Procurement can help you plan your budget
Budgets are concrete things, based in fixed numbers. But it’s amazing how much time is spent discussing budgets subjectively. Much like the spend procurement brings under management, finalizing a budget can be managed with the 80/20 rule: 80 percent of the time should be dedicated to discussing 20 percent of the spend. The trick is to discuss the right 20 percent!
Procurement technology can play a bigger role in budgeting than it does today. When spend categorization aligns with projects and line items in a budget, the whole process becomes more fact-based. Past budgets can be compared to actual spending for an improved understanding of where forecasting was the most (or the least) accurate. Projects that never took place will be easier to spot, as will overages by cost center or supply requirement.
Predictable categories of spend shouldn’t be the main focus. Assuming the need was properly anticipated, only minimal changes (if any) are likely to be required from one year to the next. Instead, more benefits come when discussion centers on investment opportunities with upside, or those that carry specific risks.
Whiplashing costs in areas such as raw materials can affect more categories of products and spend than people realize. For instance, oil prices certainly affect transportation costs, but they also affect the prices of derivative materials such as resin that are used in plastic components. The line items associated with these products and materials should be discussed to make sure there is enough room in the budget if an increase occurs.
Procurement should take time to review past cost and demand numbers in these categories and make projections about the anticipated increase and how much that will actually impact services or derivative products. It may even be appropriate to approach suppliers and see if modifications need to be made to the contract in place.
In most cases, companies recover any unused portion of a budget and reduce the corresponding cost center the following year. While that conservative approach may be necessary at times, it does little to foster growth or innovation. Discussions about what could be done with unspent funds – and what will be received in return – require time and a vision clearly fixed on results rather than a territory grab to preserve the size of a budget.
Technology is good at handling transactional aspects of budgeting, but it can do so much more. Ideally, budgeting should look past this year vs next and instead be informed by the context of longer trends. Good analytics software can do this, and decision-making teams can be far more effective when they can look at planned spending for a single cost center, line item or business unit and compare it to multiple years.
This is where procurement – and the technology it uses – can elevate budgeting to a new level and demonstrate value that goes far beyond cost savings. And while it might not get the CPO a larger budget, it is certainly a strategy today’s procurement teams can take to the bank.