Why don’t we start off with a simple question?
If I told you there was a process that, if leveraged correctly, could unlock new levels of profits for your business; could lower company costs; and could drive improvements that enhance overall performance – would you implement it?
If I taught you how to do it, would you leverage technology to automate key processes? Would you consider opening your doors to third-party services to enhance your capabilities?
You may be nodding your head saying yes, but take a second to think it over. Maybe you wouldn’t. It all starts with three easy words – “managing direct materials” – and there’s a little bit you should know about this atypical buying process.
Historically, direct materials form the core of any manufacturing based organization. Like any other category sourced, price and quality are key criteria by which items are sourced, but the similarities end there. Direct materials can have extreme fluctuations in volume, is time critical, and has a range of complexities all within a single commodity. Additionally, it is absolutely necessary to leverage new technology if you truly want to achieve superior results.
That said, there are some top-notch advantages to using this method:
- 98 percent of direct materials spend under management
- 28 percent higher year-over-year cost reductions
- 63 percent greater rates of contract compliance
Still interested? Good – here’s what you need to know.
When it comes to sourcing direct materials, technology alone doesn’t cut it. In order to identify opportunities for savings and effectively drive them to the bottom line, companies need commodity knowledge, market information and best practice processes that can be applied across categories.
That’s why manufacturing requirements drive the sourcing and buying process for direct materials. Manufacturing methodologies such as Just In Time (JIT) or Built to Order (BTO) requirements end up driving the need for a vastly different requirement to handle the materials, which feed into the manufacturing process.
Regardless of the process being employed, the underlying requirement is to ensure continuity of supply at the right time and right place. A manufacturing environment is unforgiving to a material supply chain and errors have an exponential impact. Examples include a full production being reworked or scrapped due to incorrectly delivered product, product recalls, or even production lines being stopped.
Within direct material sourcing, there is a level of complexity not often seen in indirect categories. While the indirect categories focus on services or finished products, direct materials has to deal with multiple conflicting requirements, inventory allocations, BOMs and reliability of supply.
In a world where the ability to react quickly to changes in the marketplace is critical, sourcing professionals need all the tools available to them in order to be efficient at sourcing for rapidly changing requirements put upon them by the marketplace. So how can we mitigate risk?
Risk Mitigation in Direct Materials
- Strategic Items – Give most attention; cultivate supplier relationships; apply strategic sourcing/analytics; contingency planning
- Leverage Items – Spend aggregation; flexibility to substitute suppliers/products; place high-volume order
- Bottleneck Items – Stock-up when item is available; seek alternative sources; find ways to control vendor(s)
- Non-critical Items - Automate as much of this spend as possible
I’ve mentioned technology a few times throughout this article, so I believe it would be an injustice if I didn’t clarify which technologies would be best to leverage in order to drive efficiency and mitigate risk.
Technologies to Leverage
- Catalog management and eProcurement – Help manage non-critical items
- Category management and eSourcing - Key tools for leverage items
- Strategic Sourcing Tools - Appropriate for effectively managing strategic items
- Supplier Management - A focal point for bottleneck items
Sourcing for direct materials is not rocket science, yet it requires a different skillset and tools when compared to indirect materials. Having the right tools simplifies the process but nevertheless, requires a different mindset, which understands the full implications of the sourcing activity.
There is a huge amount of insight, networking, and information sharing available at the end of this month at Ariba Live in Singapore. This is where customers, suppliers, and organizations are invited to share their experience, learn of new developments, and see the power of intuitive and collaborative solutions.
See you at Ariba Live!
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Derek Lee is a supply chain practioner who has more than 15 years of experience across industry and consulting roles prior to joining SAP Ariba. He has worked with multiple fortune 500 clients and has assisted with strategy and implementation of process and technology improvement programs. His industry experience ranges across media, high tech, life sciences, transport, logistics and retail.
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