As manufacturing organizations continue to grapple with “new normal” and post-pandemic supply chain issues, trying to right the ship against waves of uncertainty, price fluctuation & inflation, and scarcity remains challenging. But we’re not playing a completely new ballgame. During the 2008 global financial crisis, virtually every player in the supply chain faced significant financial challenges related to reduced trade volume, tightened credit requirements, and logistics.
These financial struggles led to offshore shutdowns, eventually leading to procurement issues. Global crises premeditate procurement headaches. In fact, companies in the top-quarter percentile in procurement capabilities saw 42 percent higher total return to shareholders after the 2008 crisis. Today, those leading the charge in procurement continue to remain dominant in the market, despite the glaring supply chain frictions surrounding them.
We can break materials sourcing down into two buckets: indirect and direct. Despite indirect costs growing by 7 percent year-over-year, companies rarely struggle with indirect procurement. Make no mistake; there are certainly cost-saving opportunities in indirect sourcing (e.g., downstream automation, AI, IoT, etc.) But those cost-saving opportunities are icing on an already delicious cake.
Direct materials are a different story. This is the area that separates supply chain leaders and laggards. Direct procurement is a high-risk, complicated, time-consuming, resource-drenching process filled with nightmarish documents, dead-ends, and fiendish expectations. With indirect you may be sourcing for few items at a time vs running a sourcing event for direct material sourcing: it involves thousands and (sometimes) tens of thousands of line items from 10’s of suppliers and internal stakeholders. Trying to score wins with direct sourcing can be challenging, especially for electronic components… and especially in the middle of a crisis.
So, how do you win with direct materials sourcing in today’s hyper-competitive supply chain? And how can you use smart technology to remediate your direct materials sourcing?
The "Standard" Way to Source Direct Materials Doesn't Work Anymore
Let’s look at how the average OEM in the electronics space handles direct material sourcing.
As a reminder, we have an entire post on dealing with the challenges associated with part sourcing in today’s hectic environment. So, we won’t be tackling the immense volume of shortage escalations and headaches surrounding shortages and “availability.” Visit our previous posts to learn more about those issues.
You start with an RFQ. Not only do you need to carefully spell out your requirements for the project, but you need to compile a list of every component you need for your device or part and layer in your annual forecast. For some devices, this may be thousands of individual components. Obviously, compiling these RFQs is incredibly time-consuming and resource intensive. Most of us end up with sprawling spreadsheets stuffed to the brim with part numbers and product details. But those spreadsheets are costing you more than you think.
Around 8 percent of employees are considered “spreadsheet experts.” These people gain significant amounts of tribal knowledge surrounding spreadsheets, and they spend a good amount of their time buried in these data-drenched documents preparing lists of part numbers and RFQs. We’ll ignore the dangers associated with these spreadsheet gurus leaving your company without spreading their closely guarded knowledge for the moment (this is a serious problem!)
Instead, let’s focus on the “time spend.” Your data jockeys spend significant time searching for the right data (sometimes up to 30%). ) Often, that data is hidden in those dense spreadsheets. When you add in the time it takes to put together these RFQs and other documents, your direct material sourcing begins with a massive loss.
So, for most electronics manufacturers, simply compiling part numbers for every component on an RFQ is nightmare fuel. You have to figure out where these parts are needed and their catalog number. Then you have to create sprawling spreadsheets and send them to the right suppliers. This is another area where things get dense and complicated. Who is the “right” supplier?
When it comes to direct sourcing, pricing shares the vehicle with a wide variety of variables. Suddenly, things like technical capability, reliability, regionality, stability, and financial health come into play. And back-end costs associated with things like payment terms and lead time can make a significant difference to your business, so breaking down which suppliers get authorized isn’t easy.
You end up communicating complicated requirements with multiple suppliers. Inboxes flood with messages, and Excel documents start to pour out of every digital nook-and-cranny. So, someone needs to figure out what information is needed, by whom, in what format, and at what time. And it’s not easy. In fact, it’s downright pain ful. All these different suppliers are flooding you with all these different questions and responses across different mediums and in different formats.
Is it really surprising that 43 percent of procurement teams have seen a significant decrease in morale (and 49 percent a loss in productivity) over the past two years? Combining these archaic processes with shortages is a recipe for disaster. You need new processes. And you need them today.
Direct Material Sourcing: A Path Forward
Eighty-six percent of business leaders believe procurement is playing a key role in their COVID-19 recovery. And 69 percent think the solution to their sourcing woes is digital.
To score big wins with direct material sourcing, you need to combine processes with technology. Obviously, tech isn’t foolproof or magic. You still need to cut out ad-hoc RFQs, streamline processes, connect teams, and create cohesion. But digital solutions like Parts Analytics are the backbone of these process strategies. You need to rally data from all sources under one common solution, automate RFQs, and build more comprehensive and meaningful supplier vetting strategies.
You don’t want different departments talking to different people, building these incredible relationships, then wasting them. Eliminate tribal knowledge. Create processes built on intense collaboration, best-of-breed technology, and streamlined steps. Over 80 percent of supply chain leaders strongly agree that sourcing strategies need all three of the following:
- AI and analytics
- A Future-ready operating model
- New, invigorative ideas
Alone, technology is simply a tool. But when combined with the right processes, you can make magic happen. Similarly, amazing processes aren’t worth much if employees are still chained to dense spreadsheets and confusing communication streams.
Are You Ready to Modernize Your Sourcing Strategy for Direct Materials?
While most of us are struggling during this period, we strongly believe this global crisis will fuel transformation. The truth is: the direct materials procurement process is broken in most companies.
We spend far too much time dealing with enormous spreadsheets, manual data entry, awkward communication processes, and inter-departmental confusion. Luckily, there’s a way out. Technology (along with some internal process tooling) has the very real power to change the way you approach direct materials sourcing. We’re not talking about a mid-horizon transformation. You can change your processes in days or weeks.
Imagine an easier, faster, and more accurate sourcing process. And imagine how much time, money, and energy you’ll save grappling with RFQs for your products.
Are you ready to learn more? Contact us to learn how Parts Analytics can fuel your procurement strategy. More of an “I’ll believe it when I see it” type? Take our free demo for a test drive. Our experts can have Parts Analytics up and running in days — not weeks. We can’t fix all of your sourcing woes. But we can certainly give you the tools you need to do it yourself. Welcome to the future of direct materials sourcing.
