Procurement/Manufacturing: A Difference to Understand the Purchasing/Supply Chain Divide

This post is based on excerpted content from the Spend Matters Perspective: A Direct Materials Guidebook – Six Key Principles for the Manufacturing Road Ahead. The paper is part of the Spend Matters Research Library, a service that offers free access to over fifty Spend Matters papers to qualified procurement and supply chain practitioners. Providers, including software companies, consultants, BPOs, staffing firms/MSPs, etc., can access the Spend Matters research library by becoming Spend Matters PRO Core (single seat) or Premier (company-wide) access members.

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Until two decades ago, the long history of direct materials sourcing focused primarily on two key objectives, which were simple but all consuming. The first objective of those involved with direct materials procurement (which often weren't within the procurement organization, but rather working at the plant or facility level, like a materials manager or expediter) was to maintain stock and make sure production lines were not shut down for poor quality, shipment delays, supplier bankruptcies or other reasons. The second was to make sure that the organization paid an acceptable price.

Beginning in the 1990s, strategic sourcing methodologies began to impact the world of procurement. By introducing process rigor (like the following: define requirements, write RFI, examine and qualify universe of suppliers, write detailed RFQ, conduct sourcing negotiation, award contract) many companies were able to identify savings that were previously left on the buying table. Shortly after the introduction of strategic sourcing, global sourcing would take center stage, representing a cost-focused evolution of direct materials buying based on exploring and exploiting global options.

More recently, we have seen organizations take further steps in their direct materials procurement evolution toward "lean sourcing" methodologies (focused on total cost management including internal and external costs, risk, etc.) plus approaches focused on supplier engagement, development and management. The very latest step in direct materials sourcing processes has focused on a topic we have explored in other Spend Matters papers: Market Informed Sourcing, a strategy based on information discovery throughout the entire supplier and market engagement process.

Such an evolution is likely to ultimately include new capabilities around developing better specifications and the process of matching requirements, production schedules and deliveries with the right set of suppliers, while streamlining the maintenance of changes in production and supplier engagement (e.g., speeding up a first article testing/approvals process). We also expect a natural evolution of how companies will dynamically manage demand on the buy-side and capacity on the-sell side – and the meeting points of the two areas and constituents. It goes without saying that quality and continuous improvement, including joint cost reduction efforts with preferred supplier partners, will always be key and take the form of managing supplier performance and incremental improvement efforts.

Download the full Spend Matters Perspective on the topic: A Direct Materials Guidebook -- Six Key Principles for the Manufacturing Road Ahead today.

- Jason Busch

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