Purchasing Strategic Planning: CPOs, Have You Done Your Homework?

Every single year all companies face the budget planning cycle. At company level, this is defined as the revenue target, the costs and expenses to run the company, and, the profitability for the following year. In a perfect world this process should be two-way street where the corporate leadership defines the targets with functions and businesses giving their input. In the end, all functions and businesses must follow the corporate guidelines.

Short Term Planning

Once the company’s targets are defined, the CPO or Vice President of Purchasing should define the Purchasing targets for the following year.

There are several Purchasing metrics available in the function that should be part of planning cycle. However I’ll mention a minimum of four targets the function head should define: Total Spend, Addressable Spend, Savings and Resources (FTE).

Total Spend can be calculated using the company’s revenue and CAPEX  (capital expenditures) plan.

Addressable Spend can be estimated based on the previous year’s sourced spend; contracts which will expire in the following year as well as major spend needs based on Revenue and CAPEX.

Savings can be defined based on improvement from the previous year’s savings in percentages (Savings/Addressable Spend), market economic cycle and relative position to market savings based on benchmarks.

Resources (FTE) can be calculated based on a budget defined by the corporation and previous year’s capacity (Spend/FTE) for each commodity.

With these four targets, as VP of Purchasing or CPO, you are covering Efficiency (Addressable Spend / FTE) showing how much you can handle with existing resources and Effectiveness (Savings/Addressable Spend) showing the quality of your sourcing projects.

Based on these targets, each Commodity Director can start defining the projects to be sourced next year, using the same metrics, and, the Sourcing Managers (buyers) can define their personal goals using the same metrics.

Long Term Planning

Strategic Planning is more elaborate and time consuming. The CPO or VP of Purchasing should lead the Strategic Planning exercise every three years covering the next five years. The objective is to define: Vision and Mission for the Purchasing function, as well as the Objectives and Goals for the next five years.

There are several methodologies to define this roadmap; however my preference is get grounded in facts; externally and internally. Let me elaborate about it.

Externally: Generate data from Global Economy Trends, Your Industry Trend and External Purchasing Trends.

Internally: Get data from Your Company (Business) Strategy and Your Purchasing Function.

Once you get all the information and data, through several sessions with the purchasing leadership, cluster and affinitize the ideas and trends into five to seven themes related to the Purchasing function. For each theme, define the strategic objective. Now you have enough material to define the Vision and Mission for Purchasing.

For each strategic objective, you need to define the goals for the next five years. Define as many goals as you think appropriate, then prioritize them by using value and impact to the company, also defining the completion date. It is recommended that for each strategic objective, the CPO defines a person from leadership as “owner” of the objective.

Once you complete the Long Term Planning, it is much easier to do the Short Term Planning because now you understand the “roadmap” and each year you refine the goals aligned with the business strategy.

As strategic planning is complex and time consuming, it can be worthwhile to have an outside consultant to help with the development of this process, at least for the first time. The consultant is unbiased and has an outside perspective helping to challenge the goals.

Now that you have done your homework, I wish you Happy Holidays and a very efficient and effective 2013.