Make Budgeting “Logic Friendly (-ier)”

budgeting

Another routine task that we go through every year. Some more than others – but, admit, once a year a time comes when everyone starts looking into ceilings. Well, you know, for numbers. However you call it – budget plan, benefit plan, delivery plan, opportunity analysis, business plan, zero base budgeting – we all live and breathe numbers. Procurement HAS to deliver. But how do you decide what to promise?

Whatever your category / buying / supplier management plan is, once a year you will sit down to review what has been done, how successful it was and, most importantly – WHAT’S NEXT? I’ve had that question more than once and, to help me and others save time, came up with a small grid of assumptions and recommendations. It looks like this:

savings-grid

Looks scary? Actually, it is quite simple. Please read on for further explanation which criteria is being taken into account when deciding the numbers. Opportunity analysis should reply two questions: WHAT to target (to prioritize bigger opportunities) and HOW to do it. This time it will be more about the first question.

Category maturity

First criteria – category maturity. Basically, you have to consider, how well you know the category. It does not have to be copied word by word, but you will get the meaning. Category maturity abbreviations in the grid above are given in the first column. Here is what I use:

  • NA: Never addressed. And it means straightforwardly that – never addressed. Maybe you are trying to address your tail spend for the first time. Maybe, finally, you got the support and courage to address “we have always done it that way” spend and suppliers. Maybe it was never managed by procurement. Whatever the case – it should, as a rule, allow you to expect bigger opportunities. Signs: very big number of suppliers; or on the contrary – only one supplier who has been there for ages. Contracts, signed long ago (ten, fifteen years or more). Lack of internal processes in buying administration, big number or buyers. You might not be even aware that the category exists.
  • I: Immature. Categories, that were on someone’s radar, but still having some “grey” areas. Categories, where, if asked suddenly, you would not be able to remember contract start and ending dates or even contact people at supplier’s side. Or even – what is the full list of suppliers in the category. You know, that spend is there and someone some time somehow did something, but what exactly that was…? Well – potentially a nice opportunity.
  • SM: Somewhat managed. Here you might even know suppliers and their representatives! And the contract duration. But, most likely, procurement’s efforts to deal with prices were limited to pretty much one or two challenging questions about the price over the phone.
  • MTE: Managed to an extent. You know the items, services, SLA’s, specifications. You have been having tenders and negotiations. You have been buying “like for like”.
  • M: Mature. You know ins and outs: if needed, you could set up a business to become your own supplier. That is how well you know it. Demand management? Been there. Make or buy? Solved that. Outsource? You have outsourced, re-insourced and re-outsourced again. Face it – you’ve done it all.

A good tool to check how well you know your category – check how many of the 64 methods, proposed by A.T. Kearney, you have applied to the category. That should also give a good indication on how much is still out there to be done.

Price / Market / Source flexibility

Another criteria to consider, while evaluating opportunity – how flexible are you to challenge the supplier, the product, market, and ways of buying? After all, it is not only about you and your wishes. There is a thing, called market outside of your office walls.

In the grid above, abbreviations are on the lowest line. My categorization is provided below:

  • SS: Single sourced. Wider explanation is in another blog post. Link here.
  • LS: Limited sources. In this case, you will be able not to only imitate negotiations, but actually have one. Surely, those two or three suppliers will know everything about each other and you will have a very slippery road to go, but, still, better than nothing. Right?
  • FCEC: Flexible, change with effort and cost. In these situations you might have more than three suppliers out there in the market, but any change will cost money and will require effort. In other words – no restrictions for “procurement show”, but quite a few restraining factors for real change.
  • FCE: Flexible, change with effort. There will be occasions, where market / prices / specification will be flexible. But you will still have to think about effort and resources that it will require. When prioritizing your activity plan for the upcoming year, proper planning is important. All in all – it is not just about identifying the opportunity – it is also about implementing it.
  • VFEC: Very flexible, easy change. Not much to comment. You will not find this very frequently, but if you do – it is all of your “quick hits”. If you have any of them, you should be hunting them right now – instead of reading this post. Seriously!

Ready, Steady, Go!

The process of budgeting will be exactly that: preparing data, analyzing it; making assumptions and decisions, which will, hopefully, lead to implementing them.

This time around, making logic assumptions, I hope, will be easier. Look at the maturity of the category and flexibility of the market (and some other factors) – and suggested savings’ number is just there. I am adding template with the grid in excel. The file also contains some more suggestions and formulas to make your budgeting process faster (opportunity-analysis-template). Numbers and category names are just suggestions – feel free to adjust according to your expert judgement.

Then choose methods of working and administration: simple tasks, project teams. Choose strategies and action plans (the HOW bit) – tenders / e-auctions / partnerships, outsourcing, etc. And go after the numbers! Happy hunting!

 

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Make Budgeting “Logic Friendly (-ier)”