Direct Materials: The Supply Chain’s Missing Link for

Performance Improvement

Summary of a Quantitative Research Project on Direct Material Purchasing

1/11/2017 By Lora Cecere

Founder and CEO Supply Chain Insights LLC

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Contents

Research Methodology

Disclosure

Executive Summary

Driving Innovation and Accelerating New Product Launch

The Procurement Organization

Recommendations

Summary

Appendix

Additional Related Research

About Supply Chain Insights LLC

About Lora Cecere

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Research Methodology We are committed to delivering thought-leading content for the supply chain leader. Our goal is to be

the first place that visionaries turn to gain unique insights to drive supply chain excellence.

This report is a summary of quantitative research fielded in 2016 on the satisfaction and current

performance levels of existing technologies for direct materials. (Direct materials are items purchased

for direct assembly into manufacturing processes as defined by a bill of materials. In contrast, indirect

materials are sourced for the corporation outside of a bill of materials.) A summary of the study

methodology, outlining goals and objectives, is shown in Figure 1:

Figure 1. Study Goals, Objectives, and Overview of the Methodology

Disclosure Your trust is important to us. In our business we are open and transparent about our relationships. In

this research process we never share the names of respondents and/or give attribution to open

comments collected in the research.

Our philosophy is “You give to us, and we give to you.” We collect data from a private network of

qualified participants and openly share the results. The participants of our research always receive

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the final reports; and, if interested, we share insights from the studies with the respondents of our

quantitative surveys and qualitative interviews in a complimentary one-hour phone call with supply

chain teams, or through a virtual roundtable discussion among respondents.

This report is written and shared using the principles of Open Content research. It is intended for you

to read and share freely with your colleagues, and through social channels like LinkedIn, Facebook

and Twitter. When you use the report all we ask for in return is attribution. We publish under the

Creative Commons License Attribution-Noncommercial-Share Alike 3.0 United States and our citation

policy is outlined on the Supply Chain Insights Website.

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Executive Summary Growth in global markets is slowing. Stock markets reward growth, and most supply chain leaders

want to be successful in driving a growth agenda. To accomplish this goal, within the supply chain

there needs to be a healthy intersection of the worlds of gray and black.

In the launch of new products, companies manage a stage-gate process. This is the circle of life for

new product launch. This is a world of gray. As supply chain teams work with new product launch,

they must effectively dance with this world of gray.

The conversations encompass wider and wider groups of people as products progress. This includes

suppliers. Today’s solutions are not effective in driving this type of meaningful conversation. There

are gaps. Instead, enterprise solutions drive black and white discussions.

Most supply chain leaders come from the world of black and white. In operational teams there is little

gray. Products are made at specification targets, and quality of design is carefully measured through

Six Sigma processes. Process variation is rigorously controlled. Enterprise Resource Planning (ERP)

systems strengthen the discipline of these processes. Within this world there are fixed and well-

defined item codes, production locations, and material specifications. This gives rise to a question:

"How will companies grow if they only automate the world of black and don't embrace the world of

gray?" This leads to another question, "Are supply chain leaders hampering product development

efforts by forcing black-and-white process definitions too early onto product launch processes?" As

shown in Figure 2, this research suggests they are.

For sourcing, discrete companies perform well on cost, lead times and delivery reliability. This is the

world of black and white and the management of known specifications, sourcing arrangements, and

contract performance. However, in the world of gray, in new product launch we have not cracked the

code to power innovation, either internally or externally, with suppliers. Few companies have the

capabilities for the collaborative review of design drawings, and a collaborative workflow to facilitate

conversations on opportunities and design. A missing gap is to tie these collaborative discussions on

design to sourcing. The gap between traditional Product Life Cycle Management (PLM) systems, and

Supplier Relationship Management (SRM) for sourcing decisions, is large. Traditional deployments of

PLM, SRM and ERP have not closed this gap.

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Figure 2. A Contrast of Current Performance of Sourcing Measured Against the Capabilities of the Most

Valuable Technology for Direct Material Sourcing

To better understand the issue let’s take a closer look at the data. For example: in Figure 2, when we

evaluate manufacturers’ supply chain capabilities, we see that respondents in make-to-order and

configure-to-order industries rate the performance of technology as effective in evaluating price, lead

times and delivery reliability (this is the world of black and white.). However, in contrast, they rate

current capabilities as less effective in determining financial viability and innovation (the world of

gray.). Organizations are currently using Materials Requirements Planning (MRP) from Enterprise

Resource Planning solutions, along with Excel spreadsheets, and as a result are unable to

collaborate with suppliers to compare design requirements, collaborate on tolerances, and discuss

options. New technology options for collaborative sourcing exist to enable these capabilities. The

problem is that the capabilities of these new technologies lack market awareness.

