Bringing the Networked Economy to Direct Material Procurement
Think you can compete on quality alone? Think again. Today, companies without high quality products are not just in trouble – they are not in business. Quality is assumed now, forcing companies to look for operational improvements, such as on-time delivery, customization or lower production costs, to give them a competitive edge. In particular, industrial machinery manufacturers are reevaluating their operations to find ways of increasing output without raising costs or negatively impacting performance. Lowering cost of goods sold (COGS) by leveraging cloud-based technology for direct material procurement is one way visionary manufacturers are gaining a sustainable advantage.
New Solutions to Traditional Processes
The vast majority of cost in manufacturing industrial machinery is in the raw materials and component parts. In fact, direct materials such as steel, fasteners, electronics, and sub-assemblies typically add up to a lot more than the labor. With material prices mostly set, driving down COGS requires companies to find better ways to eliminate waste and add value. Fortunately, technological advancements are helping companies overhaul traditional processes such as parts procurement and supply chain collaboration.
To better understand how technology is being used to improve operations, consider the existing machinery manufacturing process. At a high-level, manufacturers begin by defining a customer’s needs and providing a price quote. From there, delivery dates and other details are worked out through back and forth communication until a purchase order is sent and a sales order created. Next, engineering verifies all specifications, while purchasing orders the raw materials. Finally, manufacturing fabricates or assembles all the parts, the product is delivered and service takes over with on-site installation or aftermarket service and maintenance. Each of these areas offers numerous opportunities to drive greater efficiency through technology. However, purchasing raw materials, outsourced component parts, and sub-assemblies, otherwise known as direct material procurement, is especially ripe for transformation.
Challenges of Procurement for Industrial Machinery
Material procurement for manufacturing industrial machines and equipment is fraught with complexity. On the supply side, volatile markets and fragmented suppliers often make access to certain specialty parts difficult. Additionally, working with global vendors in multiple currencies can create intricate pricing problems. From an industry perspective, the nature of industrial machinery products also presents unique procurement challenges. For example, it can be hard to obtain the large number of items needed in the necessary quantities due to regulatory and environmental requirements. The solution to overcoming these challenges is a system that allows companies to buy direct materials through the “cloud” similar to how indirect materials currently are purchased.
Cloud-based Direct Material Procurement
In today’s complex, connected economy, businesses are more reliant on their external partners than ever before. Sharing information and processes up and down the supply chain is critical for smart, insightful decision making. In fact, “data show that fully networked enterprises are not only more likely to be market leaders or to be gaining market share but also use management practices that lead to margins higher than those of companies using the Web in more limited ways” (McKinsey& Company). Fortunately, cloud-based technology is making it possible for manufacturers to easily and effectively collaborate with digital communities of partners, peers, customers, and prospects around the world. Cloud-based procurement is already being used for indirect material purchasing (i.e. materials not part of the finished product or used to make the product.) Therefore, using the cloud to manage purchasing direct materials such as steel, component parts, and complex sub-assemblies is a logical evolution with compelling benefits.
Using “the cloud” for procurement means accessing a network of remote servers hosted on the Internet to manage, process, and share data in real time. Some of the benefits include:
- Improved collaboration – The most obvious benefit is the improved collaboration capabilities with suppliers. For example, businesses with immediate access to multiple suppliers’ information can quickly compare and contrast to discover the partners that can lower costs for goods and services while minimizing supply chain risks.
- More efficient information management – Another benefit is the ability to streamline the management of contracts from a single location for greater productivity and compliance. Also, keeping supplier information on a single, web-based platform ensures content is updated at all times and creates the ability to perform supply risk analysis at a moment’s notice.
- Greater spending control – Using the cloud for direct material procurement also can help control spending by providing buyers with the information needed to be strong and effective negotiators.
- Trend identification and analysis Finally, companies can identify spending trends by analyzing company-wide buying practices using data stored in the cloud. For example, executives can access spending information, classify it according to company and industry standards, and then enrich it with D&B market intelligence. Using this report, buyers can better understand company-wide practices and leverage real time data for negotiating prices or mitigating risk through diversification.
According to Gartner Inc., “Line-of-business leaders everywhere are bypassing IT departments to get applications from the cloud (also known as software as a service, or SaaS) and paying for them like they would a magazine subscription.” Using cloud-based applications to interact with suppliers and identify trends is already helping industry-leading companies make better decisions and increase efficiency of all departments. The results are undoubtedly adding important bottom-line profitability and giving companies a much-needed competitive advantage. It’s time to find out, “how much of your procurement is in the Cloud?”