An annual operating plan is a formal statement on what Procurement wants to achieve in a year and how it plans to do so. An AOP can be a lengthy document that explores Procurement’s potential contribution to organizational goals, its opportunities and pitfalls, and the specific projects that will produce results over the course of a year.
Benefits of an annual operating plan
The greatest benefit of an annual operating plan is that it makes Procurement’s intentions and tactics clear to the entire organization. This transparency makes it easy for the entire business to stay aligned from the beginning of the year because every business unit knows the direction every other business unit is moving. Annual operating plans also set the stage for cross-functional collaboration all year long instead of relying on last-minute requests. Most importantly, an AOP makes sure Procurement’s internal resources and processes are working toward the same goal. It also provides a way to keep them focused regardless of what comes up over the course of the year.
What should an annual operating plan include?
An annual operating plan for procurement should be a formal document that explains Procurement’s goals, why leadership selected them, and how the function will achieve them. It should serve as both a quick reference guide throughout the year and a roadmap for where the function plans to go. Below, we’ve listed a few standard sections, though you may include others based on your needs.
- Executive summary – a short overview of Procurement’s goals and how they drive the organization’s goals forward.
- Goals, OKRs, and KPIs – a detailed breakdown of Procurement’s goals for the year along with the metrics used to track performance and progress
- Budget overview – a brief explanation of how the function will spend its budget and along what time frame. This section will include both determined and undetermined expenses
- Market analysis – a detailed exploration of market factors that are already affecting sourcing and procurement processes or may come into play as the year develops. This section should include solutions and contingency plans.
- SWOT analysis – a list and explanation of the procurement organization’s strengths, weaknesses, opportunities, and threats.
- Strategic plan and initiatives – a comprehensive list of Procurement’s planned projects, ordered by priority and expected impact. This section should detail the timeline of each project, which areas of the business it will impact, and what goal it ladders up to
- Resource plan – a list or chart showing the division of resources between the proposed projects.
How to create an annual operating plan?
Step 1: Do the initial research and analysis
The first step to creating any strategic plan is to know what you want to achieve. In Procurement, there are four non-negotiable sources of this information. The first is organizational goals. Understanding where the board and executive team want to take the business this year should be the primary guide for your strategy. Focusing on anything else will move different parts of the business in different directions, even if you’re pursuing good goals.
The second source that should inform your plan is market trends, changes, and predictions. Understanding these developments will help you plan for challenges, get ahead of pricing fluctuations, and capitalize on opportunities for leverage. Then, you should conduct a spend analysis to understand the current state of your spend data, supply chain, and risk levels. Finally, compile that information into a SWOT analysis to identify strengths, weaknesses, opportunities, and threats.
Step 2: Consult with key stakeholders to understand their needs
Next, talk to your stakeholders and learn what problems they want to solve this year. Find ways to align the company’s goals, market trends, and your SWOT analysis with their needs. The places they overlap will be a golden opportunity to create value.
Of course, you may have more stakeholders than you can handle. In that case, prioritize the business units that will have the largest impact on organizational goals. Alternatively, focus on the ones with the greatest chance of being impacted by market changes. You may be able to prioritize intuitively, but it’s always a good idea to use spend analytics so you can make data-driven decisions.
Step 3: Prepare a plan
After researching and meeting with stakeholders, analyze the data you gathered to identify the five most important big goals. You might identify more, but you should prioritize three to five and set the rest aside as supplementary. Then use your data to identify tactics, projects, and initiatives for each goal. Every project should ladder up to a goal, and every goal should have several projects that will move it forward.
In this step, you’ll want to strike a balance between being specific and flexible. Specify how long you expect each project to take place, when work will begin, the forecasted outcome, and the type of value. But at the same time, remember that changes can come out of nowhere. Inflation might cut your forecasted savings by 10% or a ship could block the Suez Canal again and force you into emergency sourcing. The more prepared you are for the good and the bad, the more impactful your plan will prove to be at the end of the year.
Step 4: Set a budget and allocate resources
Now that you have a plan, it’s time to decide how you’re going to execute each initiative. It’s no secret that Procurement budgets are hard to come by. In fact, many leaders are reporting that they’re expected to accomplish far more with the same resources they’ve had for years. But that doesn’t have to scale back your annual operating plan.
Instead, focus on maximizing the potential of your existing resources. The best way to do this is to get and keep your team on the same page about the plan. Low-investment tools like SpendHQ’s Performance Management module can help you manage each project in a transparent pipeline, like a sales team’s CRM. With it, your team can assign projects, communicate horizontally and vertically, manage the flow of work, and track and report the results in real time.
Step 5: Review and approve
Once your annual operating plan is set, review it with two groups: your executives and your stakeholders. Your executive review will make sure Procurement’s strategy is aligned with the rest of the business. It’s a great chance to catch up on last minute changes and ensure you work parrallel with Finance as the year kicks off. The executive review is also a great opportunity to request more budget or collaboration if you’ve identified projects that need it.
Meeting with stakeholders is your chance to make sure you understand their needs. Ask them if your goals, projects, and proposed solutions will improve their work. Specifically, make sure your plan doesn’t include anything that will disrupt their work or processes. Of course, you can’t do everything stakeholders need, and they may not agree with some necessary changes. In those situations, treat this meeting as a chance to smooth things over and look for ways you can meet each other in the middle.
Now it’s time to put your plan into action.
Step 6: Execute and monitor
Now that it’s time to get to work, put your team into execution mode and keep them there by managing each project in a centralized, single source of truth. Using a solution like SpendHQ, closely monitor your pipeline and be prepared to get involved when necessary to keep everything on track. As results roll in over the year, direct executives and stakeholders to explore the tool themselves and remind them that they have uninterrupted access to the data.
Most importantly, keep a continuous improvement mindset. As the year progresses, some parts of your annual operating plan will fall through. Don’t worry—there’s no way to predict everything. Your results at the end of the year will present new opportunities to grow and plan more effectively next time.
How to make sure your procurement actions are aligned with the AOP
Prioritize pipeline tracking and project management. Align every action in a single source of truth so that both leaders and individual contributors alike can see what the org is doing and what it’s working toward.