In this report we give insights on the gaps, and recommendations to close the link in the supply chain,

in order to work better with suppliers on new product launch.

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Driving Innovation and Accelerating New Product Launch In the world of gray and new product launch, product specifications are not final. There is no item

code, and it is not clear where products will be produced. Instead, the product is a fuzzy concept

gaining definition. The most important planning processes for sourcing/procurement, and for the

supply chain leader, take place in this world of gray. In stage-gate finalization, traditional planning or

sourcing techniques are not effective.

Table 1. Technologies Used by Respondents for Direct Material Sourcing

In evaluating the supply chain’s effectiveness in supporting stage-gate processes in discrete

industries—including make-to-order and assemble-to-order processes—based on design drawing

and assembly, we find that companies are satisfied with the current technologies of material

requirements planning and product life cycle management technologies, but that each of these

technologies is only effective within their respective functional silo. They are not effective in powering

collaborative workflows between engineering and procurement, and between the manufacturing

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company and strategic suppliers. The technologies used for direct material sourcing are outlined in

Table 1.

Note that Microsoft Office tools such as Access, Excel and Outlook are the most heavily used

technologies in the sourcing process. Much of the workflow is managed in parallel outside of

procurement technologies within the large ERP providers’ systems. Why? MRP works well within

sourcing of known products (the world of black) and PLM is effective in product design (the world of

gray), but the adoption of solutions to support supplier collaboration in innovation processes is very

low. Based on qualitative interviews of supply chain leaders, we find a vast majority of companies

lack a collaborative technology to bridge across the worlds of black and gray. As a result, they cannot

effectively work with potential suppliers in the fine-tuning of quality of design, and translating it to

quality of conformance.

Figure 3. Characteristics and Abilities of Companies to Make Decisions on Direct Material

Sourcing

This is especially true in the area of value-added engineering. Value-added engineering is a

systematic method to improve the "value" of goods or products and services. In this process value is

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defined as the ratio of function to cost. Value can therefore be increased by either improving the

function or reducing the cost. Instead, the current focus is on cost management in procurement, and

on product launch in engineering. The processes to engage suppliers on innovation, and the

improvement of value-based engineering, are a lost opportunity. As a result, as shown in Figure 3,

corporate abilities to make decisions on innovation with their suppliers ranks low.

The Procurement Organization

With globalization, and the acceleration in M&A activity, procurement is more centralized with the

need for greater collaboration. In Figures 4 and 5, we share the characteristics of the companies’

sourcing processes. We share these to help the reader understand the complexity of sourcing in

global organizations. The scale is immense.

Figure 4. Technologies Used by Respondents for Direct Material Sourcing

The average company in this report has $5.4 billion in revenue and 12,000 employees, with

centralized procurement and the high involvement of multiple teams in direct materials purchasing.

There is a need to collaborate between procurement (purchasing), engineering (R&D), and the supply

chain organization. Quality, manufacturing, and product management are also integral to buying

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processes. Sourcing is far more complex than Purchase Order Approval (POA) and pricing workflows

in ERP transactional engines. There is a great need for collaboration from a centralized procurement

group to more regional supply chain functions. This includes the connection of Request for Proposals

(RFP) to engineering drawings/bill of materials and iterate on the trade-offs of materials (examples

include tolerances, substrates, finish, grade, package and final assembly), cost and delivery. Without

this type of technology, the discussion is limited to only cost and delivery, and suppliers are never

involved in a collaborative workflow on trade-offs.

Figure 5. Team Involvement in Procurement Decisions

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Recommendations As you read through this report, we hope it stimulates thought and drives action. Here are five

recommendations to consider in building your strategy:

1. Ask the Right Questions. Think Beyond Existing Paradigms. A frequent mistake companies

make is to focus only on technology. Start with the goal and work backwards. If innovation is

your goal, don’t accept the status quo. Train employees to ask the right questions and use new

technologies to drive collaboration. Consider augmenting ERP and sourcing processes with

collaborative sourcing technologies from Directworks, Pool4Tools, and SupplyOn.

