Supply Chain Disruptions, Global Pandemic, Mass Layoffs, Economic Downturn, and a New Normal perspective for Supply Chain Operations. An Annual Procurement Plan is critical to efficiently and effectively manage and conduct the essential elements of today’s Procurement Mandates. In this article, we will outline the Framework for a Top-Class Annual Procurement Plan. In later segments of this work, we will go into more detail concerning the individual components of the plan.
It is a best practice to form a Category or Commodity Team, led by procurement leadership to formulate and execute an Annual Procurement Plan. A Category or Commodity Team is most effective when formed from representatives from key stakeholder groups such as customers, sales, marketing, engineering, finance, and logistics.
Today’s executives are increasingly asking their procurement functions to provide detail and how they plan to realize cost reduction and bottom-line impact. The absence of a well-constructed annual procurement plan will disable procurement professionals from answering this question confidently, accurately, or at all. The inability to answer this question is not a viable option for a purchasing professional who wants to maintain job security. Certainly “winging it” will be frowned upon, to say the least.
An Annual Procurement Plan can serve as proof that these executives require. A Procurement Plan is a structured document that illustrates a well-thought-out approach to optimally procure various groups of products and services. This plan should be integrated into and driven by an organization’s Corporate Strategy.
A comprehensive Procurement Plan includes these sections:
Forecast: A projection of the demand for each of the various groups of products and services (referred to as “commodities”). In a manufacturing environment, a sales forecast can be the basis of your buying plan forecast
Market Analysis: An assessment of the market for each commodity. The market analysis section of the buying plan is generally designed to determine whether supply is growing, declining, or stagnant and whether demand is growing, declining, or stagnant. These determinations can be made by addressing characteristics of the market in terms of number of major suppliers, new developments, availability of materials, suppliers’ financial conditions
Approach: The process to procure each commodity. The Approach section of a Procurement Plan is an instruction on how to procure these commodities.
The following is a process for procuring commodities:
(1) Develop a new contract
(2) Develop a new blanket order
(3) Utilize an existing contract
(4) Utilize an existing blanket order
(5) Utilize existing, non-contractual supplier relationships
(6) Buy in a hand-to-mouth fashion from the supplier deemed most appropriate at the time of purchase.
Resources: The Resources section of the buying plan specifies the people and other resources needed to manage the purchase of the commodity. You will indicate the names of each person responsible for the commodity, including end users and representatives from other departments
Historical Spending: The historical spending section of the procurement plan indicates the amount spent on the commodity. It should be based on a list of each commodity and the amount of money spent on such commodities in the past year. This list is commonly called a “Spend Profile.”
Techniques: The techniques to be used to reduce costs for each commodity.
These techniques can include, but are not limited to, the following:
- Competitive Bidding
- Value Analysis
- Savings Sharing
Savings: The savings section of the procurement plan includes an estimate of the savings that the Procurement Department can achieve for the applicable commodity through application of various cost reduction techniques. Savings is calculated by multiplying the year-over-year price difference by the forthcoming year’s quantity.
Savings Formula = (Last Year’s Price – This Year’s Price) * This Year’s Quantity
Future Spending: A summary of the estimated amounts of spending on each commodity taking into consideration changes in volume and changes in price realized through market forces and the application of cost reduction techniques.
New Spend Formula = Old Spend * Change in Demand * Change in Price
Executive Summary: A summary of all portions of the buying plan for each commodity