Forecasting your spend is a vital part of meeting Procurement and Finance targets.
Spend data is a valuable asset for financial planning. With advanced spend cleansing, classification, and enrichment, you improve the accuracy of your forecasts.
Spend data enables stakeholder discussions on vendors, future order amounts, volume-based contracts, and future cost-saving initiatives. All these elements will increase the value of your forecasts!
In this blog, we'll discuss the basics of spend forecasting and the techniques you can use, plus what to consider.
What is spend forecasting?
Spend forecasting combines historical and present spend information with qualitative and quantitative methods and provides insights into future spending.
Spend forecasting gives a holistic view that decision-makers can use to make better sourcing decisions, reduce future costs, and create more value.
What is demand planning?
Demand planning is a part of spend forecasting, where projections on future sales define the requirements for raw materials, goods, and services.
Demand planning is a supply chain management process that predicts future demand.
Demand planning has a big impact on Procurement plans:
- Any change in demand affects sourcing and contracting decisions.
- Increased demand provides opportunities for volume-based discounts, whereas drastic drops in demand can result in difficult discussions with current suppliers and increases in unit costs.
- Demand planning also helps you decide inventory levels and minimum order quantities.
The importance of spend forecasting
Spend forecasting aids organizations in managing their outflow of funds more effectively. From a Procurement perspective, data analysis and predictive tools help procurement teams source raw materials, goods, and services at a more attractive overall cost from the right vendors.
The aim is to predict what will be needed, by when, and in which location.
Forecasting attempts to predict demand for goods, materials, and services with the best information possible.
Planning tools assist in decision-making about the future. Simply put, you need forecasting to see what's coming ahead instead of only looking into the rearview mirror.
Where to focus forecasting efforts?
Procurement can't influence all third-party spend. The focus should be on spend under management. You should be interested in the most significant spend categories, which you have influence over.
For any forecasting exercise to be successful, business units and procurement must work together.
Can you agree on limiting consumption when prices are peaking? Can you substitute material with an alternative? Can you hold some stock and secure current prices by doing so? Pay special attention to key, volume, and bottleneck suppliers.
The collaboration will help align the goals of the forecast and its application to procurement strategy.
Forecasting also enables your supplier to secure production capacity and lower raw material prices.
Visibility into your future orders will be appreciated.
Forecasts can and should be adjusted as needed. Be careful with sharing binding forecasts unless you are sure about your future business outlook.
Spend forecasting techniques
Spend forecasting has a set of qualitative and quantitative techniques that can help with a fluctuating market.
Although it is an inexact science, there are ways to help.
Quantitative spend forecasting
Quantitative forecasting techniques are objective. They use validated historical spend data along with cost analyses and currency fluctuations.
Quantitative forecasting can include technical models such as regression analysis, exponential smoothing, and econometric modeling.
Qualitative spend forecasting
Qualitative techniques are regarded as subjective as they include expert opinion, market research, focus groups, and panel consensus.
Both quantitative and qualitative approaches can work together to support forecasting.
The elements to consider in spend forecasting
Several factors can affect the spend forecast. Below are listed some key elements:
1. Cost drivers
It is essential to understand the main cost drivers of a product that may influence future costs.
What influences the cost of an item? Usually, it's raw materials, energy, or labor cost.
Raw material indices and energy prices are sources for projecting future price fluctuations.
3 ways to tackle commodity price volatility
To forecast savings more accurately, estimate the impact of the price movement within each key cost element.
2. Market trends
Historical data analysis can only tell us so much. Market research and indexes will help predict price movements. Global demand figures for raw materials and finished products, e.g., shipping containers, will assist in identifying future price increases.
Download the complementary Material Forecasting whitepaper here.
A deep dive into commodity pricing trends and forecasts can help determine where costs rise or fall. You can set up revised cost models at the commodity level and plot them against future time frames. If prices are attractive now, it may be the time to buy in bulk to achieve economies of scale.
3. Currency fluctuations
For imports, the choice of currency and a focus on exchange rate fluctuations is vital as the correct payment terms, price, and quality.
The benefit of currency trend analysis and exchange rate forecasting means you can make sourcing decisions based on facts.
Information is available on-demand in real-time to allow for adjusting your view in times of supply chain disruptions.
4. Spend patterns
Spend patterns can change.
- Is there a spend increase in a certain category that you might want to leverage?
- Is it beneficial for you to make orders more frequently or infrequently?
- Can you order a larger quantity when supply uncertainty is ahead?
Unusual or unexpected purchases can also provide opportunities. Invoices (especially without POs) can highlight areas to rationalize or enter into new strategic supplier partnerships.
Integrating new commodities into formal sourcing processes and category management is the best practice for better visibility and forecast accuracy.
Factors that impact forecast accuracy
Companies use various techniques to predict future spend, relying on spreadsheets, benchmarking, and trend analysis.
Manual methods are slow, prone to human error, and have problems with version control and scalability.
Forecasting accuracy increases with robust spend analytics in the background and reliable external data that can enrich your analysis. Automating forecasts should be compared with the cost of potential mistakes, loss of savings, and poor decision-making.
How to reduce cost with forecasting
Sievo enables you to analyze, review, and refine your strategic spending plans to support the drive toward obtaining the best value for your spend.
With Sievo you can benefit from quantitative and qualitative inputs, combining your historical data with business intelligence and hyper-relevant external data. Visit the product page for more details: Materials Forecasting
Header photo from unsplash.com (Freysteinn G. Jonsson)