Getting Real and Resilient in Direct Procurement Execution

“Direct Procurement” is a pretty broad term. It seems simple enough: procurement for goods (and maybe even a few services like contract manufacturing and logistics) that ultimately flow to external customers.

But, dig a little deeper and it certainly includes both direct materials sourcing (e.g., sourcing components off a bill of materials) and procurement execution (scheduling, launching and tracking the POs — and the goods themselves).

However, direct procurement is more than a source-to-pay process because direct procurement organizations help manage the inbound supply chain — and managing the suppliers/third parties needed to make it happen.

Based on some research we did a few years ago surveying hundreds of procurement and supply chain professionals, you can see this direct procurement influence model:

Source: Putting the “Supply” in Supply Networks, https://spendmatters.com/research/putting-the-supply-in-supply-networks-part-1/

One thing that’s interesting is that the execution aspect of PO Planning, allocations and monitoring has less procurement influence than sourcing and supplier management. Yet, when supplier-related supply disruptions from risk events like COVID-19 occur, the ability to be resilient and recover from the risk events takes many forms (which we cover in great detail in our COVID-19 response series), and procurement becomes front-and-center. Mitigating the risk isn’t achieved solely by using supply chain risk management techniques and tools to model and monitor the risks, prioritize various scenarios, consider contractual commitments and efficiently re-source, but also tactically just making sure that you’re keeping the supply lines flowing on a day-to-day basis. Our direct procurement research study shows that while procurement has been most concerned with cost savings, the second most critical buyer objective has been continuity of supply:

Source: Putting the “Supply” in Supply Networks, https://spendmatters.com/research/putting-the-supply-in-supply-networks-part-1/

Also note that while risk reduction is just a few more notches down, the continuity of supply ultimately manifests itself as “perfect fulfillment”/“perfect orders” for supplier goods delivered internally or to customers. In a just-in-time supply chain world, it only takes a shortage of one raw material SKU to shut down a production line. This in turn may leave customers waiting (or canceling) while other ordered materials are sitting around idle on the books in the form of precious unconverted cash (i.e., working capital).

In this world, we should all say a little prayer for the poor buyer/planner who has to not just expedite orders in isolation, but rather try to optimize an overwhelming number of factors to satisfy competing internal/external stakeholders. It’s overwhelming enough in good/stable times because of the volumes, variability, velocity, and [financial] value involved. I started my career in materials planning, and it’s a fairly thankless job, and a “noisy” one in many respects, especially if you’re in an MRP-planning environment that’s constantly spewing out planned POs and PO changes needing endless re-scheduling and expediting.

This direct procurement execution area (i.e., e-procurement for direct) has been crying out for better technology for over 40 years, and it’s actually much more complicated than you’d think.

I’ll dive into this in future analyses, but one interesting provider that I checked out recently is SourceDay.

Despite the name, it’s not a strategic sourcing player, but rather focuses on direct procurement collaboration/execution (see our Spend Matters PRO analysis on SourceDay here). My colleague Nick Heinzmann also wrote up a nice piece on how COVID-19 was impacting the customers of this scrappy 70-person firm out of Austin, Texas.

I spent some time demo’ing its product, and it’s definitely on the right track in attacking this area.

But what piqued my interest for this article was an analysis that SourceDay ran on its customers’ planned POs.

Source: SourceDay, 2020

The data comes from roughly 2 million PO lines of customer data, and you can clearly see the impact in terms of the percent of POs needing to be changed.

SourceDay said that during this COVID-driven period, the majority of changes were “move outs,” where suppliers were either requesting later deliveries (with contract manufacturing having the highest increase out of all the industries) or buyers pushing out delivery dates because they were seeing/sensing a drop in demand. It’s the latter example, though, that shows how such a platform can be used.

Global Interconnect, a manufacturer of custom connectors/cabling, used the solution to help it respond to the COVID-19 outbreak.

Several critical part suppliers in China were having issues, so the firm set up a war room and used SourceDay to:

  • rapidly reconfirm all open orders
  • re-prioritize parts based on customer orders
  • communicate push-outs and pull-ins (aka “hot list”)
  • expedite selected parts

The result was no factory downtime. The lesson here is that if you want to be resilient, you’ll need some flexible tools to move fast and stay connected with your suppliers so that they can move with you.

We’ll return to the unique requirements for direct procurement planning and execution in future analyses, and see how various solution providers stack up, but until then, please don’t hesitate to reach out if you want to discuss this old — and new — area.

Until then, do check out our downloadable white paper that discusses the broader opportunity of integrating procurement and inbound supply chain to perform strategic supply management rather than just strategic sourcing.

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