The Beautiful Complexity of Procurement Planning
Where's the procurement planning when you need one?
Once, we wrote about demand management in this blog.
It's a good enough topic, which misses one crucial element - demand management mastery comes after sophisticated planning.
In some companies (and I'm quoting my own experience), procurement planning barely exists. Our colleagues tend to accept the business demand for granted and not try to understand or, God forbid, challenge it.
When discussing value generation, we mainly mention category management, stakeholder relationships, and supplier innovation.
The lion's share of procurement value could be created in the planning stage. To do that, we must establish trustful relations with budget owners, master some inventory and consumption forecasting methods, build and maintain complex SKU and price databases, and much more.
Indeed, some colleagues find it simpler to dedicate themselves to tireless supplier negotiations and measure the value creation in savings.
Unfortunately, that only has a marginal effect, as if we were curing the symptoms of a disease and not its cause. Bad planning and suboptimal demand management cannot be compensated by discounts.
This post will provide one of many possible views on the procurement planning process. We aim to encourage a discussion and enrich the conceptual model proposed herein.
The proposed conceptual model of procurement planning
Let's get straight to the generic view of the procurement planning process.
Planning preparations
Indeed, we must establish the process governance, timelines, responsibilities, stakeholder training and comms, etc. There should be a good policy describing all of that.
1. We must create the SKU database (e.g., SAP MDG-M) with each item's complete set of attributes, including its estimated cost. This database will enable the translation of demand into SKU-level specs with costing.
2. Before the planning process starts, Finance will issue the budget memorandum, which includes critical macroeconomic indicators, e.g., CPI, currency exchange rates, cost of energy, fuels, and raw materials, and internal WACC.
We must update our SKU cost estimates accordingly, e.g., adjust the historical prices for inflation or the cost of imported items for new exchange rates.
3. We must operate the inventory management plan to estimate the inventories at the beginning of the new budget period.
You can easily download inventory reports when planning, but that would happen around Q3, while you need to forecast Q1 next year.
Demand planning and consolidation
4. Business units start collecting and aggregating their demand.
5. Each chunk of demand (e.g., divisional one) must pass by the inventory check to ensure the stock usage as much as possible. Ideally, procurement must help business units with this exercise and provide a layer of independent control.
6. The optimized demand must pass by the SKU and cost master to translate into inventory units and obtain budget estimates.
7. Finally, this well-specified demands from all business units will be consolidated into the draft Demand Plan.
Categorization of demand
8. Draft Demand Plan includes thousands of SKU lines, which procurement needs to segment into different categories.
Not 100% of the demand will be covered by the category management. Given the projected spend, importance, and complexity, some categories will be identified as strategic.
The business must provide specific requirements for each strategic category - need-by dates, critical technical requirements, quality management provisions, etc. This information is vital for category planning.
Demand plan
9. Around this time, the company's Financial Plan will become clear. Finance will review the draft Demand Plan and negotiate (or simply dictate) the available spend budget.
Given limited funds, business units may undergo another circle of demand planning to trim their needs.
10. Business and Finance will eventually reach a consensus demand that fits the Financial Plan. This is where the Demand Plan will be approved.
Category management
11. Based on the Demand plan, procurement will finalize category plans.
12. As part of category planning, procurement will prepare the contract management plan to identify valid multi-year contracts and upcoming contract renewals.
13. Another vital step, frequently neglected, is the preparation of the Supply Plan. We should only plan to buy something after we know the need-by date. Category requirements and a contract management plan will be instrumental in supply planning.
14. Lastly, as long as we're clear with supply timelines and given category plans, we can complete the Procurement Plan.
The proposed view is still quite simplistic but represents the significant complexities of the procurement planning process.
Please comment and suggest what's missing. Any inputs on this subject are crucial and will be greatly appreciated.
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More information on this and other exciting topics can be found in "The Technology Procurement Handbook." It represents 23 years of experience, billions of dollars worth of successful sourcing projects, and 1000s of hours spent on research, analysis, and content creation for the most demanding professional readers.
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