Living in a Materials World (in Direct Materials Sourcing)

Last Tuesday, I blogged that Aberdeen Took a Tip from Madonna in their latest research study, Direct Materials Sourcing: Living in Materials World, which is due to hit their website in the next couple of days. Before the study, they hypothesized that direct materials sourcing should include the following business processes:

  • Standardized Strategic Sourcing Initiatives Company Wide
  • Cross-Functional Procurement Teams
  • E-Sourcing and E-Procurement Solutions
  • Procurement Involvement in Product Development
  • Leverage of Outsourcing

The study more-or-less confirmed these hypothesis. Specifically:

  • 97% have a formal direct materials sourcing program,
    83% of these programs have been in place for more than five years,
    and 70% more direct materials are strategically sourced
  • they differentiate themselves by their appetite for, and usage of, external support,
  • 70% have a greater likelihood to utilize e-Sourcing,
  • they engage product/design teams sooner in the process, and
  • over 50% more of their direct materials spend is
    sourced using LCCS

Furthermore, Best-in-Class enterprises have:

  • 98% of direct materials spend under management,
  • 28% higher year-over-year cost reductions,
  • 63% greater rates of contract compliance, and are
  • 55% more likely to track implemented savings

This report is one of the best reports I’ve seen out of Aberdeen in a long-time. It not only includes the standard metrics you’ve come to expect from Aberdeen research studies, but also includes metrics for process, organizational structure, knowledge/data management, technology usage, and performance management broken down by laggards, average performers, and best-in-class enterprises.

And it notes that Any collaboration gap that exists between a procurement department and its internal stakeholders is exacerbated by an increasing reliance upon off-shore suppliers who, in addition to offering potentially lower prices, may also require longer lead-times and different risk management strategies, a point I’ve been trying hard to make as of late.

The report also includes the standard Best-in-Class PACE model, details on services utilized by Best-in-Class companies, a couple of compelling case studies, and required-actions for laggards, average, and Best-in-Class performers to advance up the supply chain food chain.

So, how can you achieve Best-in-Class? The statistics above provide some insights. For starters:

  • make sure you have a formal direct materials sourcing program with a pipeline that always exceeds capacity to allow your team to maximize their potential as their capabilities improve
  • use center-led procurement and a cross-functional sourcing team
  • use best-in-class e-Sourcing and e-Procurement solutions
  • collaborate with product design and engineering on NPD from the get-go
  • leverage 3rd party services, outsourcing, and best-cost country sourcing
  • use contract management and track compliance and savings
  • read the report – it is worth it! (And check back – I hope to have some commentary from the report author, Andrew Bartolini, as soon as he has a moment to spare!)

And remember, plans are only good intentions unless they immediately
degenerate into hard work (shown by a high percent of spend under
management) and a focus on bottom line results.