Direct Materials: The Supply Chain’s Missing Link for Performance Improvement - 11 JAN 2017
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Transcript of Direct Materials: The Supply Chain’s Missing Link for Performance Improvement - 11 JAN 2017
Direct Materials: The Supply Chain’s Missing Link for
Performance Improvement
Summary of a Quantitative Research Project on Direct Material Purchasing
1/11/2017 By Lora Cecere
Founder and CEO Supply Chain Insights LLC
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Contents
Research Methodology
Disclosure
Executive Summary
Driving Innovation and Accelerating New Product Launch
The Procurement Organization
Recommendations
Summary
Appendix
Additional Related Research
About Supply Chain Insights LLC
About Lora Cecere
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Research Methodology We are committed to delivering thought-leading content for the supply chain leader. Our goal is to be
the first place that visionaries turn to gain unique insights to drive supply chain excellence.
This report is a summary of quantitative research fielded in 2016 on the satisfaction and current
performance levels of existing technologies for direct materials. (Direct materials are items purchased
for direct assembly into manufacturing processes as defined by a bill of materials. In contrast, indirect
materials are sourced for the corporation outside of a bill of materials.) A summary of the study
methodology, outlining goals and objectives, is shown in Figure 1:
Figure 1. Study Goals, Objectives, and Overview of the Methodology
Disclosure Your trust is important to us. In our business we are open and transparent about our relationships. In
this research process we never share the names of respondents and/or give attribution to open
comments collected in the research.
Our philosophy is “You give to us, and we give to you.” We collect data from a private network of
qualified participants and openly share the results. The participants of our research always receive
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the final reports; and, if interested, we share insights from the studies with the respondents of our
quantitative surveys and qualitative interviews in a complimentary one-hour phone call with supply
chain teams, or through a virtual roundtable discussion among respondents.
This report is written and shared using the principles of Open Content research. It is intended for you
to read and share freely with your colleagues, and through social channels like LinkedIn, Facebook
and Twitter. When you use the report all we ask for in return is attribution. We publish under the
Creative Commons License Attribution-Noncommercial-Share Alike 3.0 United States and our citation
policy is outlined on the Supply Chain Insights Website.
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Executive Summary Growth in global markets is slowing. Stock markets reward growth, and most supply chain leaders
want to be successful in driving a growth agenda. To accomplish this goal, within the supply chain
there needs to be a healthy intersection of the worlds of gray and black.
In the launch of new products, companies manage a stage-gate process. This is the circle of life for
new product launch. This is a world of gray. As supply chain teams work with new product launch,
they must effectively dance with this world of gray.
The conversations encompass wider and wider groups of people as products progress. This includes
suppliers. Today’s solutions are not effective in driving this type of meaningful conversation. There
are gaps. Instead, enterprise solutions drive black and white discussions.
Most supply chain leaders come from the world of black and white. In operational teams there is little
gray. Products are made at specification targets, and quality of design is carefully measured through
Six Sigma processes. Process variation is rigorously controlled. Enterprise Resource Planning (ERP)
systems strengthen the discipline of these processes. Within this world there are fixed and well-
defined item codes, production locations, and material specifications. This gives rise to a question:
"How will companies grow if they only automate the world of black and don't embrace the world of
gray?" This leads to another question, "Are supply chain leaders hampering product development
efforts by forcing black-and-white process definitions too early onto product launch processes?" As
shown in Figure 2, this research suggests they are.
For sourcing, discrete companies perform well on cost, lead times and delivery reliability. This is the
world of black and white and the management of known specifications, sourcing arrangements, and
contract performance. However, in the world of gray, in new product launch we have not cracked the
code to power innovation, either internally or externally, with suppliers. Few companies have the
capabilities for the collaborative review of design drawings, and a collaborative workflow to facilitate
conversations on opportunities and design. A missing gap is to tie these collaborative discussions on
design to sourcing. The gap between traditional Product Life Cycle Management (PLM) systems, and
Supplier Relationship Management (SRM) for sourcing decisions, is large. Traditional deployments of
PLM, SRM and ERP have not closed this gap.
