Is Your Procurement Strategy Hurting Your Business?

Is Your Procurement Strategy Hurting Your Business?

Is Your Procurement Strategy Hurting Your Business Strategy?

Your business is no doubt driven by strategy.

So is your procurement.

But do your business and procurement strategies align? Or is your procurement strategy hurting your business strategy?

Procurement Strategies

In my last blog post, I highlighted the fact that defining procurement savings can be a murky task.

However, despite this fact, it’s still safe to say that most procurement “strategies” boil down to cost-cutting.

In fairness, not all these strategies focus on black and white “cost savings”. Some are careful to ensure that cost savings are only incurred when they won’t negatively affect quality, quantity, or timeframes. Others look at long-term savings rather than focusing only on the short-term. And several consider costs and savings in terms of the ultimate outcome, rather than an individual product or service.

Nevertheless, most procurement strategies focus on cutting costs.

Which wouldn’t be a problem, except that this rarely aligns with most business strategies. And that’s a problem.

Business Strategies

Generally speaking, most businesses employ one of four standard business strategies:

  • cost leadership
  • differentiation
  • low cost focus
  • differentiation focus

Cost leadership involves being the low cost producer of a product or service in your industry. You then sell that product or service at average prices (and make a bigger profit than your competitors), or below-average prices (still making a profit, but gaining greater market share).

Differentiation is about developing a product or service that is unique or has unique features in comparison to those offered by your competitors. The selling point is the uniqueness, and this value-add often allows you to charge extra.

Low cost focus involves focusing on a narrow segment of the market, and marketing based on price in that segment. Once again, it involves being a low cost producer, and/or being willing to sacrifice profits for greater market share.

Differentiation focus also focuses on a narrow segment of the market. But this is about marketing based on unique features, not price.

Do They Align: Cost Strategies

Cost-based procurement strategies do align with cost leadership and low cost focus business strategies. In such a case, your procurement strategy won’t hurt your business strategy, per se.

But that doesn’t mean that all is well.

Because chances are that in this scenario, your procurement strategy may be hurting your business.

Cost leadership and low cost focus rarely represent a sustainable competitive advantage in business. After all, your competitors will almost always be able to lower their prices too. Any cost advantage is therefore generally only achievable short-term. It won’t be long before everyone’s doing it. Which means it won’t be a competitive advantage for long.

Do They Align: Differentiation Strategies

On the other hand, a procurement strategy based on cost savings rarely aligns with a business strategy based on differentiation or differentiation focus.

Such a procurement strategy will ultimately hurt and hinder the business strategy, because differentiation and differentiation focus are not achieved through cost cutting. In fact, they may even require greater spending.

Of course, you can make up for this higher procurement cost through a premium price at the point of sale. But this means you need to take a long-term approach to procurement, and change your focus from cost cutting, to quality and delivering a better product to your end user.

Two “Take-Aways”

There are two key “take-aways” from this.

To begin with, your business will only thrive if your procurement strategy and your business strategy are aligned. It’s also important to remember that your business strategy needs to drive your procurement strategy, not vice versa.

The second “take-away” is that cost-based business strategies are rarely competitive, at least not long-term. If your business and procurement strategies both focus on cost, it’s time to consider changing them to help your business become more competitive in the marketplace. Obviously, both strategies must still align with one another after the change.

 

Your Say

Does your procurement strategy align with your business strategy? Have you ever worked in an organisation where the two did not align? Let me know in the comments below.

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