The Guided Approach To An Effective Procurement Strategy

The company's procurement strategy is usually the first source of diagnosis When ‘company engineers’ are called in to save a crumbling business. They will review or renegotiate all the existing supply contracts.

Managers will watch in amazement as the usual hard-nosed suppliers give in to the pressure of agreeing to offer price discounts ranging from 10 to 20%. Such a strategy is aimed at creating cost savings that can transform a company’s ailing prospects.

As a business owner or manager, you need to draw up a good procurement strategy that will transform your purchasing function into an effective avenue for boosting profits and improving efficiency and competitiveness of your business.

This brief discusses the important tools you need to equip your self with in order to turn procuring into an exciting value adding function to the future growth of your business.

Deciding what you need.

Your procurement strategy has to first of all identify and define the most important features of the goods or services that will form the backbone of your business.

Decide what you want your purchases to do, and how well you want them to do it. Agree details with your potential supplier, and set them out on a specification sheet that will act as a checklist in case of any future misunderstandings.

The checklist would include but not be limited to specifications like:

• Size.


• Unit measure e.g Kilograms, grams, pieces etc


• Independent test reports on samples delivered


• Expected Quality and appearance.


• Range of acceptable technical features.


• Packaging requirements


• Delivery schedule.

Do not over-specify because.

• Unnecessary or unreasonable specifications are counter productive to a good procurement strategy.


• It may become un economical to your suppliers as a result of increased costs.


• Suppliers may get irritated and blacklist or frustrate your business, especially if they are few among many buyers (Oligopolists) .

Put all your commitments in writing.

The specifications and the terms you agree with your potential suppliers will form the basis of the purchase contract.

Business relationships often break down because of misunderstandings.

Having a written contract will help both parties avoid misunderstandings.
Verbal or oral agreements are also binding and admissible in courts of law, but the biggest difficulty is to prove ones level of commitment to the contract.

Unless you draft a procurement strategy and propose your own terms in it, you risk agreeing to the supplier’s terms, which will unmistakably be in their favor.

Specific terms to include in your written contract.

Agree in advance what will happen if the supplier’s goods are faulty and have the following questions answered.

• Will the supplier replace only the one faulty item or the whole batch?


• Will replacement supplies be delivered immediately, or will you get a credit note to be offset against preceding supplies?


• Will replacement goods be free? Who will pay for the delivery of replacement goods?

Ensure that the supplier fits in well with your ordering systems.

• Will the supplier agree always to quote your order reference?


• How will you be able to avoid paying for all the goods when part of a delivery is incorrect?

• Payments in advance should generally be avoided, especially if you are unsure about the supplier’s creditworthiness.

Payment by way of a letter of credit is a much more secure option.(This is when you instruct your bank to remit specified funds to the suppliers bank from your account as soon as terms specified in your procurement strategy are fulfilled by the supplier).

These funds are set aside whenever you instruct your bankers to open a letter of credit in favor of a potential beneficiary. The funds cannot be accessed by you or your supplier until the terms of supply are agreeable to both parties.

All your bank does is to confirm to your suppliers bankers about the commitment to pay, and your suppliers bankers will in turn advise the supplier to deliver or ship the goods. In some cases, your supplier’s bankers may advance money to the supplier in order to facilitate their contract.

• Ask for a discount for early payment.
• In cases where the supplier insists on say 40% advance, insist on paying the balance of 60% after 60 or 90 days from date of delivery. By doing this, you will have the opportunity of paying after realizing cash returns from their prior supplies. It will also enable you to free up the much needed cash towards meeting other needs of your business. Hence better cash flow management

The supplier will soon learn what needs to be done to achieve the standards you require. Improvements will feed straight through to your own product or service — fewer delays, less waste, fewer complaints, and more customer satisfaction.

Expert tips on a good Procurement Strategy

• Buy the product that offers the benefits you want. Never buy on price alone.


• Focus your price-cutting efforts on those items you spend most money on.


• Focus your quality-boosting efforts on those items which most affect the quality of your own product.


• Keep accurate records of all your purchases.


• Do not ‘squeeze’ a supplier if you plan to buy regularly from the same source.


• Look for opportunities to pay using your products instead of cash. (for example arrange to give your CPA a computer from your stock, in exchange for preparing and filling your accounts.’)

The process of drafting an effective procurement strategy may stretch from looking obvious to complex. It all depends on how well you negotiate and articulate your interests. Consider consulting your CPA for professional advise or contact us for extra clarity.

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