Daily Archives: November 4, 2007

Sourcing Lifecycle Management I: The Direct Sourcing Cure

Strategic Sourcing is great. Technologies that enable it greater still – since even an across-the-board 5% reduction in spend can have more of an impact on the bottom line than a 25% increase in sales. And with the right tools and techniques, the former is a lot easier to achieve. However, today’s strategic sourcing applications, while working wonders on indirect, MRO, service, and commodity spend for vendors across the board, sometimes fall short when applied to custom parts and raw materials in the manufacturing verticals such as aerospace, automotive, defense, medical device manufacturing, and parts of the high-tech and electronics sector. If you look at the mega-success stories, many are with CPG companies, Food Service providers, Retailers, and standard-component device manufacturers in high-tech and electronics. There aren’t a lot with custom defense providers, medical device manufacturers, or sophisticated consumer device manufacturers. That’s why something else is needed. But to see why, we’ll have to discuss current technologies and where they fall short.

First, there was the ERP. By integrating MRP, HRM, accounting, simple e-commerce, accounting, and some basic CRM, it enabled better processes, quicker reporting, and more efficient operations. But it had a fatal flaw – it was designed to run a business within the four walls of an enterprise. There was no concept of external supply partners collaborating with internal cross functional teams to source goods and services. A purchaser entered an order into the system when it was made, accounts payable entered an invoice when it was received, and then entered the payment when it was authorized. That’s it. Modern ERP systems have improved, and some have add-on procurement modules, but the fundamental system is still flawed from a supply chain perspective.

Then came e-Sourcing technology to address the more strategic aspects of sourcing. e-Sourcing vendors delivered RFX, on-line reverse auctions, decision optimization, spend analysis, and contract management solutions that have worked well with unsophisticated spend. However, being optimized for simple commodities and services that can be costed using a single price-per-unit bid, they fell short for products that could only be accurately costed using a combination of fixed set-up costs and variable production runs and couldn’t handle complex assemblies that required multi-level collaborative bill of material descriptions at all. Finally, most e-Sourcing technology does not adequately begin to address the most difficult problems associated with direct-sourcing – project management, design and specification management, and collaboration.

This led some vendors to develop web-based Product Information Management (PIM) systems to manage all of the designs, schematics, and documentation related to a project. A specialized extension of traditional Product Life-cycle Management (PLM) solutions, they were designed to complement existing sourcing solutions and provide the badly needed design and specification management capabilities. Problem is, most don’t support complex assemblies or multi-level collaborative bills of material (cBOMs) and trying to find the right component specification in a given project is like trying to find a needle in a haystack, as complex specifications can contain hundreds of parts, each with multiple description and specification documents, and have thousands of associated documents. Plus, project management is only complicated by having to switch between two systems and PIM does not enable e-Procurement.

e-Procurement, designed to handle the requisition, order invoicing, and payment aspects of the traditional procurement cycle, delivers significant improvements in productivity, and drastically reduces invoice processing costs (up to 90%), but the real cost savings potential is in strategic sourcing and capturing all of the data needed for meaningful spend analysis. However, when dealing with custom manufactured parts and service, savings are only realized if the contracted rates are adhered to, the parts are delivered on time, and the quality levels are acceptable. e-Procurement only deals with with the transactions, not the post award performance management.

Now we also have the trifecta of supplier management technologies: Supplier Relationship Management (SRM), Supplier Performance Management (SPM), and Supplier Information Management (SIM). While SRM tries to manage communications and agreements; SPM tries to manage performance by way of quality tracking, improvement initiatives, and balanced scorecards; and SIM just focusses on managing all data related to the supplier, its products, and existing agreements. These are all great technologies, but performance management really needs to be tracked against orders and contracts and actions defined within the context of post-award management of a sourcing contract.

In other words, whether deployed on their own, or as a group, neither stand-alone ERP/MRP, basic sourcing, PIM, e-Procurement, nor supplier management technologies hold the key to successful, productive, streamlined direct sourcing projects. That’s why Sourcing Life-cycle Mangement (SLM), which integrates the supply chain centric business processes of sourcing, procurement, PIM, and supplier management into one coherent platform customized for the direct sourcing of custom parts and materials for manufacturers, is needed.