Direct Procurement in 2016: Manufacturing, Commodity Management, Supply Chain and More

direct materials sourcing chalermchai k/Adobe Stock

There are many who would argue that direct procurement is procurement. Yet I typically define direct procurement, in the broadest sense, as referring to the sourcing, buying and management of ingredients, materials, parts, components, assemblies, packaging and related items, and services associated with “spend” that is accounted for under costs of goods sold (COGS) from an accounting perspective.

Hence, direct procurement is going to feature prominently at the ISM and Spend Matters Global Procurement Technology Summit that’s taking place on March 14–16 in Baltimore for good reason. It’s also a topic you’re likely reading about more frequently of late on Spend Matters and our broader media network, including MetalMiner, because our readers have told us they want to learn more about direct materials-centric procurement technology.

Of course, one could expand the above definition of “direct procurement” in different directions outside of a manufacturing context, and even argue in services-driven business that external labor can be a “direct” procurement item. But generally speaking, we usually classify direct procurement as expenditure related to producing, assembling, inventorying, protecting for shipment or otherwise impacting materials, ingredients or SKUs destined to be “purchased” by someone outside the business.

In 2016, we’re forecasting some rather curious things on the docket for direct procurement — both from a procurement and market-facing standpoint. These include:

  • The second great rise of “risk management” as a core competency of direct procurement. Supply chain and supplier risk management programs and insight went from sideshow to essential during the last downturn. In 2016, we are beginning to see an increased expansion of how procurement organizations define risk management for direct spend (and their supply chain) as a willingness to purchase a new generation of dedicated solutions that are “built for purpose” so to speak.
  • For manufacturers, a greater emphasis on bringing direct spend “under management” much in the same manner as indirect spend is now more effectively controlled or influenced by procurement. However, direct spend is a different purchased animal indeed and by “bringing it under management,” we’re not simply referring to slapping on an expanded purchase-to-pay wrapper around it. Rather, we’re talking about addressing it primarily via focused and dedicated solutions (some of which may also work on a similar or modified basis with indirect spend, others of which are truly unique to “direct procurement”). We expect an increasing number of North American manufacturers to proactively go to market for direct procurement technologies separate from indirect.
  • Continued interest in tackling volatility through commodity management approaches, either for materials or ingredients purchased directly by the organization or those acquired by sub-tier suppliers for use in goods being acquired by the company. As commodity markets turn or hit bottom and start on the upswing, this interest will be even more pronounced. The ability to closely link sourcing strategies to commodity outlooks, forecasts and changes in market conditions both for long-term (on-contract) and near-term (spot buying) will become even more valued.
  • Greater enthusiasm for identifying and hiring the right talent to support the direct procurement function, whether it’s formally under procurement or in the business. We expect more companies to follow the lead of high tech manufacturers and others in recruiting analytically oriented supply chain, operations and general business graduates from specialized programs, as well as top university programs in general.

If you’re curious about the future of direct procurement and how your organization can adapt the right set of technologies to support it, join us at the ISM and Spend Matters Global Procurement Technology Summit. We also encourage Spend Matters PRO and Advisory clients to reach out to us for more information and to let us know what specific areas of direct materials procurement technology coverage will be most important to you in 2016.

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