The top capabilities of Direct Materials Sourcing solutions

This Spend Matters series takes a look at the state of procurement technologies in the market today and whether they meet user demands. Spend Matters is featuring the top 5 digital capabilities of different procurement technologies and what functionality you can expect from average and top performing solutions, leveraging its SolutionMap dataset.

In this article, our analyst Bertrand Maltaverne looks at Direct Materials Sourcing solutions.

What does a Direct Materials Sourcing solution do?

Direct materials sourcing is a focused view of sourcing solutions that emphasizes Bill-of-Materials (BoM) management, cost modeling, SCM/PLM integration (process and data) and other aspects related to the acquisition of direct materials and the design of the extended inbound supply network.

*See ‘Sourcing Optimization‘ for the sourcing of direct services such as complex logistics.

Why buy Direct Materials Sourcing solutions

As the volumes and complexity of the data for direct materials sourcing (especially at large manufacturers) can be overwhelming, direct sourcing solutions integrate a company’s PLM, SCM and ERP systems, finished goods modeling, risk and category impact analysis and linkages to the customer quoting processes for better predictive cost analytics, forecasting and identification of value-creation opportunities through category/supplier management.

Top 5 Direct Materials Sourcing tech capabilities

What’s the state of different procurement technologies in the market today and do they meet user demands? Spend Matters is featuring the top 5 digital capabilities of different procurement technologies and what functionality you can expect from average and top solutions, leveraging its SolutionMap dataset.

Exploring the actual market state of the top 5 capabilities

1. RFx creation

The ability to create sourcing events and configure them based on various organizational, category and process requirements.

The average solution supports the creation of RFxs from templates, from Excel uploads, from scratch, from past events and from BoMs. Creation from a BoM allows users to include in sourcing events, a limited set of information (part number, description, quantity). Direct-materials sourcing solutions allow more advanced item/lot-level configurations than generic sourcing solutions, e.g., more in-depth cost breakdowns. However, the calculation these solutions can do and external data feeds that can be used in price sheets are limited. Similarly, average solutions offer sourcing automation, but it is limited to simple tasks like supplier invitations and bid acceptance (but not award).

Top performing solutions provide more guidance when creating RFxs by recommending content, e.g., which template to use or which suppliers to invite. They do so by using AI/ML to surface content and recommend specific actions, which extends their guidance beyond predefined rule-based workflows. RFxs can be configured in many different ways with settings at the item/question level to ensure that all elements required for decisions are collected. RFxs created from BoMs inherit rich item-level information, and I have seen how leading providers support use cases like the management common parts (same part used in ‘n’ BoMs pushed in a consolidated RFx) with ability to aggregate/split volumes (including cases of multi-year programs) across BoMs.

2. Bidding and analysis

The capacity to enable suppliers to bid in the most appropriate way and to allow us to analyze/compare offers in various and detailed ways to ensure the right decision-making process (TCO, ESG, etc.).

The average direct materials sourcing solution offers suppliers simple means to enter their bids (including alternatives) with basic response validations in the form of drop-downs, format checks for dates and email addresses, simple arithmetic operators, etc. The same applies to the feedback they can receive; it is limited to the ability to export reports to Excel that show average bid/score and each supplier’s bid/score.

Buyers can score each bid manually, and they can compare offers in a side-by-side view. Also, analyses are limited to ‘Buy’ decisions, as the solution only supports comparison with pre-loaded incumbent prices.

Top performing vendors offer suppliers advanced AI/ML-based capabilities to prefill answers based on historical data and, in the absence of historical data, to give advanced price predictions based on the market and the particulars of the buying organization, supplier or individual. Suppliers can also get detailed feedback on how they perform compared to the competition. They can enter complex bids and price schemes using functions and market data. In addition, they can propose multiple alternatives and even entirely new products or services.

