The Spotlight is Now On Direct Materials
The manufacturing industry is moving through a massive transformational period driven by a variety of forces, including a changing world economy, increasing access to data, and breakthrough innovation in materials, assembly operations, and transportation.
Simultaneously, there is a rise in global manufacturers turning to emerging technologies that are purpose-built for manufacturers to automate, standardize, and transform their direct materials sourcing and supplier management processes.
Let’s expand upon these trends and take a look at what is now changing in the market and why.
The focus has shifted from indirect materials to direct materials.
For the past decade, companies have focused on optimizing indirect materials. There is a crowded market of technology solutions that are helping companies increase buyer efficiencies, improve costs, and gain visibility into spend. Because every industry has indirect materials spend, there are many technology providers that provide solutions to this common spend. A majority of manufacturers have taken advantage of these solutions and have seen great gains. Now that indirect spend has come under control and is almost exhausted in some companies, the shift is now turning to direct materials.
For manufacturers, direct materials sourcing has been known to be very engineering-driven. Engineering would design a product (often with a specific supplier in mind) that has a final or near-final specification. They would then throw it over the wall to sourcing to collect final quotes and prototypes by a certain date, which barely provided enough time to properly source, collaborate or negotiate with suppliers. In order to launch products successfully on time and at or below target cost, manufacturers realize they can no longer afford to design products without bringing cross-functional teams and suppliers to the table earlier in the process. By doing so, results have shown a 10-20% earlier product launch and up to 20% cost reduction. (Aberdeen Group) Manufacturers are now embracing enterprise solutions to help them collaborate with internal stakeholders and product suppliers and manage their largest and most complex spend, direct materials.
Procurement and supply chain teams are centralizing.
In today’s economy, everything is global – especially for manufacturers. Sourcing locations and final product ship-to locations have no borders. “Global sourcing” to a manufacturer used to be more of a vision for the future, but it is now becoming a reality and a current practice. More and more manufacturers are abandoning decentralized procurement models, where each region operates with its own business practices, tools, principles, and measurements for sourcing and supplier management. Instead, center-led and center of excellence teams have emerged, which are helping to break down silos that are naturally created through regional dividers, product lines, and acquisitions. When manufacturers work as a single unit across the globe by standardizing processes and technologies regardless of location, they are able to reduce total spend, reduce the risk of unmet regulations, increase customer satisfaction, and react to changing landscapes faster.
By centralizing functions, processes and technologies are also becoming centralized. Manufacturers are creating standard sourcing processes and templates leveraged by all sourcing teams, developing and implementing global cost modeling and target cost methodologies, standardizing supplier onboarding and management practices, and adopting technologies that can be implemented globally.
Different spend will be managed differently.
Manufacturers have different solution requirements than other industries because their spend profile is different. Manufacturers purchase direct materials, capital expenditures, and indirect goods and services from suppliers. All spend is not created equal, and these categories are very different and serve different purposes.
- Direct materials are product components that often contain manufacturer’s designs and intellectual property. Suppliers of this type of spend are largely seen as strategic partners and even considered a competitive advantage because they have the ability to impact a manufacturer’s growth, margins, ability to innovate, speed to market, quality, and new market expansion.
- Capital expenditure is highly engineered equipment for facilities. Suppliers are typically contractors. Manufacturer’s financial objectives within capital expenditures are to achieve a return on capital invested.
- Indirect materials are operation expenses and commodity item/services. Suppliers of this category are typically vendors, and the focus is on expense management and making it easy to ensure buying compliance across the organization.
With different teams of people running different business processes in each category and engaging different suppliers with very different objectives, different technology solutions are needed.
Manufacturers do not have many options when it comes to enterprise sourcing and supplier management solutions that are suited for direct materials and capital expenditures. They revert to inefficient, gap-filling solutions, like spreadsheets, email, FTP sites, to accomplish this work. Or a one-size-fits-all solution that ends up not meeting their specific business challenges. The market is ripe to capitalize on a focused solution that is tailored for a specific spend within a specific industry.
Collaborative partnerships represent the future of innovation and the future of supply chains.
We are living in an era of unprecedented innovation and global connectivity. For direct materials, products are changing faster than ever before and manufacturers are drowning in revisions, rapid iterations, and product changes. It is difficult to keep up with the latest version, rationale for price increases, reasons behind delays, and explanation of late products or failure to hit target costs.
Business models have also shifted. Collaborative partnerships represent the future of innovation and the future of supply chains. Suppliers are more important than ever. And the way manufacturers perceive them and work with them is changing. We are finding the most successful companies are embracing supplier collaboration to create a competitive advantage, reimagine their products, and win in the market.
- 75% of manufacturers say that partnerships will form the basis of innovation. (KPMG 2015 Global Manufacturing Outlook)
- 39% of global CPOs plan to increase their levels of supplier collaboration. (Deloitte 2016 CPO Survey)
Manufacturers are embracing a new way of thinking that is no longer siloed in its approach, where each department works independently and outputs a product, but instead it’s collaborative where cross-functional teams work together around the product. This new way of thinking will require abandonment of old world methods of spreadsheets and islands of data, and instead embracement of enterprise solutions, visibility, and collaboration in order to work more effectively across stakeholder functions and with their extended enterprise of suppliers to drive innovation and develop, launch and deliver more profitable products.
The opportunities to create a competitive advantage through greater supplier engagement are compelling, but these relationships require a structured approach to be most effective. After developing the appropriate business processes, many manufacturers are now turning to technology to enable their supplier engagement efforts, including activities such as profiling suppliers, managing innovation and cost improvement initiatives, technical design collaboration, strategic sourcing, supplier component qualification, and ongoing supplier performance management. By automating and enhancing these activities with technology, manufacturers can more professionally manage their supplier relationships, make better, data-driven business decisions, and achieve greater product success.