What Procurement should do to have a bearing on budgeting and forecasting

Planning, budgeting and forecasting are processes that serve myriad purposes, such as target setting for the short- and medium-long term, allocating resource, establishing benchmarks to monitor performance, and projecting future results. These processes typically follow guidelines and standards set by Finance, but they involve all areas of a company, and Procurement is no exception. Today, much reflection is revolving around planning, budgeting and forecasting.

With the volatility in target and procurement markets, and the uncertainty characterizing the competitive scenario that companies have been doing business in for the past few years, some forecasting approaches are being called into question. Although they made sense in the past, today they need a fresh take both in Procurement management and in the Finance Department. The research project conducted by the SDA Bocconi Procurement Lab aims to explore the current status of forecasting and target setting in companies, and to map out possible trajectories for their future development.

Our study consisted of semi-structured interviews and a survey of a sample of 21 heads of Procurement in companies with turnover exceeding €1 billion. All of these companies belong to a group of more than 30 Procurement Lab participants.

We specifically examined the following aspects of budgeting and forecasting in the Procurement Department:

• the main limitations of the current budgeting and forecasting processes
• the role and the objectives of planning, budgeting, and forecasting
• the (supporting or leading) role of Procurement directors in the budgeting process
• the volatile context and how it affects the process, in light of market scenarios and the need for control
• database management, to include internal data, external data, and methods for data analysis and integration
• support tools for the budgeting process

We drew on our research to build a matrix incorporating eight elements that define the level of satisfaction with the system and the different types of companies. (These were divided into macrocategories based on a classification of the relative competitive context.) We then identified the perception of the intensity of the various forces that give rise to complexity. At this point, we were able to cluster the positioning of the companies in question into four types, contingent on the sophistication of the forecasting system and the level of complexity of the market/business: mature systems, macro controllers, planners, and coordinators.

Managers who participated in the research attested to the traditional limitations of corporate forecasting processes, specifically the fact that they are excessively long and inefficient, data are unreliable, and their relevance in light of corporate strategy is not always clear.

From the data we collected and our conversations with managers at the companies in the Procurement Lab, we were able to discern certain development drivers for their approach to budgeting and forecasting:

1. clear identification of the aims of the different decision-making processes

2. integration of said processes in the form of business partnerships between the Procurement and Finance functions

3. expansion of the perimeter of forecasting by focusing on performance drivers rather than performance per se

4. greater flexibility in forecasting via a scenario-based approach

Our data reveal a wide variety of approaches, yet there are common traits and criticalities both in terms of budgeting and forecasting.

As for the aims of different forecasting processes, in terms of relevance the budget is squeezed between the plan (with a time horizon and periodic revisions that are increasingly frequent) and the forecast. When these different processes are “standardized,” so to speak, the risk is losing sight of the company’s strategic vision - in other words, continually chasing contingencies without taking a moment for deeper reflection on the long term.

Our findings highlight a very traditional vision among procurement managers who play a leading role in budgeting and forecasting with respect to sales price dynamics. What also emerges is that these managers often play their part without a clear picture of, or any involvement in, forecasting on sales volumes.

As for shifting focus to performance drivers, we still find a prevalence of typically incremental methods. Even more widespread, instead, are zero-based approaches, or methods anchored on advanced statistical models which would align with the need to understand the impact of various performance drivers.

As for the necessity to gain greater flexibility by using multiple scenarios, our findings indicate that a single-scenario approach dominates both when it’s time to forecast and budget. (This said, for core procurement, managers say they use a multiple-scenario approach, with particular focus on external macro-dynamic variables.)

Ultimately, from both our quantitative analyses and qualitative dialogues, our findings show that the current scenario needs an injection of innovation and investments to forge ahead on critical evolutionary paths:

• approaches and systems capable of governing the volatility underlying the business (commodities, sales volumes, final demand), to include rescheduling the planning period along time horizons that would allow management to influence this process
• cost modelling and automation tools to measure the impact of fluctuations on all purchased products, with full visibility of the cost breakdown structure
• appropriate organization of analysis and feedback on budgeting, to onboard all relevant parties, including Sales
• data and information governance tools to track deviations, managerial actions, and results