What is procurement?

The quick answer people give is “it’s buying”. That is only one part of what procurement is…

Procurement enables an organisation to operate by ensuring that the right goods and services are available to fulfil the objectives of the organisation.

Direct procurement deals with goods and services directly related to what the organisation sells. For example, windscreens for a car manufacturer or flour to a bread manufacturer.

Indirect procurement relates to all goods and services required by the business which do not directly relate to what their core business is. For example, computers or office supplies to both the car and bread manufacturers.

When we say “it’s not simply buying”, consider that it would typically be a procurement-led decision whether or not to outsource management of the IT service desk in an organisation. Procurement’s role is to establish what the particular need is and to work with the organisation to ensure that the need is fulfilled in the best possible way.

Procurement is very important to a successful organisation. Sales and marketing can only do so much to increase revenue whereas the procurement department gives an organisation control of its costs and therefore directly impacts profit.

Sourcing strategy options

Sourcing strategies determine how your company will ensure supply of a particular product or service. Typically development of a sourcing strategy includes consideration for where to purchase, considering demand and supply situations, while minimising risk and costs.

Potential sourcing strategies include:

• Direct negotiations,
• Insourcing,
• Outsourcing,
• Competitive bidding (RFx, Reverse Auction),
• Panel contracts (having a restricted number of suppliers signed up to your terms for one procurement category),
• Volume aggregation (using fewer suppliers), and
• Global sourcing (also low cost country sourcing).

Several factors go into selecting a sourcing strategy such as:

• What the supply market looks like,
• Volatility of supply/prices, and
• How important the product/service is to our company (Often there are four groups in which products are divided; critical, routine, leverage and bottleneck products).

Got feedback? Please send it through!

How to build a procurement category plan

The purpose of a category plan is to define the category and the planned strategies to maximise value and reduce risk for your company.

A category plan should include:

• A profile of the category as it stands, and
• The strategy to effectively ensure and manage the ongoing supply of goods and/or services.

Development of the category plan should be led by the procurement category manager and should involve the key business stakeholders to ensure its relevance. Once developed it should be reviewed (and refreshed if necessary) on a regular basis ,annually in most cases.

The plan should extend past the length of a typical contract in that category (for example, many indirect categories have a 3 year average contract length in which case the plan should extend to at least 5 years in the future).

Category Profile

• Definition of what the category includes
  (e.g. Travel category plan could include Hotels, Air Travel, Car Hire and Travel Booking Companies)
• Name of category manager
• Name of contract manager
• Historical spend and current contracts
  (if possible spend mapped to contracts, for example spend in Hotels was $50M of which only $30M was with contracted hotel providers)
• Future demand and requirements
  (in particular the potential changes in future demand and the rationale for them)
• Supply market analysis
  (who are the major suppliers, what are the changes happening in the industry, substitute products etc)

Category Strategy

• Opportunity areas (demand & supply)
• Sourcing strategies (e.g. “tender for hotel accommodation”, “renegotiate air travel contracts”, “implement panel for car hire providers”)
• Implementation timeline

A few notes about category plans

A category plan should have a page at the front with a space for the physical signature of the head of procurement / senior finance stakeholders to ensure accountability.

Category plans can be used to measure the performance of category managers at the end of each year.

A well designed category plan should be used in daily / weekly planning by a category manager to ensure relevance of tactical activities.

Here is a category plan template for you to use as well as an example for you to see what one looks like once populated. Your feedback is very welcome and will help us to continue to refine these!

Category Plan Template