Forecasting Practices In Purchasing

INTRODUCTION A number of earlier studies have shown that the role of purchasing is expanding in the long-range strategic planning function in most firms. This appears to be attributable, at least in part, to the impact purchasing can have on reducing product design costs, assuring the flow of critical materials, and aiding in just-in-time implementation efforts. |1~ Purchasing planning is also taking on added importance as progressive departments strive to improve materials management methods, identify key long-term sources for purchased materials, and improve material quality and supplier performance levels in general. Because of this expanded planning role, purchasing departments are increasing their use of forecasts to obtain information on such things as future economic conditions, material availability, commodity prices, new material developments, and new technologies having an impact on materials management activities. While some forecast information relevant to purchasing is available through published trade reports, many product- or market-specific forecasts must be generated or administered in-house to be useful to the purchasing planner. While previous studies have examined forecasting in general, very few have studied forecasting practices specifically in the purchasing area. |2~ The primary objectives of this research were to identify: (1) the degree of forecast utilization in purchasing, (2) the types of firms utilizing purchasing forecasts, (3) the items forecasted in purchasing, and (4) the methods of forecast generation. The following section discusses briefly the relevant forecasting literature, followed by a discussion of the research methodology, a presentation and discussion of the results, and finally the conclusions. A REVIEW OF RELEVANT FORECASTING LITERATURE A review of the more general forecasting articles provided a number of insights into the status of forecasting practice today. Armstrong's review of the forecasting literature exhibited some disagreement among the findings of various studies as to when certain forecasting methods could most appropriately be used, as well as whether a combination of methods should be used. |3~ Subjective techniques, such as expert opinion, were found to be useful in short-term forecasting situations but less reliable than quantitative methods for long-range forecasts, particularly when significant changes in the environment were expected. Causal forecasting methods (such as regression analysis) were not found to be particularly useful in short-term forecasting, and extrapolation methods (such as time series analysis and simulation) showed little improvement in short-term accuracy. Additionally, simpler quantitative methods were found to perform just as well as the more complex techniques and often resulted in less bias. |4~ Conflict also was found in the research regarding the combining of two or more methods to reduce forecasting error. The research work of Armstrong|5~ and Sanders and Ritzman|6~ found that combination methods did reduce forecasting error, although the practice was infrequently employed. Dalrymple, however, discovered no significant relationship between the use of combined forecasts and forecast error. |7~ The literature on purchasing's role in forecasting price, supplier delivery lead times, and material availability is quite limited. In a survey of purchasing personnel in electronics firms, Ellram and Pearson determined that about half the respondents had total responsibility for material price forecasting. |8~ For MRO (maintenance, repair, and operating) materials, Hanafee found a reliance on price indexes to predict price increases. |9~ A recent exploratory study by Wisner indicated that judgment forecasts by purchasing managers were used extensively to forecast price, lead time, and product availability. |10~ This result was supported by other research in general, although Sanders|11~ and Sanders and Ritzman|12~ found that manufacturers were familiar with quantitative forecasting methods. …