In last week’s article, we looked at what makes direct materials special and their unique established requirements, particularly when focusing on eSourcing. In today’s article, we continue to investigate direct materials management, or perhaps more specifically, the management of direct materials suppliers and the solution functionality to properly manage them.
Supplier Management Technology Landscape Remains Fragmented
Supplier management is complex and, unfortunately, quite a vague concept. For example, if you ask 10 different procurement organizations to define it, you will likely get 10 different suggestions of what it entails. This complexity is reflected in the supplier management solutions landscape as well. There are several functionality groups within this solutions landscape:
- Supplier Information Management (SIM). SIM is a functionality focused on collecting and managing relevant information about suppliers, usually in so-called “supplier profiles” designed by the buying organization. It typically offers support for supplier onboarding as well.
- Supplier Relationship Management. A functionality that supports the ongoing relationship with the supplier in the form of messaging centers, joint workspaces and dashboards, supplier challenge capabilities, and so on. Some solution providers go beyond this by providing support for joint innovation as well.
- Supplier Performance Management (SPM). A functionality to help track and manage supplier performance. It should support a combination of hard data (e.g., delivery performance, SLA adherence, quality performance, etc.) and survey-based “soft data.” In some cases, solution providers are using community feedback and ratings as part of performance data as well.
- Supplier Risk Management. A functionality to detect, track, manage, prevent, and mitigate supplier risk. Risk comes in very different forms, however, so solutions have different scopes. Some solutions are focused on the capability to collect, and in some cases validate, data to ensure compliance with various regulatory requirements ranging from money laundering to child labor. Others focus on supply chain visibility and the ability to track the physical supply chain. Yet others focus on cyber risks.
- Third-Party Supplier Data. This area is slightly different from the others as it is as much of a service as an application. While most of the data providers have applications of their own, they often integrate with solution providers that offer the more traditional supplier management capabilities laid out above. Third-party data providers apply expertise to collect and evaluate relevant data and often present it as scorecards or aggregate scores.
These groups are not, however, mutually exclusive and there is a significant overlap between the areas. Supplier risk management often requires supplier information management capabilities, while supplier performance management overlaps relationship management when it comes to improvement projects and so on. Similar to direct materials sourcing, no provider does all of the above. Also, the different solution providers tend to have fairly clear specializations — although most expand outside their original focus, driven both by customer requests and the search for bigger addressable markets.
How Are Direct Materials Suppliers Different?
As in the case of sourcing, direct materials supplier management has some unique requirements that differ from indirect. Most notably, direct materials have physical supply chains with suppliers critical to the end product. This is especially true in heavily regulated industries like pharmaceuticals where new suppliers must be rigorously evaluated before being approved as a supplier. Approvals can take more than a year for suppliers of active product ingredients, excipients, and primary packaging.
Thus, the close management of direct materials suppliers is more critical than indirect suppliers. This, in turn, puts extra requirements on the various supplier management solution capabilities, such as the following:
SIM capabilities need to be configurable and flexible to support the specific information required by the purchased product. It should also be connected to risk management, assuring that relevant information is collected and maintained for compliance with various regulations. In some industries, supplier audits are required, organizations with this need should ensure that there is support for this as well.that Supplier audits can be a necessary in , indirect categories like hosting/data center services in IT as well.
There needs to be solid supplier performance management capabilities to measure and track performance. Ideally, there should be predictive capabilities to ensure performance issues are addressed before they lead to actual problems. The supplier performance management solution should be supported by relationship management capabilities to manage improvement initiatives and projects with collaboration spaces where information can be shared and actions assigned.
Supplier risk management might be the area where direct materials differ the most from indirect materials. Two primary risk areas are compliance-related risks and supply risks. The first is closely related to SIM and focuses on the collection and reporting of specific data related to various regulations. Those regulations could relate to conflict minerals, money laundering, slave labor, or hundreds of other areas. It is certain that more regulations and regulatory requirements are coming. Thus, it is critical to have the flexibility to gather the necessary information coupled with the know-how of what information is needed.
Supply risk management is different and focuses on the physical locations of manufacturing plants, distribution centers, and delivery routes. Mapping and tracking incidents that could cause delays or damage products allows proactive identification of concentrated risks in critical nodes and understand the impact of various events like strikes, natural disasters, ships running aground in canals, and so on.
Support for risk management often requires third-party data providers. These are typically integrated into the SIM or risk management solutions to provide accurate and up-to-date information about any risks that can impact your supply base. Often, third-party data covers various ESG topics or financial data as well.
No Single Solution to Rule Them All
As you can see, direct materials can have very specific requirements within supplier management solutions, and as in direct materials sourcing, no solution supports all of this.
This is not meant to be an exhaustive list, but rather to highlight the differences between direct and indirect materials requirements when it comes to supplier management. Specific needs will vary by industry and geographic scope, and as always Ardent Partners is available to discuss more specific use cases and context.
RELATED RESEARCH
Magnus Mondays — Graphite Connect: Supplier Management, Network Style
The Recipe for Best-in-Class Supplier Management
