Ensuring 'first mile' readiness for direct materials sourcing

Increasingly common and severe disruptions have placed a spotlight on inadequate processes and operational weaknesses across supply chains. And while it is near impossible to predict every possible scenario, reluctance by businesses to adopt new technology solutions and approaches will continue to exacerbate and extend the duration of issues when they arise.

For manufacturing companies, the “first mile” is a high-stakes game, often accounting for up to 70% of revenues. It’s the place where raw materials are sourced, consolidated and produced. Sourcing raw materials like coal, limestone, steel, copper and so on requires establishing a global reach and managing multiple layers of complexity and risk.

Sourcing is an area that is particularly ripe for innovation and modernization. Business leaders across a myriad of industries know the challenges of managing the sourcing process all too well. They identify a need for a given product and secure the budget to acquire it — and then the convoluted process of engaging and evaluating various providers takes on a life of its own, turning one problem into two.

Challenges in sourcing are prevalent in all industries, but especially in commodities and direct materials due to the sheer scale of the space — materials are typically purchased in bulk, necessitating massive shipments and much collaboration among disparate stakeholders. In addition, the quality of these materials can vary greatly, and many organizations struggle to gain the visibility needed to account for this. Finally, procurement processes must be completed on schedule as even small delays can cause massive supply chain disruptions. For an example, look no further than the Suez Canal saga, which occurred in March and continues to have a major impact for a significant number of global industries.

Unfortunately, far too many organizations are boxed in by legacy platforms and outmoded processes that make efficient procurement impossible. ERP systems have been slow to meet the requirements of direct materials management, which often involves accounting for multiple types of product categories with specific quality parameters that legacy processes cannot adequately support. P2P systems, on the other hand, are mostly designed to manage indirect spends where suppliers are largely interchangeable. In contrast, managing direct materials depends on deep and sustained collaboration with suppliers who work as strategic partners to meet business goals.

Perhaps the most significant inefficiency is a lack of collaboration and visibility among the various stakeholders on the supply chain, with many suppliers functioning as black boxes, providing little visibility into their operations and making it difficult to trace inputs, track variances and manage risk.

What little collaboration does occur often takes place primarily via unsecure, antiquated methods like email or phone calls — while at the same time, essential and highly sensitive information is often stored and shared via the humble spreadsheet. It can also be difficult to reach the right stakeholders when needed. This can leave organizations scrambling to respond to urgent or unforeseen matters.

The time is right to transform first-mile business practices with better sourcing strategies. Manufacturers that rely on direct materials have yet to take advantage of new efficiencies — in part because the systems they are using are too complex and too inflexible for their needs. Without the ability to address category-specific issues, manufacturers risk squandering new opportunities to source the goods that they rely on more flexibly, collaboratively and effectively.

By mastering the first mile, businesses can anticipate how disruptions will impact their value chains and take steps to minimize those impacts. With real-time visibility and improved communications, businesses can work more collaboratively with suppliers to discover alternatives, adjust production timelines and minimize impacts to the bottom line.

For some companies, managing risk might involve creating a more diverse, more local supplier network rather than relying on a few global suppliers. Others might have complex specifications that can be met by only a few qualified suppliers. To ensure the long-term availability of critical direct materials, manufacturing businesses are finding new ways to onboard suppliers faster and build stronger relationships with their sourcing partners — all with standardized processes supported by technology.

With improved insight and better communication, buyers can understand a given supplier’s capabilities better, identify potential bottlenecks and prepare contingency plans if necessary. As efforts evolve from merely surviving to thriving, the degree and speed of an organization’s recovery will be more directly tied to their ability to build supplier relationships.

The complexity of direct materials sourcing requires an automated, streamlined approach to critical processes — from sourcing events to purchase orders (POs) to invoice processing. With a complete view of processes across their supply chain, firms have deeper visibility into what’s working and what isn’t. By automating critical processes, organizations can streamline work, improve communications and reduce errors that can cause delays.

Automated tracking of POs, real-time integration with ERP/MRP systems, and automated matching of invoices, POs and receipts can help organizations improve productivity across critical direct spend categories. They can apply changes to established processes and measure the impact of those changes to drive continuous improvement. Finally, they can apply AI/ML algorithms to the data they’re generating to further refine processes and surface intelligence.

As businesses grow more complex and extend their reach, the need for secure and accessible collaboration will only increase. Businesses who succeed in creating spaces where employees, partners and suppliers can collaborate in a self-service way will flourish. By eliminating silos and externalizing information from multiple parties, manufacturing businesses will be able to increase visibility across their supplier networks, resolve issues faster, improve supplier performance and drive real value for the organization.

Each of these approaches feeds into a fundamental truth: Today, an organization’s overall technology blueprint is a central component of its risk management strategy. As supply chains grow more complex and margin for error shrinks, firms must embrace digital transformation to maximize efficiency internally and demonstrate stability to counterparties, investors and other stakeholders. Those that do not will quickly find themselves outpaced and outmaneuvered as innovation continues to accelerate. This is especially true in the first mile, which can make the difference between a profitable transaction and a wild goose chase.

Implementing solutions to address these needs may result in some disruption up front, but with a disciplined approach, organizations can make a smooth transition today while maximizing their odds of success tomorrow. In a world that is rife with uncertainty, the benefits of digital transformation are one thing that manufacturing companies can bank on.

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This article was first published on Supply Chain Brain.