Part 5 of the “State of the Mill Industry” series
Executives across mill products companies wake up every day in a world of volatility that impacts every aspect of the one thing that can make or break their business – sourcing. With the rising demand for highly tailored and configured products delivered in smaller lot sizes, within shorter lead times, and from ethical supply-chain practices, these asset-intensive operators are finding that becoming a low-cost producer is extraordinarily tricky.
Sourcing a block of assets and pigeonholing their use may have led to short-term savings and modest growth in the past. However, this traditional procurement strategy is beginning to squeeze supply chain planning and profit generation from an operational and control perspective.
In fact, according to the 2018 Deloitte CPO survey, 51% of procurement leaders are finding that their teams do not have sufficient capabilities and skills to execute a long-term strategy. Meanwhile, this talent gap continues to widen as two-thirds of surveyed participants delay the adoption of intelligent technologies such as predictive analytics and collaboration networks.
Opening decision-making mindsets to both sides of sourcing
Sourcing is a virtual web of growing complexity, increasing risk, and changing cost – and it’s only getting worse as the industry continues to experience a steady stream of acquisitions and mergers. Yet the function must be predictable enough to control overhead costs and flexible enough to tap the right suppliers to obtain the raw materials, components, machinery, parts, and maintenance services when they are needed.
To maintain this balance, mill products companies, just like most industries, break down their sourcing activities across a broad supplier base into two distinct categories: direct and indirect. However, this approach doesn’t necessarily provide the equilibrium of predictability and flexibility businesses need.
1. The reality of direct spend
In sourcing, direct spend is focused on the procurement of commodity-based materials. For example, a steel fabricator buys steel, and vertically integrated paper manufacturers purchase trees or land. The quality, quantity, and availability of the natural supplies are beyond their control – unless they have visibility into demand, can forecast future needs, and act on these insights with swiftness and agility.
Most companies acquire these capabilities by integrating themselves deeply into their suppliers’ manufacturing process. Responding to demand shifts and assessing significant asset requirements, the business and its suppliers can collaborate during the planning cycle to preserve their production capacity.
There’s a lot of back-and-forth communication that happens with, more often than not, a flurry of spreadsheets being exchanged. There’s nothing wrong with this practice, initially. But once demand, supply chain, economic conditions, and commodity costs shift, it’s challenging to pivot the entire chain of procurement and supply-chain stakeholders to address opportunities and risks before the business is impacted negatively. And when you are working with large volumes of data that continuously change, a lack of version control could quickly lead to outdated information. Common industry requirements such as hedging and risk exposure due to inventory replacements cost are often managed outside of an integrated system, if at all.
2. The reality of indirect spend
There are considerable opportunities in the mill products industry – which is the reason why so many mill operations are watching their assets to quickly address diminishing capacity or keep up with increasing demand. However, when procurement activities aren’t strategically managed over the long term and data management capabilities aren’t upgraded, an excess of capital can be deployed and that cost may be carried forward throughout the business.
Most mill products companies’ organizations seem to do an excellent job of managing this form of sourcing within their four walls. But when they start looking at it from a corporate perspective, their operations cannot systematically pull together numerous plants to optimize orders for items – such as spare parts for a machine they all use. These locations just do not have the right tools available to them – forcing each site’s maintenance person to order a part at a higher price compared to more cost-efficient bulk pricing. Accurate master data and equipment digitization is critical to indirect spend optimization.
Balancing direct and indirect spend comes down to better data
This is the moment when procurement organizations should step up as a substantial enabler of asset availability – and a large part of their success boils down to data.
Exercising tremendous influence on the return of business assets, procurement leaders have the insights necessary to develop the workforce, optimize maintenance, reduce downtime perspective, and increase asset performance. Access to manufacturing data as well as information on equipment, spare parts, and bills of materials allows procurement organizations to assess external pressures and the boardroom’s desire to boost output, decrease cost, and increase efficiency.
But the function can go a step further by accelerating the capture, processing, and analysis of that intelligence in the moment mill equipment generates it. A machine may sense a performance level that is below the operation’s threshold, then trigger the supplier to send the malfunctioning part while a maintenance request is triggered and scheduled. When this capability is integrated into the maintenance, repair, and operations (MRO) process, indirect spend can become a predictive model of demand from consumers as well as shop-floor needs.
Digging into asset data to uncover the real treasure – hidden growth
While competitors continue to struggle to make sense of their large volume of disparate and varied data, mill products companies that can leverage their data to optimize asset performance and MRO spend will always stay a step ahead. They can optimize parts purchases and rationalize maintenance requests, all while pivoting operations to take on new opportunities and mitigate risks.
If you think about it, the math behind investing in initiatives to make better use of data is quite simple. The less downtime experienced, the more productive the shop floor – making return on assets go up and, ultimately, leading the way to a more profitable company.
For more insights, read the entire “State of the Mill Industry” series.
And please listen to the replay of our “Pathways to the Intelligent Enterprise” Webinar, featuring Phil Carter, chief analyst at IDC, and SAP’s Dan Kearnan and Ginger Gatling.