Industryweek 12461 Collaboration

The Changing Face of Direct Materials

Nov. 7, 2016
Contract manufacturing has created a new dynamic that requires a new, more collaborative approach from source to settle.

Contract manufacturing is giving business a new look, allowing companies to eliminate capital equipment and buildings and thus free up cash and improve their balance sheets. Few businesses do all of their own manufacturing today. In fact, industry analysts estimate that over one-third of manufacturing has been outsourced. And this trend continues to grow.

This, coupled with the fact that the vast majority of the world’s leading enterprises are expanding into new and emerging markets, and that as they globalize, they are seeking suppliers of direct materials that are green, diverse and reliably compliant with increasingly complex environmental and related regulatory requirements, has added a whole new layer of complexity—and risk—to direct materials sourcing and collaborative supply chain planning and execution.

Risky Business

Consider the OEM that doesn’t manufacture its own supply for products. Starting with the supplier selection process, risk is created through complex requirements and lack of visibility into granular supplier qualification criteria.

For example, OEMs may need to qualify suppliers by region, by commodity and even by plant. In some cases, they need to mitigate the risk of cross-contamination across materials such as chemicals, which means sourcing items from approved suppliers by plant.

Missing Links

Once award decisions are made, companies need to create contracts quickly, safely and in a compliant manner. Each and every contract also needs to be signed, stored and easily accessed for purchase order execution purposes.

But when sourcing and contracting systems aren’t integrated with ERP systems, much of this work is manual, slow and inefficient—or worse, pricing and other terms negotiated during the sourcing process may never be uploaded to the ERP system, which results in contract leakage and increased materials costs.

Rising Complexity

And then there’s the challenge of sourcing for complex, multilevel manufacturing bills of materials (BOMs) like the assemblies—and components of those assemblies—needed to build high-tech devices such as a personal computer or mobile phones. The more complex the BOM, the harder it is for the commodity manager to ensure that the right suppliers are selected for all items in the BOM—at the right price and terms.

Poor Visibility

As the product manufacturing process moves into planning and execution mode, supply chain systems and processes are often disconnected from data sources indicating whether suppliers can provide inventory on time. This limits visibility into the availability of supply, which must be reliable to meet tight production deadlines and customer demands. When memory, casings and keyboards, for example, don’t arrive on time, production lines stop, stock-outs and missed shipments occur, revenue and stock prices fall, and customers are lost.

To hedge against this, the only logical option is to add buffer stock as “insurance,” which in the age of lean and just-in-time manufacturing, few companies can afford to do.

A New Way Forward

Simply throwing more people, inventory and spreadsheets at these issues isn’t the answer. It will only perpetuate risk and inefficiencies. What’s needed is a connected, digital direct source-to-pay process that tightly integrates people, information and processes—and enables collaboration between departments and with suppliers.

Leading companies understand this and are pushing to innovate quickly. And their timing is good, because digital competitors unencumbered by manual processes and legacy systems are rising quickly and ready to overtake those who wait.

Connecting the Dots

To successfully manage the complexities of multi-tier supply chains requires creating an ecosystem in which buyers can seamlessly connect and collaborate with all of their suppliers anytime, anywhere from any device. And with the advent of digital technologies and business networks, the cloud and modern information technology (IT) architecture, this can be done.

Companies today can, for instance, connect systems and processes across the extended supply network—from product design, sourcing and planning to procurement and manufacturing execution—and integrate product lifecycle management (PLM), sourcing, contracting, ERP, materials management, and supplier collaboration activities to achieve a whole new level of supply chain visibility, efficiency and collaboration.

Take the example of a $4 billion cosmetics retailer that replaced its EDI platform, which couldn’t auto-reconcile orders, fulfillment data and invoices from suppliers, with an intelligent network that can do all this, as well as provide visibility into where inventory is located in the supply chain.

Or Yaskawa America, a global provider of automation solutions and support that replaced its homegrown supplier portal system with a collaborative sourcing solution to consolidate both direct and indirect spend on one platform and drive greater simplicity and efficiency while reducing costs and creating equal and fair opportunities for its partners.

National DCP, a $2 billion supply chain management company serving the franchisees of Dunkin' Donuts, is using cloud-based applications alongside its ERP system to fuel efficient digital processes for direct materials sourcing to increase productivity and lower sustainable costs.

And after moving to a global instance of ERP as part of its lean manufacturing initiative, a $4 billion manufacturer of industrial machinery is using a collaboration platform to bridge the gap between its systems and processes and those of its suppliers, ensuring that data in its ERP accurately reflect suppliers’ ability to commit.

Making the Complex Simple

For many companies, seamless supply chains are a dream. But by investing in direct materials sourcing and collaboration solutions that connect everything from supplier selection, onboarding and collaboration to supply chain planning and execution, they can make them a reality. They can remove the complexity from direct materials sourcing and run simple. And perhaps most important, they can innovate and deliver game-changing results.

Leah Knight is senior director, solutions marketing with SAP Ariba, a marketplace for digital business that helps millions of buyers and suppliers collaborate across the entire source-to-pay process.

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