Successful companies have always been concerned with clarity regarding their spending patterns. For modern enterprises, having a good understanding of what they’re buying, from whom, at what price, and at what level of risk, is indispensable for long-term survival.
Having good spend visibility is even more crucial for manufacturers. Direct materials can account for as much as 80% of a product’s cost, and unforeseen disruptions in the supply chain can completely shut down a company’s production lines.
Until recently, getting a handle on direct materials spend has been relatively easy. After all, in a manufacturing environment it’s not difficult to identify what parts are required for the finished product, where those items are purchased, and at what price. But now, with digital disruption accelerating across the entire commercial landscape, and particularly with the impact of the COVID-19 pandemic, that reality is changing fast. Normal supply patterns have been upset, and the supply chain has become much more unstable and unpredictable. Changes can occur overnight that throw a monkey wrench into the most carefully laid procurement plans.
In this “new normal” environment, companies that have insufficient visibility into their entire procurement spend can quickly find themselves facing unprecedented threats not only to their bottom lines, but often to their very existence.
How Lack of Spend Visibility Torpedoed Auto Production
A good example is the pandemic-induced shortage of semiconductors in the automotive industry, which led to a loss of more than 11 million units of production in 2021, with another 7 million units expected to be lost in 2022.
In 2020, with the COVID pandemic raging and sales falling, automakers reduced production, significantly cutting their demand for the chips that are integral to the operation of modern vehicles. That started a chain reaction in which their Tier 1, 2, and 3 suppliers also reduced their demand. Semiconductor manufacturers responded by reallocating much of their production to other areas, such as consumer electronics. When automotive demand suddenly reignited, low semiconductor inventories caused shortages that resulted in severe production reductions across the industry.
Why were the world’s biggest automakers caught flat-footed? A Deloitte report provides the answer:
Automotive OEMs’ visibility is primarily limited to their tier 1 suppliers… Beyond that, there is often surprisingly little information shared in terms of who suppliers are in subsequent tiers, what components they provide, and how their operational parameters could potentially destabilize the entire network.
This lack of visibility is also insufficient to uncover structural bottlenecks that exist at subtier levels of supply.
Automakers had little visibility into their semiconductor supply chains and were therefore unable to respond effectively when procurement problems loomed at sub-tier levels. As Carlos Tavares, CEO of multinational automaker Stellantis commented, automakers expected “to be protected by our Tier 1s from this kind of situation.” That expectation was not fulfilled.
Noting that “chip makers are traditionally Tier 3 or Tier 4 suppliers to automakers,” Gaurav Gupta, research vice president at Gartner, observes that it was their lack of visibility into the lower levels of their supply chains that catapulted automakers into the semiconductor drought that impacted their production so drastically.
Comprehensive Spend Visibility Is Necessary for Effective Inventory Management
Today’s reality is that end-to-end spend visibility is indispensable for effective inventory and procurement management. Jithendra Palasagaram, Founder and CEO of Part Analytics, puts it this way:
Traditionally OEMs have been limited to Tier 1—what they buy directly—but didn’t necessarily care about Tier 2 and below where the actual costs are.
But the pandemic has taught them that actually, you really need to have a handle on visibility all the way. Otherwise, you’re going to get hit with surprises, shortages, and cost increases.
In today’s volatile procurement environment, if you lack comprehensive spend visibility that reaches your Tier 2, Tier 3, and perhaps to even lower-tier suppliers, it’s almost inevitable that you’ll sooner or later be blindsided by unanticipated shortages or cost increases.
Benefits of Comprehensive Spend Visibility
Having visibility into the conditions facing all your suppliers will allow you to:
- Lower risks—You may identify possible threats or disruptions well before they become critical, and in time to either help suppliers adjust, or make different arrangements if necessary. You’ll also be able to ascertain where you should diversify your supplier base to mitigate the risk of supply disruptions.
- Reduce costs—You’ll be able to identify which sub-tier suppliers provide the greatest cost savings opportunities, or use your leverage to get better deals from your chosen suppliers.
- Improve supplier relationships—You’ll have the information you need to forge closer relationships with key suppliers and work with them to improve the procurement process.
- Reduce or eliminate maverick spend—You can increase compliance by identifying and addressing maverick spending. According to a recent study, manufacturers lose about nine percent of their targeted or negotiated direct materials cost reductions due to purchases made outside of the company’s established procurement process.
Why Traditional Approaches to Spend Visibility Are Inadequate Today
Spend visibility is all about data—data that provides insight into the metrics that define superior procurement performance, such as:
- What are we buying, from whom, for how much, and on what terms?
- Has this supplier reliably met their commitments in the past?
- How do their quality, pricing, and reliability compare with other suppliers of similar items?
- Are we getting the best pricing and quality available?
The difficulty is that such information is normally not available in a neatly pre-packaged form. Rather, it’s usually spread out across multiple sources and systems, often with incompatible formats, and with varying levels of accuracy and completeness.
Most companies today are still managing their procurement using manual processes that depend heavily on Excel spreadsheets and email distribution. But this approach requires procurement specialists to spend inordinate amounts of time searching out, gathering, consolidating, and massaging data to get it into a useable form. Kristen Ortwerth, Head of Marketing at Part Analytics, describes the problem this way:
You have people who have an incredible wealth of knowledge around Excel and making Excel work, but they’re still trying to take something that was not built to be a database and make it work like a database, and it’s just not designed to do that.
Some manufacturers are attempting to manage their direct materials procurement through their ERP systems. The problem is that POs for critical parts may be issued by Tier 2 or Tier 3 suppliers. Those transactions won’t even show up in the OEM’s ERP, which typically provides spend visibility only for Tier 1 suppliers.
How to Achieve Comprehensive Spend Visibility
To achieve comprehensive direct materials spend visibility that maximizes cost savings while minimizing risk, you must have real-time access to a wide range of data, both public and private, gathered from across your entire supply chain. You must be able to automatically rationalize, consolidate, cleanse, and classify that information, and present it to your procurement team in a form that allows them to make timely, actionable decisions.
You’ll also need visibility into conditions in areas where suppliers or raw materials are located, so as to anticipate possible future disruptions. You should also factor in information concerning the financial health of key suppliers.
And you’ll need to be able to quickly scale and adapt all these processes in response to the rapid internal and external fluctuations that are inevitable in today’s environment.
Capabilities such as these go far beyond what’s possible using manual processes. That’s why more and more manufacturers are turning to sophisticated, AI-based supply chain software solutions like the SaaS platform offered by Parts Analytics. Employing such advanced digital technologies to enable spend visibility across a manufacturer’s entire direct materials sourcing pipeline is fast becoming an indispensable element of procurement success.
