Many CPO’s will also be working on the procurement budget in the coming months.  How do they translate trends, major developments affecting the function and company goals into a signed off and acceptable budget? That hopefully will at the same time reflect some investments and elements that are needed to bring procurement to the next level.

What could CPO’s consider for their budget, where are the areas to invest and where will procurement build its areas of business relevance and value? This article will select a few and zoom in on those areas.

Budgeting and planning in companies

Finance steers and gives guidance to the budgeting, planning and reporting process in the organisation. Normally each budget for a procurement organisation is set for the year to come (12 months period) either related to a 12-18 months rolling forecast, which are increasingly common, or as part of a separate budgeting cycle. In current times businesses work on the basis of scenarios and different scenarios are requested from Procurement for short, medium and long term. The time horizon might vary, the type of information requested is most likely still similar.

The role of Procurement in the budget process

Procurement is normally requested for input on different aspects of the budget. That can be in the beginning of the budget, eg supply market developments, cost reduction ideas/initiatives, inflation or price development trends up to the moment volumes and cost prices need to be known to develop insights in the results for the year to come (see table 1). Finally it should result in a formal agreement and handshake on the scenario’s and numbers with other functions as well as clear targets for the function on its overall contribition of the company.  Of course this differs per company, per industry, the role of finance and the maturity of the company/function.

Table 1: Typical budget input provided by Procurement

The Budget

For making a budget for next year it might be even more relevant than previous years to discuss in the leadership team the questions: How will 2next year be different in the way we operate and set our priorities? What have we learned and are we learning from the geopolitical trade tensions and a bit longer ago the COVID period?

Besides, some levers to the development of the function, such as digital, innovation (AI), sustainability, risk management and resource management, which have the possibility to increase the (future) value contribution should be anchored in the budget. Typically these demand strong leadership that continues to invest in these times of geopolitical trade tensions and short term focus.

Digital

The aim of digital should remain good quality master data, faster and better decision making, more strategic focus and after initial (FTE) investments, reduction of FTE in several repetitive tasks. It also requires dedication and focus that is difficult to organise on top of the traditional resources in the organisation. New software applications, AI require thorough selection, approaches and roles that are different from implementing the traditional procurement software. Piloting, trial outs and cocreation with new software suppliers, often not spotted by corporate IT departments and policies, is the more probable way of implementation.

Areas that most likely deserve attention in many companies are:

• Continued: masterdata harmonisation, data quality, single source of truth, data governance
• Dashboard developments.
• Pilots on digitalisation of certain processes, such as guided buying, spend clean up, pricing intelligence, risk management, negotiation support etc. (jointly with ICT and cocreation with start-ups, scaling and integration)
• People, data analysts, data engineers, procurement project leads supporting this process (2-3 FTE in larger organisations)

Innovation and sustainability

Should result into faster and more efficient company innovation (higher percentage of ‘newly created revenue’) and contribute to the overall company purpose and CO2 reduction. The two areas are closely related. They require dedication that acts as catalyst and accelerates the awareness, practices, training and spreading of the relevant knowledge and skills.  Budget considerations are:

• Appoint dedicated FTE’s, assuring progress and realising ‘the next level’, developing both areas in terms of methodologies, designing roadmaps and activities, knowledge, training and cocreation with other functions (min. 1-2 FTE in larger organisations)
• Organising the ‘fit for purpose’ supply base in terms of compliance, CO2 reduction, green energy buying
• Selecting suppliers for collaboration on innovation and sustainability (result segmentation)
• Virtual x-functional supplier and company events, inspiring and filling the pipeline with ideas and projects.
• External collaboration on sustainability on industrial level to increase efficiency

Risk management

If one topic needs to have its place on the next year agenda and should be awarded with dedicated attention, actions, and milestones, it is risk management. The VUCA context, the new normal, made clear that global supply chains need continuous adaptations, reviews and redesigns. Response and react mechanisms need to be part of the toolbox of the CPO and crisis teams. Also in case of climate, or environmental related crises.

The budget could reflect the investments in risk management, more than in all the years before, on:

• Investing in approval of second suppliers (sampling, testing, etc) and the decision how to organise for this? Each category manager on its own supporting R&D and operations or centrally coordinated from Procurement with a more or less dedicated FTE coordinating?
• Investing and integrating software that identifies, classifies and signals risks (real time) and parallel to this structurally investing in automation of risk management around cybersecurity and data protection. Moving away from spreadsheets and providing also here insights in supply risks.
• Continued structural work on corporate and company risks identified in processes and practices and where possible to automate those, requiring dedication in process mining, streamlining and efficiency.

Resource development.

Where the shortage of talent for companies will not disappear, also the pressure on FTE will be paramount.

Procurement is and will remain more and more a people’s task in those areas which are strategic and tactical and where the difference is made for the business. Examples are supply base and stakeholder management and relations, complex strategic negotiations, creative solutions and topics as risk management, innovation, sustainability.

Does the current 9-box matrix (agile learning versus performance) and performance management system identify and develop the right people for the future? Or is it just producing and promoting copies of the current population? Is there sufficient diversity (on all thinkable aspects) in the talent pipeline? Are there some positions reserved in procurement teams to develop talent? Is the function sufficiently attractive?

The budget could consider some key elements and small investments in:

• Marketing of the function by building on the Employer value proposition specific for procurement, which still can be improved in procurement functions.
• Personal CPO and leadership engagement and interaction with talents
• Appointing young graduates and company high potentials in a talent pool working on risk, sustainability, innovation and learning about the core procurement activities
• Developing rotation schemes inside the company or even with procurement functions of other companies like Maersk, HSBC, Ikea (now Henkel) Maersk company website
• or Clariant and Enel talent rotation by David Rae

Interested to discuss further on innovation, sustainability, risk management or digitalisation or talent management in preparing your budget, please contact us at the AIE company.