Technology is fundamentally changing how organizations collect and act on real-world data. Companies across industries are realizing that manual processes, which once sufficed to meet a business’s goals, are no longer viable in today’s digitized world.
In the area of procurement, recent digitization efforts have focused largely on indirect spend categories — i.e., those that are not directly involved in goods, materials and services related to the production of products a company is offering to their customers. What many organizations overlook, however, are the vast benefits that direct spend digitization offers to a company’s processes and bottom line. Following are four reasons companies should refocus their efforts on direct spend digitization.
Prioritizing indirect spend addresses only 10% of the problem. Indirect spend represents procurement’s low-hanging fruit for digitization, which is easier and less expensive to implement than direct-spend digitization. It’s no wonder, then, that companies choose to digitize this area of the business before its more complex counterpart.
Adding to the challenge, one-size-fits-all sourcing solutions don’t work when it comes to direct spend. Instead, it requires industry-specific solutions, since different industries, such as discrete manufacturing, process manufacturing and retailing, all have different source-to-contract process considerations and criteria for analyzing their direct spend.
Neglecting the direct-spend aspect of procurement digitization, however, means ignoring 90% of a company's overall spend when it comes to manufacturing industries. As a result, companies forego potentially dramatic improvements to processes such as product development, sourcing and production.
Without digitization, there’s often a disconnect between direct strategic sourcing and contract and execution processes, making it extremely difficult to develop a holistic view of an enterprise’s spending practices and ensure that negotiated terms are enforced. Manufacturing companies, for example, often have long product planning cycles that can stretch anywhere from three to eight years before production starts. Without digitizing direct spend, organizations forego the advantages that can come with early collaboration among engineering, sourcing and procurement teams, as well as between internal organizations and external suppliers.
Direct spend digitization facilitates collaboration. For organizations that have not digitized their direct spend, engineering teams working on product designs and innovations are inhibited from engaging the sourcing and procurement teams early on in the process. This can lead to suboptimal sourcing and product development results, such as higher costs and supply delays. Breaking down internal silos by allowing sourcing and procurement teams to collaborate with engineering early in the product life cycle promotes crucial internal collaboration.
Design processes in many manufacturing industries begin years ahead of planned production and often start with developing a bill of materials. By allowing sourcing and procurement partners early access to and influence on that information, they can use design requirements to find credible sources in advance, improving sourcing decisions and costs.
Other industries, such as retailing, benefit from the same early collaboration among design and sourcing teams by enabling procurement professionals to establish sources of supply for critical private label products and packaging materials. Whether it’s for design and production support or for packaging sourcing, digitizing direct spend provides an enterprise’s procurement organization with more time to vet potential suppliers — to make sure they’re able to deliver what they promise and that they can meet company standards on quality and sustainability. It also enables them to set up alternative sources of supply, in case supply chain disruptions compromise the ability of chosen suppliers to deliver on time or at all.
Involving partners early enables crucial feedback on design choices. Giving external contract manufacturers and suppliers access to the work of engineering teams early in the design process allows them to offer instant feedback on how their design choices impact sourcing and production costs. Since 80% of costs are determined during the design phase, the absence of that information means that an important cost-avoidance opportunity is left on the table.
Early collaboration with suppliers also allows engineering teams to tap into the innovation capabilities of their supplier base. Procurement departments are increasingly issuing Requests for Innovation with their direct suppliers. Exposing design ideas to these suppliers can elicit suggestions on design changes that would enable the suppliers to deliver better, more cost-efficient and simpler solutions.
Making changes later on in life-cycle processes is increasingly expensive: The cost of late-stage engineering changes is 75% higher than if changes are made before production has begun. Companies that don’t implement digital processes for direct spend will struggle to reduce their procurement and production costs.
Including sales and production forecast information into the new product design and new product introduction process gives suppliers and contract manufacturers the information they need to reserve sufficient capacity and effectively support the overall production process. It’s easier to convince a supplier to reserve the necessary capacity earlier in the product life cycle than at the eleventh hour.
Visibility promotes sustainability goals. Sustainability is an increasingly important factor for a company’s regulators, customers, employees and investors. Visibility into direct suppliers and their manufacturing processes — as well as their downstream supply chains — is critical to a company’s ability to meet sustainability goals. Companies often focus on their top-tier suppliers. But the real sustainability risks related to social responsibility often come lower down in the supply chain.
Companies are increasingly viewing their supply chains’ carbon footprint as a cost center. Retailers, for example, are finding that their consumers are changing their buying patterns by opting for products that have been sourced and manufactured sustainably. Especially for those retailers that sell private-label products — because their brand image is directly involved — sourcing and procurement teams are introducing sustainability metrics and evaluation criteria as important factors when it comes to deciding on contract awards. But they need data on the carbon footprint of the entire supply chain if these decisions are to be meaningful.
The majority of companies have adequate visibility into their first-tier suppliers, but only 10% have visibility beyond that. Sustainability efforts can’t start and end within an organization’s four walls or with its top suppliers. It needs to extend all the way down the extended supply chain — a process enabled by direct-spend digitization.
SAP Provides Tailored Industry Solutions to Digitize Direct Spend Processes
Digitizing a company’s direct spend requires implementing industry-specific processes. That’s why SAP offers industry-focused sourcing solutions that meet a company’s unique requirements.
“Industry-specific sourcing solutions are better suited to support business goals,” says Florian Seebauer, senior director, Center of Excellence, Direct Spend and Business Networks at SAP. “They allow manufacturers and retailers to make shifts, so that sourcing and procurement teams support company initiatives.”
For discrete manufacturing industries, such as high tech and consumer durables, SAP’s sourcing solutions offer collaboration with suppliers on bills of materials. “That way,” Seebauer says, “they can combine discussions of financial costs with design considerations.”
For automotive and industrial manufacturing, SAP helps procurement teams build product launch plans and supports complex pricing agreements, such as commodity index-based pricing. “Negotiated prices and conditions are transported to back-end systems,” says Seebauer, “ensuring that purchase orders are executed against negotiated prices.”
Process manufacturing industries, such as chemicals, pharmaceuticals and consumer goods, benefit from SAP’s sourcing solution by sharing documents, such as recipes and product specifications, with suppliers. They also ensure product compliance by automating the creation of product questionnaires on supply specifications.
For retailers, where time to market and product quality are important, SAP solutions automatically create sourcing questions based on article or category to collect information from suppliers about product characteristics, which can be used to make an award decision, and also be transferred into a Product Information Management solution to drive key retail processes.
For all these industries, SAP solutions also support companies’ sustainability goals. “We have a structured way of collecting information from suppliers to determine their carbon footprint, for example,” Seebauer explains. “These can be compared to others to support meaningful decision-making on sustainability.”
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