Strategic Procurement In SME's
20th November 2019 Daniel Usifoh, Gateway Procurement
SME’s must take a strategic approach to procurement and supply management practices in order to unlock value from their supply chains.
Every business requires external input to serve the needs of its customers and meet its strategic objectives. It is therefore a strategic business imperative to ensure that these inputs are competitively and sustainably sourced. To achieve this, large businesses and MNC’s, have adopted the concept of strategic procurement.
Strategic procurement is the process of planning, evaluating, implementing and controlling all sourcing decisions. There is evidence to support the view that strategic procurement does have a positive impact on a business’s performance. Strategic procurement contributes to the success of a business by improving its profitability and shareholder value.
In most MNC’s and large businesses, strategic procurement processes are often well developed, and the level of procurement maturity is clearly defined and established. In contrast, strategic procurement in SME’s is either basic, underdeveloped or non-existent. Less than 20% of SME’s have a separate procurement function and only 65% think that strategic procurement is important to business performance. As a result, procurement activities are typically conducted by the owner or non-procurement professionals.
Furthermore, SME’s perceive that their low volumes or lack of purchasing power inhibits their ability to influence suppliers to engage in strategic partnerships. For these reasons, the prevailing view among SME’s is that, it is pointless pursuing sourcing activities through a dedicated procurement function given already scarce resources and minimal procurement leverage.
Consequently, procurement processes in SME’s are often underdeveloped, lacking formal management structures and strategic processes. Approaches to strategic planning, supplier development and the use of technology are relatively ad-hoc. It is common to find sourcing decisions in SME’s are often based on friendships and trust. Although SME’s are extremely agile and resilient, they are much more exposed to procurement and supply chain risks when compared to MNC’s and large firms with developed procurement processes. SME’s tend to concentrate more on sales and day to day operational issues with less focus on procurement. Procurement is not always perceived as a contributor to bottom-line improvements and enabler to long-term strategic success. This is different to large firms and MNC’s who recognises procurement as an enabler to achieving business objectives.
The future of SME’s and their long-term viability is increasingly turbulent and unpredictable because of globalisation. The major reason for this unpredictability is the continuous threat of new entrants and market participants SME’s must now compete with. One of the ways to overcome this challenge is for SME’s to optimize their strategic procurement and supply management practices. This will enable them to obtain cost competitive inputs, minimise supply network risks and satisfy customer needs through superior value proposition.
SME’s must take a strategic approach to procurement and supply management practices in order to unlock value from their supply chains. Strategic procurement will create a sustainable competitive advantage through close working relationships with key suppliers. It will enhance business performance by encouraging open communication with supply partners and the development of long-term relationship to achieve mutual goals.
As businesses advance strategically, suppliers are no longer viewed as a target for cost reduction but as assets that can amplify the capabilities of the business. Accelerating innovation relies on the formation of long-run customized partnership arrangements with suppliers through effective procurement. Therefore, the need for and importance of strategic procurement to SME’s cannot be overemphasised. SME’s should integrate strategic procurement into their business strategy and unlock opportunities in their supply networks if they want to compete effectively and outperform their rivals.
About the AUthor - Daniel Usifoh is a Director at Gateway Procurement. Find out more about the work they do to help businesses deal with their strategic procurement and supply management strategies here