As direct sourcing gained steam in the 1990s and 2000s, it usually encompassed five critical business areas: design, plan, manufacture, deliver, and operate.
Fundamentally, these five areas have not changed. However, each has increased in complexity when taking into account hyper-customization, lean manufacturing, new business models, globalization, and other factors. To survive and thrive going forward, sourcing teams need to apply supply chain principles within their processes and technologies and also integrate from a technology and business process perspective.
Here at three recent examples from real-world users of direct spend management that come to mind:
- A leading provider of material handling equipment has a build-to-order (BTO) model with lean operations. As a result, many engineering change orders are issued (based on ever-changing customer requirements), requiring sourcing teams to continuously source key components from a bill-of-material directly from an engineering/design application. (For more details on this journey, here is a webinar.)
- A large network and enterprise security leader needs to constantly re-bid volatile (in terms of pricing) commodities to balance costs and delivery times to meet growth and demanding customers. With some components, cost is a primary sourcing driver. With other components, delivery dates and lead times are crucial factors. Balancing these constraints requires the sourcing teams to consider numerous scenarios, perform optimization, and use various other advanced sourcing techniques. (For more details on this journey, here is a webinar.)
- A large provider of devices needed to migrate from a build-to-stock model to a demand-driven model, requiring a much faster sourcing cycle time; faster, earlier and improved collaboration between design and sourcing teams; and a variety of other advanced capabilities. By leveraging advanced sourcing, supply chain collaboration, and integrated business planning, numerous financial metrics were achieved, including lower cost-of-goods sold (COGS). (For more details on this supply chain journey, here is a webinar.)
In all three examples, there is a large dependency on suppliers, outsourced manufacturers (subcontractors), and numerous external parties. In the past, suppliers typically provided raw materials or components for a brand owner to manufacture and sell. Today, not only has much of the manufacturing, movement, storage, and selling shifted to an interconnected web of suppliers, but these suppliers are also offering innovation – be it the end-product or a key raw material or component.
Source: “Direct Spend Management in the Intelligent Digital Supply Chain,” IDC Industry Brief, sponsored by SAP Ariba, October 2019.
IDC refers to this interconnected set of processes as the Design-to-Operate Process for Direct Materials. It consists of subprocesses connecting design, planning, manufacturing, delivery, and operations.
Within each subprocess is yet another subprocess – just keep digging and mapping these processes and subprocesses until a process owner is found who can help define how their process can leverage direct sourcing benefits. As sourcing and supply chain professionals look to tackle very specific challenges, the importance of understanding where the challenge fits from a process standpoint should be an initial step before any solution is considered.
Read the IDC industry brief, “Direct Spend Management in the Intelligent Digital Supply Chain” to learn more.