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Figure 2. A Contrast of Current Performance of Sourcing Measured Against the Capabilities of the Most
Valuable Technology for Direct Material Sourcing
To better understand the issue let’s take a closer look at the data. For example: in Figure 2, when we
evaluate manufacturers’ supply chain capabilities, we see that respondents in make-to-order and
configure-to-order industries rate the performance of technology as effective in evaluating price, lead
times and delivery reliability (this is the world of black and white.). However, in contrast, they rate
current capabilities as less effective in determining financial viability and innovation (the world of
gray.). Organizations are currently using Materials Requirements Planning (MRP) from Enterprise
Resource Planning solutions, along with Excel spreadsheets, and as a result are unable to
collaborate with suppliers to compare design requirements, collaborate on tolerances, and discuss
options. New technology options for collaborative sourcing exist to enable these capabilities. The
problem is that the capabilities of these new technologies lack market awareness.
In this report we give insights on the gaps, and recommendations to close the link in the supply chain,
in order to work better with suppliers on new product launch.
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Driving Innovation and Accelerating New Product Launch In the world of gray and new product launch, product specifications are not final. There is no item
code, and it is not clear where products will be produced. Instead, the product is a fuzzy concept
gaining definition. The most important planning processes for sourcing/procurement, and for the
supply chain leader, take place in this world of gray. In stage-gate finalization, traditional planning or
sourcing techniques are not effective.
Table 1. Technologies Used by Respondents for Direct Material Sourcing
In evaluating the supply chain’s effectiveness in supporting stage-gate processes in discrete
industries—including make-to-order and assemble-to-order processes—based on design drawing
and assembly, we find that companies are satisfied with the current technologies of material
requirements planning and product life cycle management technologies, but that each of these
technologies is only effective within their respective functional silo. They are not effective in powering
collaborative workflows between engineering and procurement, and between the manufacturing
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company and strategic suppliers. The technologies used for direct material sourcing are outlined in
Table 1.
Note that Microsoft Office tools such as Access, Excel and Outlook are the most heavily used
technologies in the sourcing process. Much of the workflow is managed in parallel outside of
procurement technologies within the large ERP providers’ systems. Why? MRP works well within
sourcing of known products (the world of black) and PLM is effective in product design (the world of
gray), but the adoption of solutions to support supplier collaboration in innovation processes is very
low. Based on qualitative interviews of supply chain leaders, we find a vast majority of companies
lack a collaborative technology to bridge across the worlds of black and gray. As a result, they cannot
effectively work with potential suppliers in the fine-tuning of quality of design, and translating it to
quality of conformance.
Figure 3. Characteristics and Abilities of Companies to Make Decisions on Direct Material
Sourcing
This is especially true in the area of value-added engineering. Value-added engineering is a
systematic method to improve the "value" of goods or products and services. In this process value is
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defined as the ratio of function to cost. Value can therefore be increased by either improving the
function or reducing the cost. Instead, the current focus is on cost management in procurement, and
on product launch in engineering. The processes to engage suppliers on innovation, and the
improvement of value-based engineering, are a lost opportunity. As a result, as shown in Figure 3,
corporate abilities to make decisions on innovation with their suppliers ranks low.
The Procurement Organization
With globalization, and the acceleration in M&A activity, procurement is more centralized with the
need for greater collaboration. In Figures 4 and 5, we share the characteristics of the companies’
sourcing processes. We share these to help the reader understand the complexity of sourcing in
global organizations. The scale is immense.
Figure 4. Technologies Used by Respondents for Direct Material Sourcing
The average company in this report has $5.4 billion in revenue and 12,000 employees, with
centralized procurement and the high involvement of multiple teams in direct materials purchasing.
There is a need to collaborate between procurement (purchasing), engineering (R&D), and the supply
chain organization. Quality, manufacturing, and product management are also integral to buying
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processes. Sourcing is far more complex than Purchase Order Approval (POA) and pricing workflows
in ERP transactional engines. There is a great need for collaboration from a centralized procurement
group to more regional supply chain functions. This includes the connection of Request for Proposals
(RFP) to engineering drawings/bill of materials and iterate on the trade-offs of materials (examples
include tolerances, substrates, finish, grade, package and final assembly), cost and delivery. Without
this type of technology, the discussion is limited to only cost and delivery, and suppliers are never
involved in a collaborative workflow on trade-offs.
Figure 5. Team Involvement in Procurement Decisions
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Recommendations As you read through this report, we hope it stimulates thought and drives action. Here are five
recommendations to consider in building your strategy:
1. Ask the Right Questions. Think Beyond Existing Paradigms. A frequent mistake companies
make is to focus only on technology. Start with the goal and work backwards. If innovation is
your goal, don’t accept the status quo. Train employees to ask the right questions and use new
technologies to drive collaboration. Consider augmenting ERP and sourcing processes with
collaborative sourcing technologies from Directworks, Pool4Tools, and SupplyOn.
