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.
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.
Below are seven suggestions for improving direct material procurement to make it more focused on creating value and reducing overall supply chain risk.
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.