The Case for Digitizing the Direct Materials Supply Chain
Today’s consumers want products with the latest innovations customized to their needs. And they want them now. Procurement plays an important role in bringing these products to market quickly. But it isn’t an easy task.
All too often, procurement is asked to obtain cost details of the components within a Bill Of Material (BOM) only after engineering has decided upon the final product design. And upon digging in, they find that the design is too expensive and send the engineers back to the drawing board. This not only causes frustration, but delays in bringing the product to market.
Innovations Are Changing the Game
In an ideal world, procurement would be involved in the design process from the outset. This way, they could advise on a variety of factors that not only impact the final product cost, but quality, supply availability, product component rationalization and product innovation. The reality is, many organizations are hamstrung by disconnected and manual processes that make such collaboration difficult. But they don’t need to be.
A new breed of solutions to digitize the direct materials supply chain is fast emerging. And they are changing the game when it comes to sourcing direct materials, fueling a more simple, open and smart way to manage the entire process from end-to-end.
Collaboration Hubs in the Cloud
Leveraging the convenience and agility of the cloud and connectivity of business networks, such solutions link the systems, information, people and processes procurement needs to source the right materials from the right suppliers at the right time with greater simplicity, efficiency and speed than ever.
For instance, by integrating Product Lifecycle Management (PLM) solutions and Procurement systems, they can automate the process of sending BOMs created in PLM directly to the sourcing solution, ensuring that all the component cost, supply availability and supplier information procurement needs to accurately plan, forecast and buy is available to them.
They can also serve as a collaboration hub for the many interactions that need to take place throughout this process both internally and with external suppliers such as managing iterations with product design and engineering along with subsequent changes to BOM structure.
Contracts Straight from the ERP
Once a final product design has been determined, the sourcing team can use collaborative negotiation functionality to award contracts to selected suppliers. And of critical importance, they can ensure that these contracts find their way to the Enterprise Resource Planning (ERP) system along with all of their associated master data. Why is this so critical?
Because the process of buying direct materials is typically driven from the ERP system as part of Materials Requirements Planning (MRP). MRP determines the quantity of a given product that is going to be built and in turn, the quantity of components or inputs that go into the production process. Sometimes these components or inputs will come from existing stock, but invariably a purchase order (PO) needs to be raised to buy the components from the relevant supplier, at the contracted price.
By integrating the contract from the sourcing process with the ERP system, procurement can create an accurate “source of supply” record that can be used to ensure that POs are raised with the right suppliers at the right prices. These POs can then be automatically sent, directly from the ERP system, to suppliers who can access them in their own ERP systems as sales orders and quickly and easily send order confirmations, advance ship notices and invoices free from the errors that often result from manual processes.
The net-net of this digitization? Aside from the savings, efficiencies and compliance that procurement is expected to deliver, it can speed the delivery of new products. And in today’s fast-moving world where real-time is no longer enough, this could be the difference between being today’s must-have item and yesterday’s news…
Tony Harris is Global Vice President and General Manager, Direct Procurement Solutions, SAP Ariba.
This article first appeared on Supply & Demand Chain Executive