2. Get Good at Managing Data in Both the World of Black and Gray. Data volumes are
increasing and cleanliness issues abound, and it is easy to become enamored with only
cleaning transactional data. Step back and redefine data processes for both the worlds of black
and gray. Drive innovation by enabling processes through the stage gates of R&D between
manufacturing, quality, and suppliers through procurement to drive value.
3. Rethink Old Problems and Apply New Solutions. Value engineering processes explore
opportunities both within the worlds of new product launch and product refinement. Map these
processes through both the worlds of black and gray, and enable a collaborative workflow to
force discussions out of Microsoft Office into technologies which enable meaningful discussions
about drawings, bills of materials, specifications, and alternatives.
4. Think Beyond Three- and Four-Letter Acronyms. While traditional data architectures center
on reporting on ERP, SCM and SCE architectures, think beyond APS, CRM, ERP, SRM, and
PLM to define your strategy. Connect traditional architectures to collaborative workflow and
sourcing alternatives. Think holistically about data requirements and analytics.
5. Drive Innovation. Use techniques within the launch phases of innovation that embrace the
world of gray. Aggressively pursue process innovation which can drive success in new product
launch. Ensure that documents and drawings can be included in the collaborative workflows and
change orders are recorded along with pricing and material considerations.
Summary Growth is slowed. Innovation is the engine of growth. Current sourcing technologies do not meet the
challenge. Innovation in sourcing technologies helps to fill this gap if companies can identify the issue
and are open to new alternatives. Without this recognition, companies are hindering innovation and
value-based engineering efforts.
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Appendix
In this section, we share the demographic information of survey respondents, along with relevant
research findings to support the key insights shared in the text of this report.
Our philosophy is that “respondents give to us and we give to them.” All respondents participating in
this survey will be given the results of this study and invited to share in a roundtable discussion with
other survey participants to gain additional insights.
In our research, the names, both of individual respondents and companies participating, are held in
confidence. The demographics and additional charts are found in Figures A–E. At the bottom of each
image are the specific questions asked in the survey along with the survey details.
Figure A. Overview of Respondents
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Figure B. Company Overview
Figure C. Respondent Involvement in Procurement
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Figure D. Participation in Spend Categories
Figure E. Respondent Industry
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Additional Related Research Over the period of February 2012 through December 2016, Supply Chain Insights published nearly
100 reports. Unlike other industry analyst groups—who keep research behind a paywall—we share
research openly to help all global supply chain leaders. All of the research is archived in our
community on Beet Fusion, for social sharing on SlideShare and on the Supply Chain Insights
website. To gain a deeper comprehension of the research in these specific topics, check out related
reports by clicking on these links:
In Search of Supply Chain Excellence
Improving Supplier Reliability
Packaging Artwork: An Important Supply Chain Process
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About Supply Chain Insights LLC Founded in February 2012 by Lora Cecere, Supply Chain Insights LLC is beginning its fifth year of
operation. The Company’s mission is to deliver independent, actionable, and objective advice for
supply chain leaders. If you need to know which practices and technologies make the biggest
difference to corporate performance, we want you to turn to us. We are a company dedicated to this
research. Our goal is to help leaders understand supply chain trends, evolving technologies and
which metrics matter.
About Lora Cecere Lora Cecere (twitter ID @lcecere) is the Founder of Supply Chain Insights LLC and
the author of popular enterprise software blog Supply Chain Shaman currently read
by 15,000 supply chain professionals. She also writes as a Linkedin Influencer and
is a a contributor for Forbes. She has written five books. The first book, Bricks
Matter, (co-authored with Charlie Chase) published in 2012. The second book, The
Shaman’s Journal 2014, published in September 2014; the third book, Supply
Chain Metrics That Matter, published in December 2014; the fourth book, The
Shaman’s Journal 2015, published in September 2015, and the fifth book, The Shaman’s Journal
2016, published in September 2016.
With over 12 years as a research analyst with AMR Research, Altimeter Group, and Gartner
Group and now as the Founder of Supply Chain Insights, Lora understands supply chain. She has
worked with over 600 companies on their supply chain strategy and speaks at over 50 conferences a
year on the evolution of supply chain processes and technologies. Her research is designed for the
early adopter seeking first mover advantage.