Procurement Strategy Implementation.docx
- 1. Procurement Strategy Definition and Implementation Learning objectives At the end of this course, you will be able to:1 1. Define procurement and its importance. 2. Explain the different parameters to consider when deciding where to source goods and services for organization’s Operations. 3. Present the main highlights of the Global Procurement Policy (7 principles and 7 procurement steps). 4. Enumerate the main standard documents and tools to use to ensure transparency and accountability throughout the procurement process. 5. Conduct a spend analysis and develop a procurement action plan that prioritizes the key categories of items and services. 6. Analyse the needs by actively involving requesters, referents, and budget owners. 7. Identify market specificities and design a Procurement strategy. 8. Recall the different milestones of the supplier selection process and the main structure of the multi-criteria CBA. 9. Prepare the negotiation phase by identifying the key negotiation parameters. 10.Establish the correct contract for the different purchases. 11.Evaluate the performance of suppliers using key performance indicators. Procurement definition and its importance Procurement is the comprehensive process of acquiring goods and services for an organization, encompassing everything from identifying needs to managing supplier relationships and payment processing. It's crucial for business operations as it ensures the right resources are available at the right time and price, impacting cost control, efficiency, and risk management. Procurement involves a series of steps including identifying needs, sourcing suppliers, negotiating contracts, managing relationships, and maintaining records. It's a broader process than just purchasing, encompassing the entire lifecycle of acquiring goods and services. Procurement can include both direct procurement (e.g., raw materials for manufacturing) and indirect procurement (e.g., office supplies). The parameters to consider when deciding where to source goods and services. There are different parameters to consider when deciding where to source goods and services for organization’s operations. Quality and Reliability: The supplier's products or services must meet or exceed your organization's quality standards and expectations. Consistency in quality over time is also essential. An organization need a supplier who can deliver on their promises and maintain a reliable supply chain. Cost and Price Structure: While cost is a major factor, it should not be the sole determinant. Consider the total cost of ownership, including factors like
- 2. shipping, handling, and potential rework. Compare pricing structures from different suppliers to ensure you are getting a competitive and fair price. Financial Stability: Assess the financial health of potential suppliers to ensure they can meet their obligations and withstand potential economic fluctuations. Capacity and Scalability: Evaluate the supplier's ability to handle your current and future production needs. And again, consider their capacity to scale up or down as required by your business demands. Logistics and Location: Proximity can be a significant factor, impacting transportation costs, delivery times, and communication. And again, consider the supplier's location and how it aligns with your supply chain needs. Ethical and Environmental Practices: In today's socially conscious environment, it's important to consider a supplier's ethical and environmental practices. This includes their commitment to fair labor practices, sustainable sourcing, and waste management. Regulatory Compliance: Ensure the supplier complies with all relevant laws, regulations, and industry standards, particularly in industries with strict requirements. Communication and Collaboration: Effective communication and collaboration are crucial for a successful supplier relationship. So, establish clear communication channels and foster a collaborative environment. Risk Management and Preparedness: Identify potential risks in the supply chain and assess the supplier's risk management procedures. This includes contingency plans for disruptions, natural disasters, or other unforeseen circumstances. Cultural Fit: Cultural differences can impact communication and business relationships. Consider the cultural compatibility of the supplier's organization with your own. By carefully considering these parameters, organizations can make informed decisions about their sourcing strategies and build strong, reliable supplier relationships. The Global Procurement Policy (7 procurement principles and 7 procurement steps). A global procurement policy typically outlines guiding principles and a structured process (steps) for acquiring goods and services. The 7 Procurement Principles
- 3. 1. Effectiveness Contingency for critical items/services. Contracts implementation. Performance management. Responsiveness and agility in emergency situations. 2. Efficiency Best value for money. Competitive process in place. Increasing negotiation power. Stimulating competition. Observing market developments and seize opportunities. 3. Accountability Transparency and fair supplier selection. Openness, fairness, competition, integrity. Adequate levels of responsibility. Compliance. 4. Quality Highest level of quality assurance (QA). Compliance with MSF QA policies. 5. Risk Mitigation Compliance with laws and regulations. Financial stability through regular controls, suppliers' reference, and operational capacity. Risk of fraud minimized through Segregation of Duties (SoD). Definition and implementation of an Internal Control Framework (ICF).
