliott-Shircore and Steele, 1985). They have refined the ‘matrix’ and
elaborated on the ‘main tasks’ for bottleneck, non-critical and leverage items. In addition, they
have formulated strategic recommendations, resulting in an overall purchasing strategy
recommendation for each portfolio quadrant as shown in the table below;

The Kraljic purchasing portfolio model (modified from Kraljic, 1983, p. 111)

This matrix is commonly referred to as Kraljic’s portfolio matrix (e.g. Olsen and Ellram, 1997;
Lilliecreutz and Ydreskog, 1999; Van Weele, 2000; Gelderman, 2003). With the help of this
matrix, professional purchasers can differentiate between the various supplier relations and
choose strategies that are appropriate for each category and thereby effectively manage suppliers
(Nellore and Soderquist, 2000).
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Overview of purchasing strategies for all portfolio quadrants

STRATEGIC PURCHASING STRATEGIES FOR DIFFERENT PRODUCTS

a) Strategic items
These products represent a considerable value to the organization in terms of a large impact on
profit and a high supply risk. Examples are engines and gearboxes for automobile manufacturers,
turbines for the chemical industry and bottling equipment for breweries. Often strategic products
can only be purchased from one supplier (single source), causing a significant supply risk. The
recommended purchasing strategies for strategic items are;

i) Maintain strategic partnership; In order to counter-balance the supply risk, firms will aim at
building a partnership relationship with its supplier (Elliott-Shir-core and Steele, 1985). The
mutual trust and commitment that is associated with an intensified relationship is likely to
reduce the supply risk to a minimum. A close and lasting co-operation with suppliers will
lead to improvements in product quality, delivery reliability, lead times, product
development, product design, and it will result in cost reduction (Tuten and Urban, 2001;
Hadeler and Evans, 1994). This situation can be characterized as one with balanced power.
Buyers and suppliers are both heavily involved in the partnership; therefore mutual
dependence is expected to be high. Total interdependence is high as well, since the relation-
ship is very intense.
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ii) Accept a locked-in partnership: This strategy often occurs when the buyer is subject to
unfavorable conditions of the supplier and is unable to pull out of the situation. The locked in
position might be caused by the fact that the supplier holds the patent to a certain product and
therefore has monopoly power to some extent. This situation can be characterized as one
dominated by the supplier.

iii) Terminate a partnership; this strategy is employed when a supplier’s performance has become
unacceptable and incorrigible. The buyer will try to reduce his dependence on the supplier. One
way of achieving this is to search for alternative suppliers. In this situation the buyer still
depends on the supplier, so we expect to find supplier dominance, although to a lesser extent
than when the lock-in partnership is accepted. Also the involvement of both parties in the
relationship is expected to be the lowest in this situation compared to the ones described above,
leading to the lowest total interdependence.

b) Bottleneck items
These products have a moderate influence on the financial results of a firm; however, they are
vulnerable with regard to their supply. Suppliers have a dominant power position for these
products (Kempeners and van Weele, 1997). The purchasing strategy that is commonly
recommended for these products is; primarily based on acceptance of the dependence and
reduction of the negative effects of the unfavorable position. An alternative strategy suggested by
purchasing practitioners is to find other suppliers and move towards the non-critical quad-rant.

i) Accept dependence, reduce negative consequences: The main focus of this strategy is to
assure supply, if necessary even at additional cost. Examples of this strategy are keeping
extra stocks of the materials concerned or developing consigned stock agreements with
suppliers. By performing a risk analysis firms can identify the most important bottleneck
products and consider the implications. A possible action for dealing with unexpected bad
dependence positions for certain products is to employ contingency planning.

ii) Reduce dependence and risk, find other solutions: This strategy is geared towards reducing
the dependence on the supplier. The most common way to achieve this is to broaden the
specifications of the product or to search for new suppliers.

c) Leverage items
In general, leverage products can be obtained from various suppliers. These products represent a
relatively large share of the end product’s cost price in combination with a relatively low supply
risk. The buyer has many possibilities and incentives for negotiation, since small percentages of
cost savings usually involve large sums of money (Olsen and Ellram, 1997). At the same time
the supply risk is minimal. These characteristics justify an aggressive approach to the supply
market (e.g. Van Weele, 2000). Frequently, a purchasing strategy directed towards exploitation
of the buying power is pursued. Practitioners also identify an additional strategy in this quadrant,
which is intended to change the current situation: develop a strategic partnership.
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i) Exploit buying power: In this strategy the firm pursues competitive bidding. Since suppliers
and products are interchangeable, there is no need for long-term supply contracts. In general,
a coordinated purchasing approach is adopted that has the form of a centrally negotiated
umbrella agreement with preferred suppliers. Call-off orders are then placed as an
administrative formality. The buying power is actively used to get better deals with
interchangeable suppliers. This scenario is therefore characterized by buyer dominance

ii) Develop a strategic partnership: In a few cases practitioners choose to abandon the leverage
position and opt for a strategic partnership with a supplier. This cooperative strategy is only
pursued when the supplier is willing and able to contribute to the competitive advantage of
the buyer’s firm. Hence, this role is only attainable for technologically advanced suppliers. In
this scenario we expect to find a balanced power position between the buyer and supplier.

d) Non-critical items
These products usually have a small value per unit. In addition, many alternative suppliers can be
found. From a purchasing point of view, these items cause only few technical or commercial
problems. As a rule of thumb routine products require 80% of the purchasing department’s time,
while they often represent less than 20% of the purchasing turnover. In general, in this situation
purchasers are advised to pool purchasing requirements. In addition Gelderman and Van Weele
(2003) identify the strategy of individual ordering and pursue of efficient processing.

i) Pool purchasing requirements; the handling of non-critical products requires a purchasing

strategy aimed at reducing the logistic and administrative complexity. A system contracting
is generally advised as the way of doing business with suppliers of routine products. The
main idea is to enhance purchasing power by standardization and bundling of purchasing
requirements.

ii) Individual ordering, efficient processing; whenever it is not possible to pool the purchasing
requirements, professional purchasers adopt some kind of individual ordering, for instance by
means of a purchase card. This strategy is aimed at reducing the indirect purchasing costs
that are associated with administrative activities, such as ordering and invoicing.