Effective Procurement Strategies for Startups

TL;DR: Procurement is a crucial function for companies of all sizes, ensuring efficient and cost-effective acquisition of goods and services. For startups, procurement is informal, focusing on immediate needs with minimal oversight, which can lead to inefficiencies and missed opportunities for cost savings. As companies grow, procurement becomes more structured, with mature organizations implementing sophisticated processes. Levi Strauss & Co., with its global operations and tiered supplier system, exemplifies a mature procurement approach, emphasizing strategic supplier selection, sustainability, and a focus on ethical practices. Startups can evolve their procurement by implementing basic policies, leveraging technology, evolving strategic sourcing, and planning for growth.

Procurement. 

If you are like me, this word immediately brings to mind another: bureaucracy. I imagine someone in an office somewhere rejecting the sales team's Miami trip requests on SAP:

Look at the anger in his eyes

This word association aside, procurement plays an important function in companies of all sizes. 

In this blog post, we will dive into what that function is, what it looks like at mature companies, and how early stage companies can take baby steps to evolve their procurement. 

What is Procurement?

Procurement is another way of saying ‘how a company buys things’. Specifically, it is all the activities that the company conducts to obtain the goods and services it needs to support daily operations. 

For manufacturing companies and retailers, procurement has a direct impact on the company’s gross margins. This is because it has influence on the prices at which the company will buy its inventory and raw materials. The lower these prices, the higher the company’s gross margin. 

For software and tech companies, procurement does not directly impact the company’s bottom line, but still plays an important role in helping the company get the best value for its spending.

In both instances, procurement can help increase a business’s profitability when done well.

Why is Procurement Important? 

The procurement function has the dual job of being the company’s internal cost cutter and external representative to the rest of the company’s supply chain and vendor network. 

What do I mean by this? 

First off, an effective procurement function goes beyond the mere act of buying; it ensures that a company acquires goods and services at the best possible prices and terms, directly impacting the bottom line. By doing so, the function ensures that the company has a handle on its budgets, and this can free up resources for investment in other areas.

A secondary qualitative benefit is that a good procurement function ensures that a company is seen as a good corporate citizen. A company with a good procurement function will ensure that the company has strong, long-standing relationships with its suppliers, whether that’s a mining company providing raw materials, or Salesforce. This matters less when the company is small, but has a major influence on the company’s ability to run an effective supply chain when the company is at scale. After all, ‘upstream’ suppliers have limited capacity and are more likely to fulfill the orders of companies they have positive relationships with (all else being equal). 

The importance of procurement in manufacturing and retail is obvious: as mentioned previously, the function has a direct impact on the company’s gross margins. 

However, even in tech and software companies, where the impact of this function is ‘indirect’, procurement plays a critical role in controlling costs, from software licenses to office supplies.  

What Does Procurement Look Like at Early Stage Startups?

In the earliest stages of a company, startups do not think about procurement. The majority of early stage companies do not have budgets or forecasts so there are no tools against which companies can gauge whether a spend is reasonable or necessary. 

Instead, the focus is on building the product and finding product market fit. Purchases are made on an as-needed basis, usually without formal approval processes or oversight. 

Founders or early employees might use a company credit card for quick buys, from office equipment to cloud services, prioritizing speed over cost-effectiveness or strategic supplier relationships.

Why is This an Issue?

Do not get me wrong: if a company does not have a product, or product market fit, or a customer, it is perfectly reasonable for cost control to take a back seat. As a great CEO once told me: ‘this shit doesn’t matter if our company doesn’t exist in 6 months’. 

However, neglecting procurement indefinitely can lead to disaster. 

Without oversight or a process-driven approach to purchasing, startups will overpay for goods and services, miss out on volume discounts, or incur unnecessary costs. For instance, I once worked with a company where two separate departments had purchased the same software, at different prices. Moreover, a lack of formal procurement processes can make it difficult to track expenses, budget effectively, or forecast future needs. As startups grow, these issues can have a direct impact on burn and bring the cash out date ever so closer. 

There must be a better way. 

Before diving into the solution, let’s discuss what procurement looks like at mature organizations.  

What Does Procurement Look Like at a Mature Organization?

Procurement in a mature organization is a well-oiled machine. It operates on a large scale and plays a critical role in the company's strategy and operations. 

What are some of its responsibilities?

• Managing a high proportion - 75-85% - of the organization's spending (referred to as 'spend under management') including:

  • Direct spend: purchase of raw materials and inventory, which has a direct impact on the company's gross margins.

  • Indirect spend: non-project related expenses like supplies, services, travel, and incidentals.

  • Treasury spend: payments requiring a foreign exchange translation, typically to pay off-shore suppliers.