- 4. Risk management process in place to identify, assess and control/mitigate Procurement related risks. 6. Ethics No illegal activity. No collusion, corruption, fraud, and bribes. Proper working conditions. No children employed (ILO) 7. Sustainability Do not Harm Principle. Social and environmental responsible organization. Responsibility and accountability for social and environmental conditions of production. Compliance with sustainable procurement guidelines (work in progress). The 7 steps of the procurement process. Steps to build a Procurement Strategy Strategic sourcing is a rigorous process that modern businesses employ to streamline their procurement activities, optimize spending, and strengthen supplier relationships. Unlike traditional purchasing, strategic sourcing aligns purchasing decisions with business strategy and market conditions to maximize value. Here’s a detailed walkthrough of the strategic sourcing process that has been proven to deliver procurement success. Please note that there is an initial preparation phase, often referred to as ‘step 0,’ which is essential for the success of subsequent steps. This phase consists in identifying and planning the main activities, as well as mapping out the key stakeholders. For complex procurement processes, it is highly advisable to plan the creation of the following groups/committees from the very beginning: A tender working group responsible for preparing and analysing the results of the tender and submitting them to the tender steering committee for a final approval.
- 5. A tender steering committee with final decision-making authority. These consultative and collaborative platforms enhance the transparency, accountability, and quality of procurement processes by involving key stakeholders with diverse technical expertise. Here the first 3 steps of the Procurement process: 1. Spend Analysis 2. Need Analysis 3. Market Analysis and Strategy Step 1: Spend analysis The spend analysis converts raw spend data into usable information. It provides an overview of the total expenditure, types of items procured, and suppliers. This overview will help you categorize priority areas and suppliers, as well as confirm the scope of activities and responsibilities within the Supply functions. The objectives of the spend analysis are to: Support cost savings. Improve contract management. Identify top spend suppliers, categories, and items. Enhance payment terms by optimizing procurement operations and sourcing strategies. Strengthen supplier relationships. Step 2: the need analysis The needs analysis consists in clarifying the needs with the requester(s), technical referent, and budget owner, to better understand their request. It is a crucial step that significantly impacts the outcomes of the procurement strategy. During this phase, it's important to work closely with the requester to thoroughly clarify the needs and objectives, ensuring the request is clear and well-defined. Special attention should be paid to the following points: 1. Technical specifications of the request (as well as historical and forecasted consumptions of the goods and services). 2. Suppliers database (including historical/validated suppliers, number of sources validated per items, effectiveness of validated sources). 3. Objective technical and commercial criteria for supplier selection. Neglecting to allocate adequate time for a thorough needs analysis or failing to consult the technical referents and the Supply team can be risky. This may result in the procurement of poor-quality items or failure to consider the total cost of ownership, including the need for spare parts for equipment, for instance. Step 3 - Market analysis and strategy This step is about: Identifying suppliers and products/services available on the market, as well as market dynamics. Developing an optimal Procurement Strategy by aligning the identified needs with market potential. With the priority categories identified and the needs detailed with the technical referent and budget owner, we can now proceed with a market analysis to determine the most effective approach for the market consultation.
