Forecast and Plan Requirement

The purchasing cycle begins with the identification of a need (a requirement). In most cases, procurement personnel have an annual or biannual planning process, whereby they will review the spending pattern for the organization (through a spend analysis, discussed later in the chapter), and prepare a forecast of what will be purchased. In some cases, there may be a whole set of new requirements that have not been planned for (such as for new product introductions). In such cases, purchasing personnel meet with internal customers to discuss their needs for the coming year. In many firms today, purchasing is the primary vehicle for obtaining external inputs (products or services) from suppliers. Hence, purchasing personnel have to work with a large number of internal customers, which will often include marketing, operations, finance, information technology, and other internal customers. Through a structured dialogue, purchasing will understand and plan for what these customers will be buying and translate this into a forecast that is shared with suppliers. (In the next chapter, we will discuss the sourcing process that takes place to identify which suppliers are to receive the business associated with fulfilling this need.)

A projected need may take the form of a component (e.g., a set of fasteners), raw material (e.g., resins), subassembly (e.g., a motor), or even a completely finished item (e.g., a computer). In other cases, the need may be a service, such as the need to contract with an ad agency for a new marketing campaign, or a food service to provide lunches at the company cafeteria. Because purchasing is responsible for acquiring products and services for the entire organization, the information flows between the purchasing function and other areas of the organization can be extensive.

Of course, not all needs can be forecasted ahead of time. Situations arise when an internal customer has a need that comes up suddenly, which is not planned for and for which there is no preexisting supplier identified to provide the product or service required. Such needs are often handled through a spot buy approach, which is also discussed within the context of the P2P process. For example, marketing may need to purchase a set of pens and cups for a special promotion and may alert purchasing on sudden notice of this need. If it was not planned for, then purchasing must work with marketing to quickly identify a supplier to provide these products on short notice at the lowest possible cost with an acceptable level of quality and delivery time.

When creating a forecast for a needed product or service, internal customers may not always be able to express exactly what it is they will need at a single point in time. For example, a chemical plant maintenance group may say that they will need replacement parts for their equipment, but they may not be able to provide details on the exact nature of the specific parts they will need, nor the exact time they will need them. In such cases, purchasing may negotiate agreements with distributors of parts that can provide a whole different set of products that can meet that need. In other cases, an internal customer may say that they need to work with a specific service provider for temp services, consulting services, or software programming, but they cannot express exactly what type of service they will need in advance. Purchasing will then go off and attempt to secure a contract with predefined costs for different classes of workers who can provide these services on short notice.