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Manufacturers Need a More Data-Driven Approach to Direct Materials Sourcing

Few decisions have as much power to make or break a product's success and profitability as those around the sourcing of direct materials. The components, parts and assemblies that go into making products not only account for 70 percent of an average manufacturer's annual spend, they have a significant impact on such critical competitive factors as brand reputation, time to market and supply chain reliability.

Manufacturers Need a More Data-Driven Approach to Direct Materials Sourcing

Because a manufacturer needs to understand, prioritize and weigh all of these factors – along with a supplier’s capability, capacity and financial strength – sourcing decisions for direct materials are extremely complex. They require a data-driven approach and the same kind of strategic and analytic thinking as a good game of chess. Unfortunately, most companies we see today approach direct materials sourcing more like checkers, with an emphasis on “piece” price that is opportunistic rather than strategic.

This situation is due partly to the prevalence of sourcing solutions designed for indirect materials – all those goods and professional services that a company needs to do business, but which are not part of the manufacturing process. These solutions do a great job managing indirect spend, but notice that they work equally well in any company, regardless of industry. This is because indirect goods like office supplies are common across industries – a legal pad is a legal pad, and lowest price is nearly always the appropriate determining factor in purchasing.

With direct materials this is not the case. Parts often must be custom made to precise specifications and such issues as lead time and order quantity are critical to efficient production scheduling. Selecting “best value” suppliers for direct materials means weighing performance and risk as well as cost, and cost considerations must include not only the piece price, but also transit, financing, compliance and inventory carrying expenses. Sourcing solutions built for indirect materials simply cannot handle all these variables.

Spreadsheets can handle a lot of variables, though certainly not efficiently. Nonetheless, Excel has long been the favored fall-back solution among manufacturers for managing direct materials sourcing. I admit, I have seen some great spreadsheets out there in terms of complexity and number of fields and they can produce some really good results, but the process is extremely cumbersome and time consuming. First, you must collect a load of information from suppliers, usually via email. The forms you get back often are incomplete or filled out incorrectly, which requires a lot of follow-up. Finally, you somehow have to take all the information from multiple spreadsheets and put the attributes of each supplier side by side so you can see how well these guys stack up against one another and against your requirements. Anyone who has been through this process, as I have, knows how painful it is and can’t help but think, ‘there’s got to be a better way!’

Well, good news: there is! The management team at Directworks, who helped pioneer novel approaches to strategic sourcing during the dotcom heyday, addressed this problem head on and developed a solution designed specifically for manufacturers and direct materials. Instead of a spreadsheet, templates within the software are published out to suppliers to collect information and quotes, all of which are then automatically served up side-by-side for easy analysis by the manufacturer.

With the Directworks solution, this process takes less than half the time it would using spreadsheets. That’s time employees can use for more productive activities, such as strategic discussions with potential suppliers or deeper analysis of bids and proposals. Executives we talk with don’t want their people chasing spreadsheets; they want them looking for the best possible tradeoffs to optimize cost, performance and quality.

Finding those optimal tradeoffs requires accessible and actionable data, and that’s where the supplier information that Directworks collects really comes into play. The template that Directworks publishes to suppliers collects all of the cost and non-cost data that typically would be required by an RFI or RFQ. But when the information comes back, instead of being locked in separate spreadsheets, it goes into a database and is immediately available for analysis and side-by-side comparisons. A supplier in China can be compared with a supplier in Mexico, not only by piece price, but by total landed cost and various performance factors.

This process also allows sourcing managers to ask specific questions and conduct data-driven price negotiations. It even converts CAD drawings and specifications to a neutral viewing format so suppliers can know exactly what is required in terms of dimensions and tolerances, enabling them to give more accurate and complete quotes. Moreover, the supplier has clear visibility into what the end product will be and how its part fits into production, which ultimately leads to better strategic discussions, better choices of materials and, most importantly, lower costs.

The bottom line is that smarter, fact-based sourcing decisions lead to competitive advantage for manufacturers through lower direct materials costs, better performance and higher margins. Isn’t it time you scrapped the spreadsheets?

Source: Directworks

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