From an evaluation standpoint, these solutions support cross-functional processes where each participant only sees and scores they are supposed to see. Answers from stakeholders can be weighted and analyzed based on various criteria. Analysis and comparison can be on all, or just some, offers from all suppliers (including alternatives). I also have seen how leading providers support a complete ‘Make or Buy’ decision process by, for example, giving users the ability to compare BoMs in a side-by-side view using various costing scenarios (e.g., make vs buy, incumbent vs potential new suppliers, different award scenarios and so on) and to allow suppliers to submit their own alternative design suggestions.

3. Category intelligence

The ability to provide outside-in intelligence to enhance the sourcing process to ensure that ‘money’ left on the table is minimized.

The average direct materials sourcing solution allows customers to collect and cement internal knowledge about categories by enabling users to enter information on categories and category strategies to ensure they are known and applied in sourcing events. In addition, they can build simple category-specific KPIs using the platform analytics ability.

Top-performing vendors go beyond this by providing their customers with outside-in intelligence on markets and categories. This intelligence covers data feeds for forecasts (price trends and history) and highly specific third-party sources for both opportunity identification and risk reduction.

Customers can use that knowledge to build their own category strategies and use external cost data to maintain commodity pricing and trends over time by category and item. I have seen how certain providers leverage their analytics capabilities and data model to support category strategization and also price management (vs. market/community price) processes.

4. Guided sourcing

The capacity to augment users by providing recommendations in terms of process and/or outcome.

The average solution includes some level of guidance that is mostly based on pre-defined rules. The purpose is to provide user support via rules-driven wizards while ensuring compliance with internal processes and best practices. Pricing guidance is based on differentials between prices in bids and historical/current prices.

Top performing vendors go beyond guidance about how an event should be built (cost model to be used, suppliers to be invited, etc.) and include recommendations about when an event should be launched and what outcome should be expected. The providers I have seen use community intelligence (based upon similar events from other users) and even ML/AI that can analyze supply/demand signals, market events and related cost changes (transportation, duties, etc.) and dynamically adjust pricing and category guidance in real time to identify unique or time-sensitive opportunities.

5. Project/program management

The ability to support collaboration (tasks, milestones, project/program-based sourcing) before, during and after sourcing events.

Direct materials sourcing requires internal and external collaboration because of the nature of what is being sourced — materials, complex sub-assemblies, etc. — and because direct materials sourcing is often project/program-based (customer projects, NPI, etc.).

The average sourcing solution supports the definition and management of projects, tasks and milestones at a high level. Tasks and milestones can be defined against projects by simply tagging stuff to a project ID/name, include dependencies and be tracked in terms of status and progress. Sourcing events can be linked to a related project or program.

Top performing providers have solutions that have project management features similar to best-of-breed project/program management tools. Customers can create complete project workflows, manage and plan (and, when required, re-allocate) associated resources. They can also drill down into specific projects by using interactive dashboards with customized formula-based KPIs. I have seen how these providers link projects/programs and all related RFx by, for example, pushing relevant details from the program (SOP, EOP, part numbers/description, multi-year program volumes) in sourcing events and feeding back the project/program with the outcome of the individual RFx (status, pricing, etc.).

The vendors considered

Coupa
GEP
Ivalua
Jaggaer
MeRLIN
Onventis
Procurence
QAD
SAP Ariba

How ‘Market State’ is derived from the SolutionMap dataset

These ‘Top 5’ (of 20) critical digital capabilities stem from the Spend Matters TechMatch workbench — derived from 183 requirements scored in the Direct Materials Sourcing Spring 2023 SolutionMap solution benchmark.

The Top 5 capabilities are the highest-weighted critical capabilities that are central to the displayed solution market benchmark. They have been developed by Spend Matters team of analysts and refined by procurement users in tech-selection projects using our market-proven SolutionMap benchmarking dataset and associated TechMatch decision-making tool.

Spend Matters® SolutionMap Procurement Technology Intelligence

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Spend Matters® SolutionMap Intelligence Process Overview

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