Five Key Components Of A Procurement Strategy

The typical contents of a procurement strategy are:

a. Make or Buy decision
b. Contractual relationship
c. Reimbursement methods
d. Supplier selection
e. Contract administration including feedback and review (10/10)

a. Make or Buy decision – When undertaking the procurement strategy an organisation needs to determine whether it shall either make or source the different goods or services required in-house, or procure the goods or services required elsewhere at a lower cost / better quality. A well-developed specification shall be required for each to derive a solid price. For example the decision shall affect the necessity for legally binding paperwork or simpler Service Level Agreements and also the time and cost of procurement.

b. Contractual relationship – There are many different types of contractual arrangements and the choice of contract type shall determine the level of management and project risk the organisation retains or pays to have provided to them. For example, paying employing two different suppliers on parallel contracts to do other same work reduces the risk of failure by one supplier on a single contract. Or employing a prime contractor to manage multiple sub-contractors and own the risk associated with their work packages.

c. Reimbursement methods (Payment terms) – The project and sponsoring organisation shall need to decide on the mechanism to pay for goods and services. Often the decision is based on risk and how well the scope and requirements can be defined. If a client can define the scope well they may choose a fixed price whereby the supplier shall own the risk of overrun but build that risk into the price. Alternatively, a unit price reimbursement method may be chosen whereby the client cannot easily define the scope and the specification is vague, they shall, therefore, own the risk of overrun but with a reduced supplier margin per unit when compared with fixed price.

d. Supplier selection – A key consideration for the procurement strategy is how to engage the right supplier. It is usual for an organisation to already have rules and guidelines which the project shall need to abide by. These processes are often used to manage a competitive tender process whereby potential suppliers are asked to submit prices for specified work in a commercially competitive manner. The project manager shall need to ensure requirements are defined, a shortlist of willing and able suppliers, invitations to tenders are issued identifying selection criteria, bid queries can be answered, a contract can be awarded.

e. Contract administration including feedback and review – Requires carrying out throughout the contract award to ensure that both parties are conforming and undertaking their duties accordingly. A key ingredient for the procurement strategy is setting out how this contract administration will be executed. This would include the reports and KPIs that the customer expects from the contractor. For example this may specify a monthy progress meeting between the customer and the suppliers.