Direct material procurement woes and how to fix them

By Lora Cecere | November 14, 2016

While new technologies have served to improve indirect procurement, direct materials procurement remains tied to MRP and ERP systems. This needs to change.

It is fall. Here in the Eastern United States, where I am based, the hot and humid days of summer are finally giving way to cool and crisp weather. As fall becomes winter, supply chain leaders are planning their budgets and building strategies for 2017. As they do so, one thing they need to consider is a redesign of their direct material procurement operations.

Direct procurement ties directly to manufacturing conversion processes through a bill of materials. Indirect procurement, by contrast, is not an input to the manufacturing processes; it includes such purchases as office supplies, professional services, and temporary labor.

In the last decade, new technologies have driven significant improvement in indirect procurement. Examples include improved control of “maverick” spend, increased use of qualified vendors, electronic bidding, and price comparisons.

This is not the case, however, with the purchase of direct materials. Direct material purchases are still controlled by material requirements planning (MRP) and traditional buying processes. The trouble is that the MRP signal, while precise, is inherently inaccurate due to the bullwhip effect. As demand latency and error have increased over the years, MRP has become an even less dependable signal.

Another issue is that traditional technology and buying processes focus on reducing costs and not on creating greater value or mitigating risks—both of which are important for creating a top-performing supply chain. While the systems deployed through conventional MRP in enterprise resource planning (ERP) enable buying, they do not help increase visibility of supplier viability, reward innovation/contribution of new ideas, or drive improvements in corporate social responsibility.

Indeed our research shows there are gaps between what companies think is most important in selecting a direct materials supplier and what procurement technology currently provides. As shown in Figure 1, the greatest gaps are in the areas of financial viability, driving innovation, measuring and nurturing the relationship, and corporate social responsibility. These risks in supply chain are growing unchecked.

Figure 1: Contrast of Company Performance on Supplier Management of Direct Materials Versus Performance of Current Technologies

According to our research, demand volatility and supplier viability are increasing risks for today’s supply chain leaders (see Figure 2). The management of the supply base is also a requirement for addressing another area of risk, product quality. The focus over the last decade on transactional systems, auctions, and portals, however, has not been equal to these challenges.

Figure 2. Supply Chain Risk Factors
Seven strategies
Below are seven suggestions for improving direct material procurement to make it more focused on creating value and reducing overall supply chain risk.

1. Design and build collaborative workflows. In discrete manufacturing, it is critical to have collaborative workflows between suppliers and the globally dispersed parties within a large organization. These workflows, however, are not present in ERP systems. For example, one of the large gaps with the technologies currently being used today is the sharing and review of design documents. To address this gap, companies should consider using a combination of product lifecycle management solutions (like Oracle/Agile, Enovia, and Siemens Teamcenter) and direct materials technologies (like Directworks, Pool4Tool, and SupplyOn).Using these two type of technologies together will help companies vies and collaborate od design specifications.

2. Be easy to do business with. Today, fewer than one in four purchase orders are processed hands-free, vendor setup times take an average of 48 days, and most suppliers feel “portaled to death.” Companies need to start analyzing their current processes to see how they can make it easier for their suppliers to do business with them. Minimize the time for vendor setup and ensure that vendors can get the data they need. For example, one aerospace and defense manufacturer that I work with has a hotline staffed with an experienced engineer to answer “quality of design” questions from suppliers. The focus is on making it easy for the supplier to get the right answers.

3. Tie manufacturing planning to direct material sourcing strategies. Less than 5 percent of companies have successfully connected their supply planning processes to direct material requirements planning. To accomplish this, consider technologies like E2open and Kinaxis to translate manufacturing requirements into sourcing requirements. Also consider transmitting manufacturing schedule changes through networks to ensure a system of record.

4. Take responsibility for your data quality. For most suppliers, the translation of demand into requirements is problematic. In the last decade, demand accuracy has decreased, and despite the investment in many technologies, the quality of the demand signal to the supplier has not improved. Hold yourself accountable. Consider tying incentives to better demand signals. For example, if you can give the supplier a better demand signal, can it give you a better discount?

5. Make purchases based on independent demand. Carol Ptak and the Demand Driven Institute are doing some very promising work redefining MRP to be driven from an independent demand signal (actual demand for a finished product, which would include point of sale data, distributor data, or end-customer demand). Where possible, use channel demand in determining requirements and push for technology vendors to adopt demand-driven material requirements planning (DDMRP) principles. Consider a DDMRP pilot with your strategic technology vendors.

6. Drive and align reward systems. Currently few companies are using incentives to encourage suppliers to be innovative. It’s time to reward suppliers for sharing innovation through open innovation networks. Build systems to enable visibility between new-product launch requirements and the qualification of new suppliers. For most companies, this is a major gap. Create a flowchart that shows the relationships between the identification of a supplier for a new product and the time required to to onboard a new supplier and review/refine the specifications for qualification. Work to shorten the review times and make the processes more efficient.

7. Invest in new technologies and approaches for direct material procurement. Companies need to recognize that supplier relationship management systems are a fit for indirect procurement but not for direct materials procurement. Building effective processes for direct procurement requires companies to redesign their processes from the “outside in” and partner with best-of-breed solutions. Don’t fall into the trap of believing that solutions applied to indirect procurement can meet the needs of direct procurement. They are distinctly different.

One of my goals is to encourage supply chain leaders to consider a redesign of their procurement processes in 2017. Direct materials procurement is a good place for them to start.

Lora Cecere is founder and chief executive officer of the research firm Supply Chain Insights.