- 6. The goal of this step is to gain an overview of the market characteristics and gather as much information as possible about potential suppliers. We can explore the local market through an indirect research, direct research, or a combination of both. Indirect research It consists in requesting and gathering information about the market and its potential suppliers from indirect sources. Information to be collected from the indirect sources: Information about their organization/entity (name, address, telephone, contact person, contact email). Information about the suppliers they are working with (name, address, telephone, contact person, contact email). Specific details regarding the supplier and the item/service category they are providing. Information about their relationship with the supplier (pro and cons). Direct Research It consists in requesting and gathering information directly from the suppliers themselves. Information to be collected from the supplier: Information about the company (name, address, telephone, contact person, contact email) in paper or through the supplier's portal. List of clients (and their contacts) that you can contact for references. Specific details regarding the supplier and the item/service category they are providing. This research will help you to: Enlarge the Suppliers' database for one or multiple categories. Shortlist potential suppliers to invite to tenders. Understand market dynamics. Understand how the other organizations/entities usually work. Ensure transparency during the sourcing process. Selecting the right market consultation method. Now that the objectives and priority actions are clear, it is essential to identify the best way to consult the market, adopting the appropriate approach depending on the market and the product. It is now important to: Determine the most suitable sourcing method and select the appropriate type of tender. Identify the evaluation criteria to consider and tailor the request accordingly for suppliers. Types of tenders A tender is a formal invitation issued by an organization, like MSF, requesting bids or proposals for the provision of goods or services. This process ensures transparency
- 7. and fair competition, enabling the organization to select the best supplier based on criteria such as price, quality, and capability. Invitations to tender may be either closed (i.e., sent to a specific list of suppliers pre- selected on the basis of their qualifications, experience and capacity) or open (i.e. advertised publicly to allow any supplier to bid, thus guaranteeing maximum competition and transparency). 1. Request For Information (RFI) The RFI is used during the market exploration phase to identify potential suppliers and/or to assess available solutions that may be suitable for our needs. For example: MSF is seeking an oxygen solution for its patients. The purpose of the RFI is to explore the available solutions in the market and identify potential suppliers who can provide them (no concrete specifications yet) 2. Request For Quotations (RFQ) The RFQ is used when specifications are well-defined, and the focus is primarily on competitive pricing and quality. Suppliers submit quotes, and the most suitable quote is selected. For example: MSF has determined that oxygen bottles are the optimal product solution. Specifications have been defined and the Procurement Manager has set clear requirements for quantity, lead time, price, and other parameters. 3. Request For Proposals (RFP) The Procurement manager (buyer) provides detailed requirements and asks suppliers to submit proposals outlining how they would meet those requirements. The focus is on price, technical aspects as well as services. For example, MSF has determined that oxygen concentrators are the best solution. Specifications have been defined, and the Procurement Manager has outlined clear requirements regarding quantity, lead time, price, and maintenance services. The Procurement Manager has requested suppliers to submit proposals detailing how they would handle equipment maintenance and spare parts delivery over the next five years. Step 4 - The Supplier Selection Process The supplier selection process aims at pre-qualifying potential suppliers or selecting preferred suppliers. The Supplier Selection process can be split into 3 milestones.
- 8. The Supplier Selection Process step requires a thorough planning, follow up and communication between the various stakeholders and the suppliers to ensure: Clarity on the chronogram of activities and the issues at stake. Clarity on the information that needs to be shared with the supplier(s); it must be consistent for all to prevent any unfair advantage. Transparency in the analysis and proper archiving of all information. The Comparative Bid Analysis (CBA). The Comparative Bid Analysis (CBA) is an Excel-based table that enables us to evaluate and compare multiple suppliers' offers -or bids- using key criteria that align with the procurement strategy outcome. This provides a clear and transparent method to justify the selection of one supplier over others. Tips & tricks: due diligence Before officially selecting one or more suppliers or service providers, it is crucial for organization to conduct a "due diligence" investigation. This process ensures the validity of the choice and provides assurance about the supplier or service provider with whom the organization will engage. These elements must be checked as part of due diligence on the supplier’s identity and operational capacity. Ask for a proof of registration of the company and check the compliance with local regulations (insurance, registered office, etc.). Check the supplier’s solvency (balance books, annual accounts, turnover, financial statements certified by an accountant, bank references, etc. from the last three years). Check the supplier’s operational capacities (by visiting its offices to check if they exist for instance) and the resources used (by looking at the skills/qualifications of leaders and teams and asking for references from other clients, etc.). Ask for the ID card of the signing person and his/her link with the company he/she represents (as well as a proof of this link). Step 5: Negotiation and Market Allocation
- 9. This step can be subdivided into 3 milestones. Negotiation can be defined as an interactive process between two or more counterparts or negotiators looking to find a common ground over a mutual interest. In the negotiation all actors try to find an agreement that is acceptable and respected by all parties. The capacity to negotiate is a transversal competence that needs to be developed constantly in our daily job and it involves several components: The capacity of listening to the other party’s interest. The capacity of communicating to others our own objectives and requests. The capacity of empathizing with the other party’s needs. The capacity of seeking mutual benefit. Tips & Tricks on negotiation The CBA will offer valuable insights for negotiation by highlighting the ideal position and priorities. This might include identifying the best service offer from any supplier, the lowest price for validated items, or pinpointing which items to negotiate for greater savings. Pareto principle The Pareto principle, also known as the 80/20 rule, suggests that in many situations, roughly 80% of effects come from 20% of the causes. This principle, highlights that a disproportionate amount of outcomes stem from a small fraction of inputs or factors. It's a valuable concept for prioritizing efforts and resources in various fields, as it helps identify the most impactful areas to focus on. The Pareto principle is also relevant here: focus on the items that have the most significant impact on the TCO (Total cost of ownership) and prioritize negotiating those. This is essential when handling a large portfolio or standard list of items.
