Advances in technology in combination with digitalization are bringing sweeping changes to the way in which companies compete, tackle issues, and innovate. Understanding the why and how of procurement spend optimization is one of the most important topics that a company can pursue. Small changes in companies procurement processes can have massive effects on performance and success.
Similarly to how consumer purchasing behavior shifts based on the item being purchased, companies adjust their purchasing strategy based on the classification of goods or services. The most basic classification is the differentiation between strategic, tactical and operational purchasing.
Operational purchasing, makes the best possible use of existing potential for success. It is the short-term purchasing of everyday catalog products. Supplier selection is quick and uncomplicated — most companies work with several catalogs that are customized to their specific business requirements.
Strategic spend usually involves large purchasing volumes, which are associated with high costs. Consequently, there are certain “best practices” that should be pursued in order to minimise supply risks. Supplier selection is based on a variety of factors such as price, past performance, quality, and spend analyses.
Strategic purchasing is geared towards the medium to long term. Wrong decisions or bad investments can only be corrected with a great deal of effort. Due to the risk involved, purchasing decisions are made based on either extremely thorough assessments of new suppliers or years old relationships with existing suppliers.
Detailed supplier evaluations, product evaluations and negotiations are the cornerstone of strategic purchasing strategies. Digitalization is helping to simplify supplier evaluations. If correctly implemented, companies can leverage software and technology extremely efficiently. They are starting to develop the ability to make their choices in digital networks. With this approach, potential suppliers compete for orders and companies can directly access supplier data. Companies are implementing digital technologies to improve supplier transparency and improve the strategic purchasing process as a whole.
Tactical purchasing is somewhere in-between strategic and operational purchasing. Here, strategic decisions are made, according to best practices laid out in corporate policy. However, best practices are often not optimally applied to tactical spend because the effort is seen as “not worth it”. Tactical purchasing decisions are often quickly made by individual departments. A clean supplier audit or negotiations to optimise costs only infrequently take place.
Tactical purchasing is a delicate balancing act. The problem is, that the cost of tactical spend items is not high enough to warrant a time intensive procurement process. Due to a disregard of best practices, massive costs arise. As purchasing decisions are made quickly and pragmatically, the organisation incurs costs that could be avoided through competition and proper supplier selection.
The importance of a sophisticated tactical purchasing strategy becomes especially apparent in time sensitive situations, such as the procurement of corona tests for employees. For many companies, short term procurements put a lot of pressure on those responsible. Decisions have to be made quickly and there is a rush to process orders. Non-optimised tactical purchasing can become costly. In most cases, there exists a lack of synergy between the person placing the order and the software.
In order to remain efficient, strategy differentiation and various approaches need to be made between the three spend classifications. The development focus should be on the constant optimisation of the purchasing organisation. However, purchasing departments often do not have the time and tools to work effectively.
How software helps
Software tools save time and money. They enable companies to quickly get the best offer, without having to reach out to countless prospective suppliers. Suitable suppliers can be found at short notice and be easily contacted using information in existing databases. The bidding and submission process is also simplified by standardized formats.
Automated processes simplify buying, strengthen business relationships, and allow for quick decisions. They enable purchasing departments to be highly efficient and responsive, by giving the human talent the tools that they need.