Wednesday, September 13, 2006

Modern Forecasting in Purchasing

Well, after a long day of air travel out of Pittsburgh and a beautiful night swim in the desert heat of Rancho Mirage, I'm settling in to share some more purchasing thoughts with you!

Coast-to-coast air travel gives me lots of time to read business magazines. My laptop battery bites the dust after about two hours on the plane and my thumbs can only take so much microtyping on my Palm Treo.

One of my favorite on-the-road magazines is Business 2.0, though it rarely mentions corporate purchasing. But the September issue did! And it specifically related to a topic that I discuss from time to time in my purchasing articles such as "Tactical vs Strategic Purchasing" - forecasting.

The article "The Wisdom of the Corporate Crowd" gives a great example of how the purchasing function can be strategic by giving some background on how Hewlett-Packard's commodity managers play a key role in HP's profitability, specifically through their forecasting. It compares their traditional way of forecasting with their new way.

The article says "On the first Tuesday of every month, 10 or so commodity managers from across Hewlett-Packard's hardware divisions dial in for a conference call - but the civility often ends there. For an hour or more, they bicker, squabble, and joust over one seemingly innocuous question: What will the price of DRAM memory chips be in one month, three months, or six? 'Usually, it's the loudest, most obnoxious guy who gets heard, ' says HP research scientist Leslie Fine."

These meetings culminate with "an official forecast that 70 HP buyers rely on to price more than $50 billion in HP computers and other hardware - often months before the chips that go in them are bought. If the forecasts miss by even a few cents, the difference, which can add up to millions of dollars, comes out of HP's slim profit margin for hardware."

Strategic purchasing? You bet!

The article goes on to describe how HP is experimenting with an innovation in forecasting where they've developed an internal Web-based, game-like model that simulates a stock market style exchange and rewards the best players (the commodity managers) with cash prizes.

And how is it working?

It's beating the pants off of the traditional way!

Gosh, I love to see creative ideas break new ground.

OK. My room service meal of pizza and a $9 piece of cake should be here soon, so I gotta go.

Greetings from steamy California!

Respectfully,
Charles Dominick, SPSM
President
Next Level Purchasing, Inc.
Struggling To Have A Rewarding Purchasing Career?
Earn Your SPSM Certification Online At
http://www.NextLevelPurchasing.com

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