In order to be successful, Procurement Managers are constantly on a look-out to review their existing category procurement strategies and align it with the latest market dynamics. And hence, it is considered as one of the procurement best practices to keep oneself updated on a short, mid and long term strategy to reap maximum benefits or more commonly, greater value for every dollar spent.
Like any business strategy, the category procurement strategy has gained the focus of strategic sourcing teams worldwide to negotiate and write cost-efficient contracts keeping the total cost of ownership (TCO) in mind.
In order to write a comprehensive Strategy Review Document (SRD), the following 7 parameters are considered most important:
1) Knowledge of the Category or Requirement – For a Product Category, this may entail knowledge of the latest manufacturing processes and machines, available substitutes, standard products, quality parameters, etc. while for a Service Category, it would be more around skills, experience of workforce, quality of service, customer satisfaction, etc.
2) Knowledge of the Category Market – Trends in recent past, growth projections in the next few years, market fragmentation, top global players, demand-supply landscape, pressure from substitutes, etc.
3) Knowledge of Cost Elements – Cost build-up or cost structure, the elements that drive the cost in the aforesaid cost structure, volatility, local factors like taxes, electricity costs, government policies eg., notifications around anti-dumping or prohibited import categories (applicable to LCCS*), incoterms, etc.
(*LCCS – Low Cost Country Sourcing)
4) Knowledge of Supplier Base – A long list of suppliers generally developed through comprehensive market research, running RFIs, and qualification through a pre-agreed/defined qualification criteria.
5) Knowledge of Contracts/RFx Clauses that may have a Commercial Impact – Time and money or outcome-based, fixed price or indexed pricing, product/process liability clauses, after-sales support, guarantee/warranty, EMD*/Security/Bank Guarantee clauses, termination clauses.
(* EMD -Earnest Money Deposit)
6) Knowledge of Prevalent Rates – By geography, by experience, by labor or by any other significant parameter specific to the category being sourced.
7) Procurement managers and financial planners are also seen hedging their risks by trading into futuristic markets and lock prices for mid-long term looking at the past category trends, research publications, geopolitical factors, and global inventories.
With the above seven key parameters, procurement managers can attempt to write and review their sourcing strategies for any of their future meaty purchase.