• Implementing strong internal controls across the ‘procure to pay’ cycle to ensure that spend is aligned with the company’s broader strategic goals and budgets. 

• Building and managing relationships with thousands of suppliers across multiple countries.

• Working closely with various departments to understand their purchasing needs and ensuring they are met effectively, and aligned with budgets.

• Managing the company’s exposure to key risks posed by: foreign exchange movement, interest rate movement, and operational risk (ensuring that procured goods are available when needed).

• Integrating environmental, social, and governance (ESG) factors into procurement practices. This means working with suppliers to improve their ESG performance, and contributing to the company's overall sustainability goals.

• Implementing sophisticated systems for procurement, spend analysis, supplier management, and contract lifecycle management.

To make the above more tangible, let’s look at how Levi’s, the iconic apparel company, thinks about procurement and its supply chain. 

Case Study: Levi’s

Levi Strauss & Co. (I will call them ‘Levi’s’) is an American clothing company known worldwide for its brand of denim jeans (source: Wikipedia). Founded in 1853, it is one of the world’s largest brand-name apparel companies. At the time of writing, it is valued at $7.2Bn and, in 2022, the company generated $5.8Bn in revenue at a 57.5% gross margin with a 10.5% operating margin. 

Levi's operates on a global scale, with production facilities in at least eight countries - Bangladesh, India, Egypt, Sri Lanka, Vietnam, Indonesia, Mexico, and the United States. This geographic diversity allows Levi's to optimize its production: the company can source high-quality raw materials at low cost with minimal operational risk (e.g., supply chain delays). The company sources apparel, accessories, and footwear from more than 500 suppliers located in 40 countries around the world. This network ensures that Levi's has a resilient and flexible supply chain capable of meeting global demand.

The selection of suppliers is a critical component of Levi's procurement strategy. Levi’s chooses its suppliers based on ‘supplier performance, country level risk, quality, capacity, and time to market.’ It categorizes its suppliers into tiers, a common practice in supply chain management. Tier 1 suppliers provide materials that are a direct input into Levi’s final product, Tier 2 suppliers are suppliers or subcontractors for Tier 1 suppliers, Tier 3 for Tier 2, and so forth. The tiering helps Levi’s improve the accountability and transparency of its supply chain. For instance, the procurement team ensures that it assesses pretty much all (98%) of its Tier 1 suppliers ensuring compliance with strict standards for quality, ethical practices, and sustainability. 

In short, Levi's procurement and supply chain operations are a cornerstone of its global success. Through strategic supplier selection, a tiered supplier system, and a strong focus on sustainability, Levi's ensures the production of high-quality products while upholding its corporate values.

How Can a Startup Evolve Its Procurement?

While early stage startups may not yet be at Levi’s scale, they can take baby steps to evolve their procurement function. Here are a few strategies:

• Implement Basic Spend Management Policies: Develop simple guidelines for purchasing, including who can make purchases and the approval process for expenditures. This can be as simple as a table showing the approval required for each function's spending:

Approval required by…	Sales & Marketing	Research & Development	General & Admin
Department Head	Up to $1,000	Up to $1,000	Up to $1,000
+ COO	>$1,001 up to $10,000	>$1,001 up to $10,000	>$1,001 up to $10,000
+ CEO	More than $10,001	More than $10,001	More than $10,000

• Leverage Technology: Adopt tools that can help your business manage its procurement. There are a range of inexpensive SaaS procurement platforms tailored for smaller businesses. These platforms will help you implement spend controls and monitor your budget in real time. Some examples include: 

  • Procurify: a procurement and spend management software. 

  • Float (Canada): a spend management platform and charge card program for Canadian businesses.

  • Pluto (Middle East & Africa): Procure to Pay & Accounts Payable automation software for businesses operating in the Middle East and Africa.

  • Brex (US): an expense management and corporate card platform for US small-to-mid-sized businesses.

• Evolve Your Strategic Sourcing: build relationships with key suppliers, especially if you are a manufacturer or direct-to-consumer (D2C) retailer. If you are a cloud company, build relationships with your biggest vendors. What does this mean? It could be as simple as being kinder to your HubSpot or Salesforce Account Executive. The more expensive the software, the more important it is to develop a strong relationship. Lastly, regardless of the size of the vendor, always look for opportunities to negotiate better terms in terms of price, delivery timelines, and payment terms: the later you pay, the better.

• Plan for Growth: As your startup grows, evolve your procurement processes to meet the needs of your business. This might involve more sophisticated procurement software, or even hiring specialized finance or procurement personnel.

By taking these steps, startups can lay the foundation for an effective procurement function that supports their growth and helps manage costs more effectively.