What is Commodity Procurement Strategy?
Commodity procurement strategy, also termed commodity sourcing strategy, refers to the strategic approach that helps choose the right suppliers to optimize the supply chain. This strategy must be aligned with the corporate objectives of your business.
An efficient commodity strategy aims at procuring qualitative goods and services from suppliers at the lowest possible prices.
Significance of Commodity Procurement Strategy
In today’s cut-throat market, developing a well-planned purchasing strategy is crucial to meet supply chain management goals.
- The strategy enhances the buying power of businesses with maximization of cost-reduction.
- It helps to build strong interpersonal relationships with suppliers and reduces the chances of conflicts.
- The commodity procurement strategy helps track commodity price trends, substitute suppliers, and other market changes. This offers a cushion for businesses during unforeseen events.
How to Develop a Commodity Procurement Strategy
- Analyze the total spend
The primary focus must be on conducting a spend analysis to integrate your competitive strategy with the commodity procurement strategy. The analysis helps determine the products and services purchased and forecasted for purchase. It should reflect the entire purchase price along with the cost of ownership. This will offer insight into the purchasing patterns of the company.
- Analyze the industry
The next step is to perform a thorough analysis of the supply market to know about the major suppliers, their reliability, substitutes, and all other competition dynamics.
- Identify, evaluate, and document cost
A clear understanding of performance metrics and cost drivers is essential. This helps to determine several factors, like commodity price patterns and trends prevailing in the market.
- Analyze supplier role
Different suppliers offer different sets of goods and services. Hence, knowing the kind of supplier required based on your business model and determining the roles of each supplier in the supply chain helps to optimize resources.
- Align business processes:
After determining and analyzing the cost drivers, performance metrics, supplier roles, and the supply industry, you must align and integrate the business processes properly. You need to know which processes are to be prioritized so they can be realigned accordingly.
- Quantify savings
The next step is to lay down savings targets and quantify possible savings to increase profitability.
- Implement the strategy
Finally, you must use the necessary tools and project management methods to implement the commodity procurement strategy efficiently.
Use Case with Commodity Procurement Strategy
Suppose company XYZ procures its raw materials from supplier A. After developing the commodity procurement strategy, it decides to switch to supplier B because the supplier offers high-quality raw materials upon bulk purchases. This will help the business to acquire more goods at a cheaper rate.