- 10. The final activity when preparing for a negotiation is to estimate the supplier’s objectives and anticipate an alternative solution (Plan B) in case the negotiation fails. To do so, you need to limit the "Zone of possible agreement" (ZOPA) and the "Best alternative to a negotiated agreement" (BATNA). ZOPA (Zone of Possible Agreement) This is the range within which an agreement is satisfactory to both parties involved in the negotiation. It represents the overlap between the minimum that the supplier is willing to accept and the maximum that you as an organization is willing to pay. BATNA (Best Alternative to a Negotiated Agreement) This is the best course of action that MSF can take if negotiations fail, and an agreement cannot be reached. Knowing MSF’s BATNA gives you leverage and helps you make informed decisions during the negotiation process. Note: Remember, it is essential to inform the suppliers who were not selected, explain the reasons for their non-selection, and provide them with feedback to help them improve for future tenders. This approach helps maintain a healthy and competitive market. Step 6: Contract management Before moving forward and dedicating resources to this phase, a Procurement Manager, should ensure that entering into a contract would be relevant and beneficial for the organization. This should be done by considering national laws and regulations, organization's legal status and market dynamics. At times, market conditions are unstable making it difficult to sign contracts or guarantee fixed prices for the long term. This may render this step less applicable. Let’s consider some mitigation measures to implement if you are unable to conclude a contract, or in other specific situations such as, for example, monopolistic or unstable markets. If feasible, signing contracts would be advantageous; however, this should only happen when the supplier(s) and all stakeholders are actively engaged and fully informed about all terms and conditions. This ensures that the contract is not only signed by both parties but that the conditions are clearly understood and effectively implemented. Contract management objectives The main objectives of contract management are: Adhere to the contracting legal procedure. Reduce exposure to risks and improve the relationship between MSF and its suppliers or service providers. Ensure transparency and accountability while enhancing efficiency. Who is involved in contract management? First of all, we shall clarify that, depending on the type of service or goods being procured, the department in charge for managing the contract may vary. Therefore, in agreement with the Tender Steering Committee, you will have to determine who will be managing the contract. In summary, contract management is crucial for building sustainable supplier relationships and mitigating risks. After signing, it's important to closely monitor whether both parties adhere to the agreement. Step 7: Supplier performance management Last but not least: the supplier performance management step.
- 11. Monitoring supplier performance is essential to ensure that contractual terms and agreements are met as expected. More broadly, monitoring supplier performance helps to: Develop strategic relationships with suppliers by working jointly with them to improve their performance. End relationships with under-performing suppliers (e.g.: supplier blacklisting procedure). Build on historical performance for decision-making. Build sustainable, long-term partnerships with suppliers. Minimize risks along the supply chain. Increase responsiveness in case of emergencies. Since supplier performance management relies on an objective evaluation, it is key to map the data/information to be collected and who needs to be involved. Indeed, it is essential that collaboration between the various stakeholders does not stop once the contract has been signed. Conclusion The strategic sourcing process is essential for organizations looking to optimize their procurement activities. By following these seven steps, businesses can ensure they are reducing costs and enhancing efficiency and forging stronger, more strategic relationships with their suppliers. In today’s competitive business environment, strategic sourcing provides a clear pathway to procurement success, aligning purchasing decisions with broader business objectives and market dynamics.