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Procurement Strategy – Inventory Strategy

Once the procurement organization dynamics have been defined, managers can move to step three in procurement strategy development: the procurement inventory strategy. The objective of this step is to ensure the timely and cost-effective purchase of inventories needed to support the business’s operations.Enter your text here...

Spend Analysis

The first action will be to conduct a spend analysis. In this step, a thorough analysis is performed on all goods and services purchased across the business to determine the actual spend levels and the degree of supplier fragmentation. The analysis should document how much is being spent on individual products as well as product families. Finally, the analysis should identify what is being purchased, how it is being purchased, from which suppliers, and from what locations.

New Product Development Requirements

This activity maps what goods and services will have to be acquired as a result of new product development. The goal is to quantify costs, procurement staff effort, and requirements for new technologies. These costs will be part of the overall procurement budget.

Financial Budgets

A key deliverable is drafting the procurement budget for inventory acquisition. This plan is compiled through an analysis of historical spend data, new product development, plans stemming from long-range MRP planning, and so on.

Make/buy Decision

This activity is related to decisions as to whether specific items are to be made in-house or outsourced to a supplier.

Materials and Services Classification

This activity ranks products and services by their importance to the organization. Two values are critical in the assessment: value relates to the level of importance the product and service has to the customer, and risk relates to the level of supply risk.

Classification involves separating purchased products and services into four quadrants:

  • Commodity: Materials and services in the commodity category are low value and low supply risk since they are typically sold by multiple suppliers and compete on cost. The goal is to purchase at lowest price and reduce the procurement effort since supply is plentiful.

Commodity is “[a]n item that is traded in commerce. The terms usually implied an undifferentiated product competing primarily on price and availability.” (APICS Dictionary, 16th edition).

  • Bottleneck: Materials in the bottleneck category are low in value but high in supply risk. Frequently the high risk of supply is based on limited number of suppliers offering the product.  The goal is to ensure supply continuity and consider long term agreements if possible.

Bottleneck - “A facility, function, department, or resource whose capacity is less than the demand placed upon it. For example, a bottleneck machine or work center exists where jobs are processed at a slower rate than they are demanded. Syn: bottleneck operation” (APICS Dictionary, 16th edition).

  • Leverage: Materials and services in the leverage are high value and low supply risk. There are multiple suppliers in this category, as there are in the commodity category. The goal is to leverage purchases to optimize costs. This can be accomplished by consolidating volume with selected limited number of suppliers.
  • Strategic: Materials and services in the strategic category are high value and high supply risk. There are limited suppliers and materials and services are critical to the organization. The goal is to have a strong relationship with the supplier for continued supply and potentially collaborate on lowest total cost.

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