Aligning Procurement Strategy and Setting Objectives
In 2023, procurement organizations will need to demonstrate their contributions to less-traditional tasks, such as supply chain risk management, cost avoidance, and ESG initiatives. With those tasks to manage, it is essential to align procurement strategy with the overall goals of the organization – for buy-in and essential upper management support. Some of the ways procurement can easily align on strategy are:
- Align and support goals issued by executive leadership
- Review annual statements issued by your organization that mention key objectives
- Communicate procurement team accomplishments
- Give credit to other functions and individuals that contributed to those accomplishments
- Prepare for how to mediate emerging issues and communicate those plans to leadership
- Step in and fill a need that other departments aren’t willing or able to
As we get further into 2023, procurement and sourcing departments will need to set SMART objectives to be successful. Objectives are ones that are Specific, Measurable, Achievable, Relevant, and Time-Bound. After all, it is difficult if not impossible to improve what you don’t measure.
Create detailed goals for your procurement strategy that align with the organizational goals (Specific)
The procurement functions have evolved over time to the point where you can be very specific in the objectives you want to target. The list can seem endless, but here are some traditional and emerging objectives you should strongly consider, measuring current month/quarter vs prior month/quarters to determine progress:
- Supply chain risk management goals include:
- Supplier defect rate, in parts per million (PPM)
- PO vs invoice accuracy
- Supplier lead time
- Cost avoidance and savings goals include:
- Spend under management (SUM)
- Procurement ROI
- Year-over-year savings
- Cost avoidance (Market vs Actual)
- Price competitiveness vs history or prevailing market rate
- Extended payment terms
- Business process improvement goals include:
- PO cycle time
- Cost per invoice and PO
- On-time payment %
- Discounts realized
- ESG goals include:
- ESG qualified spend
- Sustainable products & services purchased (%)
- ESG supplier RFx participation (%)
- Supplier sustainability performance
- Supply chain transparency (% of spend traceable to raw materials)
- Scope 1/2/3 Emissions (Total & % change)
- Renewable energy sourced
Procurement organizations contribute to the organization’s bottom line, but many fail to accurately demonstrate and communicate the value they’re delivering. To receive an adequate budget, prove your department’s value. Specific objectives compared over time can help communicate and highlight your importance to the organization’s success.
Define the baseline for each goal, and how progress will be tracked (Measurable)
Be prescriptive in how you measure objectives. Every objective should have clear definitions of What (needs to be measured), Why (it needs to be measured), When (how often it should be measured), Who (is responsible), and How (is it measured – using precise formulas and consistent data sources).
If not, it will be impossible to truly demonstrate progress, because of differing or absent baselines. Spend Under Management will be different depending on the means of tracking. Companies with a strong contract management capability and linked systems can easily determine if purchases were made at contracted rates.
Other companies may have to get creative in how they measure this while they mature in their processes. For example, it may be that you can only report accurately whether the spend was with an approved supplier. However you measure objectives, it is important that you have access to the data that can demonstrate your current state and rate of progress.
Make sure your goals are realistic (Achievable)
Most of us at one time or another have been a part of an organization that constantly sets stretch goals. We also felt the stress and anxiety of knowing we were not going to reach them, and having to explain to management every month or quarter why we were falling short.
While it is important not to sandbag and set goals that are too easy to accomplish, it is equally important that the objectives are realistic to maintain high morale and build on success.
Compare your procurement strategy to the bigger picture (Relevant)
Always focus on the important over the urgent. For example: If you receive an urgent message from IT that they need help getting savings for a bid for which they did not involve procurement early on, explain the process and the typical timelines so future needs will be given more notice.
Offer to help on a reduced scale for good relations if it does not detract from the other projects you are currently engaged in. Once you have set your objectives, periodically analyze everything your department is doing and ensure that the tasks align with and support those set objectives. If not, consider dropping the activities or delegating to concentrate on what is most relevant.
Set a due date for each goal in your procurement strategy (Time-Bound)
Set realistic target dates for when to achieve specific objectives.
For example: “Our procurement department will reduce PO cycle time from its average 2022 process time of 3 business days per month to 1.5 by the end of Q3 2023.”
Also, focus equally on the long-term goals, despite all the attention that short-term goals will garner. Setting farther-reaching goals such as increasing investments in automation enable doing things now to contribute to the ultimate improvements that will be necessary.
2023 will undoubtedly be a challenging year for procurement departments as they juggle traditional priorities such as cost optimization and supply chain risk management with emerging trends and additional considerations such as emerging Environmental, Safety, and Government (ESG) Regulations.
To be successful, SMART objectives will need to be set that demonstrate flexibility, agility, and resiliency. Another key factor is aligning strategy cross-functionally, with the aim of supporting the overall corporate vision with the right resources assigned.
Digital transformation, innovation, sustainability, and globalization will also be key factors to consider as procurement leaders navigate an increasingly complex and changing landscape. Aligning your procurement strategy with corporate goals and setting SMART objectives will position procurement for success not only this year but for years to come.
Velocity is here to help with all areas of procurement. If your organization could benefit from help with alignment, strategy, process optimization, or if you need subject matter expertise in certain categories, reach out and let’s have a conversation!