2. Get Good at Managing Data in Both the World of Black and Gray. Data volumes are

increasing and cleanliness issues abound, and it is easy to become enamored with only

cleaning transactional data. Step back and redefine data processes for both the worlds of black

and gray. Drive innovation by enabling processes through the stage gates of R&D between

manufacturing, quality, and suppliers through procurement to drive value.

3. Rethink Old Problems and Apply New Solutions. Value engineering processes explore

opportunities both within the worlds of new product launch and product refinement. Map these

processes through both the worlds of black and gray, and enable a collaborative workflow to

force discussions out of Microsoft Office into technologies which enable meaningful discussions

about drawings, bills of materials, specifications, and alternatives.

4. Think Beyond Three- and Four-Letter Acronyms. While traditional data architectures center

on reporting on ERP, SCM and SCE architectures, think beyond APS, CRM, ERP, SRM, and

PLM to define your strategy. Connect traditional architectures to collaborative workflow and

sourcing alternatives. Think holistically about data requirements and analytics.

5. Drive Innovation. Use techniques within the launch phases of innovation that embrace the

world of gray. Aggressively pursue process innovation which can drive success in new product

launch. Ensure that documents and drawings can be included in the collaborative workflows and

change orders are recorded along with pricing and material considerations.

Summary Growth is slowed. Innovation is the engine of growth. Current sourcing technologies do not meet the

challenge. Innovation in sourcing technologies helps to fill this gap if companies can identify the issue

and are open to new alternatives. Without this recognition, companies are hindering innovation and

value-based engineering efforts.

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Appendix

In this section, we share the demographic information of survey respondents, along with relevant

research findings to support the key insights shared in the text of this report.

Our philosophy is that “respondents give to us and we give to them.” All respondents participating in

this survey will be given the results of this study and invited to share in a roundtable discussion with

other survey participants to gain additional insights.

In our research, the names, both of individual respondents and companies participating, are held in

confidence. The demographics and additional charts are found in Figures A–E. At the bottom of each

image are the specific questions asked in the survey along with the survey details.

Figure A. Overview of Respondents

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Figure B. Company Overview

Figure C. Respondent Involvement in Procurement

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Figure D. Participation in Spend Categories

Figure E. Respondent Industry

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Additional Related Research Over the period of February 2012 through December 2016, Supply Chain Insights published nearly

100 reports. Unlike other industry analyst groups—who keep research behind a paywall—we share

research openly to help all global supply chain leaders. All of the research is archived in our

community on Beet Fusion, for social sharing on SlideShare and on the Supply Chain Insights

website. To gain a deeper comprehension of the research in these specific topics, check out related

reports by clicking on these links:

In Search of Supply Chain Excellence

Improving Supplier Reliability

Packaging Artwork: An Important Supply Chain Process

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About Supply Chain Insights LLC Founded in February 2012 by Lora Cecere, Supply Chain Insights LLC is beginning its fifth year of

operation. The Company’s mission is to deliver independent, actionable, and objective advice for

supply chain leaders. If you need to know which practices and technologies make the biggest

difference to corporate performance, we want you to turn to us. We are a company dedicated to this

research. Our goal is to help leaders understand supply chain trends, evolving technologies and

which metrics matter.

About Lora Cecere Lora Cecere (twitter ID @lcecere) is the Founder of Supply Chain Insights LLC and

the author of popular enterprise software blog Supply Chain Shaman currently read

by 15,000 supply chain professionals. She also writes as a Linkedin Influencer and

is a a contributor for Forbes. She has written five books. The first book, Bricks

Matter, (co-authored with Charlie Chase) published in 2012. The second book, The

Shaman’s Journal 2014, published in September 2014; the third book, Supply

Chain Metrics That Matter, published in December 2014; the fourth book, The

Shaman’s Journal 2015, published in September 2015, and the fifth book, The Shaman’s Journal

2016, published in September 2016.

With over 12 years as a research analyst with AMR Research, Altimeter Group, and Gartner

Group and now as the Founder of Supply Chain Insights, Lora understands supply chain. She has

worked with over 600 companies on their supply chain strategy and speaks at over 50 conferences a

year on the evolution of supply chain processes and technologies. Her research is designed for the

early adopter seeking first mover advantage.