At this year’s SAP Ariba Live, SAP Ariba announced that they are making a strategic push into direct materials management, among other things, in an effort to expand their solution footprint, increase spend coverage, and drive towards its goal of having $5 trillion in spend transacted on the Ariba Network. DirectWorks is another company that plays in the direct materials sourcing business.
These two companies are among several with eSourcing solutions that address the big problems that many direct materials sourcing teams face. The need for these solutions is actually more prevalent than you’d imagine. Over the years, Ardent Partners has done significant research on the topic; most recently it has manifested in the discussions I had with several of the procurement executives interviewed for this years’ CPO Rising 2017 report (now available if you click the ink) are dealing with problems in their direct materials sourcing operations that eSourcing can address. Even casual readers of CPO Rising know that I am an unapologetic advocate for eSourcing to be used as broadly as possible by procurement organizations (So is CPO Rising Hall of Famer, Gregg Brandyberry). Here’s an application of the solution in the direct materials world.
Direct Materials Sourcing (Manual) – The Problems
In many ways, the manual sourcing process in place in enterprises today resembles the children’s game “Telephone”. It involves numerous children in a chain (i.e., stakeholders in a process) communicating a story (i.e., sharing requirements and capturing bid information) by whispering what they just heard to the next child. The children share and capture information in a linear, non-collaborative, cumbersome, and wholly inefficient process until the last child shares a completely different story than what was begun. If this were a sourcing team in a typical, manually-run direct materials operation, the team would deliver sub-optimal results and everyone would have a good laugh at their folly (or not).
More specifically, in the current environment, when the engineering team chooses to engage the sourcing team, it communicates that it has a final or near-final specification by sending over a design document or spreadsheet with the currently available information and a request that final bids and/or prototypes or samples be received by some definitive date. The time available for sourcing is often less than the amount of time needed to properly source the contract, leaving little time for internal collaboration that could help rationalize requirements or consider alternatives. Tight time constraints can also limit a supplier’s ability to participate in the bid. Communication is generally managed by email while spreadsheets are used to share requirement and capture bids.
Since the manual process limits visibility across the entire process, inconsistent and conflicting information can begin to leak across the chain. The inability to centralize specification and bid information makes it difficult to compare bids or share and/or fairly weigh the different opinions and views of internal stakeholders. Additionally, the non-standardized nature of internal and external communication makes it difficult to share specification or order changes in a fair, accurate, and timely way to all suppliers. The manual nature of the bid collection process makes it highly challenging to understand the total cost of ownership (“TCO”) of any single bid. Finally, the timing, visibility, and communication constraints of the manual process often turns what should be a highly strategic process into a tactical one that generates sub-optimal results.
The current direct materials sourcing process is a manually-intensive one that reduces overall efficiency, limits the number of projects that the team can manage, and decreases the total savings that can be delivered from sourcing direct materials. Beyond that, the lack of an automated sourcing process prohibits an enterprise-level view into sourcing activity and makes it much more challenging to collaborate with internal budget holders and project teams to help them realize their strategic objectives. Other stakeholders are significantly impacted by this lack of visibility including:
- Product engineers who often struggle to find qualified suppliers early enough in the product development process to make major cost or innovation breakthroughs
- Product teams who lack the visibility into their current direct materials spend and are unable to leverage existing supplier relationships and internal expertise
- Strategic suppliers who are often forced to respond to inquiries and RFPs in a reactive manner and lack the visibility into their decision-making process that could help them improve their products and final bids.
Direct Materials eSourcing – The Opportunity
In this environment, an eSourcing solution could be used to source direct materials that will greatly increase the efficiency of the sourcing organization and greatly increase the impact that the team can have on business results, which include an enhanced ability to
- Collaborate with product teams in the development and refinement of their requirements
- Reduce product development lifecycles by collapsing the sourcing process
- Efficiently drive contracts to the suppliers who deliver the greatest value
- Leverage more spend with fewer suppliers to achieve greater cost savings
- Collaborate and communicate with strategic suppliers to improve their products while also reducing our costs and
- Gain greater visibility into the market and ultimately reduce the TCO of each supplier contract.
The larger enterprise can benefit from eSourcing via a reduction in product costs and a gain in expanded productivity from the sourcing team enabling greater sourcing activity and/or a deeper focus on current/planned sourcing projects. This may include helping to rationalize bid specifications and expanding supplier bid panels with new and more, qualified suppliers. The enterprise can also benefit from the development of improved communication and stronger collaboration across the entire product development lifecycle.
eSourcing can enable improved communication and stronger collaboration across the supply chain, resulting in potential savings and efficiency gains and innovations that improve products, reduce costs, or both. eSourcing solutions offer a relatively light level of integration, which means that the proposed solution will not disrupt the current IT infrastructure nor require significant IT support. Direct materials teams that are struggling with manual sourcing would be wise to investigate the different eSourcing solutions in the marketplace.