Tag Archives: supplier information management

5 Best Practices for Raw Material Procurement

How do you leverage consolidated raw materials demand for best practice procurement? Here are five industry best practices.

This article was originally published on Supply Dynamics on October 22, 2020 and is republished here with permission of the author and website.

It takes tons – both literally and figuratively – of raw material to manufacture an aircraft. From fasteners to injected molded plastics and countless variations of metals, electronic components, and resins are needed to produce the millions of individual parts required to deliver a completed aircraft on-time and on budget. Case in point: An average commercial aircraft contains approximately 387 tons of metal alone!

If you’re an Original Equipment Manufacturer (OEM) in the aerospace industry such as Boeing or Airbus, raw material procurement and sourcing for countless parts can result in chaos. And this problem isn’t unique to aerospace. It persists across industries including oil & gas, automotive, industrial equipment, among others.

At Supply Dynamics, we estimate that our customers outsource on average 50-80% of product parts and components. This trend has resulted in complex, highly fragmented supply chains, reducing transparency for the OEMs, while increasing dependence upon contract manufacturers and their ability to manage their own complex supply networks.

sheet_metal_roll_sm.jpg

Raw Material Procurement

How many metals, plastics, electronics and fastener sources do your part suppliers purchase from? Five or 500? As long as you get your parts on time, does it even matter? Of course, it does.

As a procurement leader, you understand there are efficiencies in streamlining raw material procurement at all levels of the supply chain. What if OEMs could orchestrate the joint-negotiation and forecasting of such materials to eliminate waste and improve efficiency through a systemic process?

By value-stream mapping actual raw materials used in part production and linking that to the demand for those parts, Supply Dynamics can help you forecast consolidated material requirements and provide a dynamic snapshot of your sourcing strengths and vulnerabilities. Sharing this information with contract manufacturers and raw material sources then enables transformational collaboration.

After more than a decade of helping our OEM customers obtain and leverage this kind of information, we’ve learned a few things. In order to successfully leverage consolidated material demand across a supply chain, we recommend OEMs follow these procurement best practices:

1) Calculate and share detailed raw material demand forecasts at regular intervals with service centers and mills

By sharing what we call a “material demand profile” with the sources of the raw material, OEMs can reduce risk for their raw material suppliers enabling them to operate more responsively, while increasing the OEMs ability to control pricing and ensure availability. Sharing a top level forecast only, with no definition of order form preferences (i.e. sheet vs coil or bar vs plate), discrete sizes and specifications, is virtually useless to a Distributor.

With such a forecast, Service Centers avoid speculation regarding which materials will be purchased or to what sizes and specifications and which site or contract manufacturers in the supply chain will purchase it. Knowing this in advance ensures service centers can stock the appropriate inventory quantities of the correct materials at the right time. This also serves to reduce lead-times. Some of our customers see their lead time reduced by 50% or more.

2) Make sure that shared forecasts contain a level of detail that reduces risk at the raw material source

If you ask a mill, distributor or standard catalog part manufacturer what really drives material prices (whether you’re talking about metals, plastics, or printed circuit board components) the answer might surprise you. While the quantity of material purchased and number of releases over time is a factor, other factors may have equal or greater impact on price, including

  • What is the accuracy of the forecast?
  • Are there limited life considerations associated with the material?
  • Are there unique packaging requirements?
  • Are there processing requirements or unique specifications associated with the order?
  • Can the customer specify quantities required by specific user, over specific time frames, and by unique sizes and specifications?

This kind of information is the proverbial “Holy Grail” for a mill or distributor because it allows them to service your business more efficiently, reducing the risk of obsolescence and allowing them in some cases to level load production and better manage inventory levels over time.

3) Establish “directed-buy” or “right-to-buy” contracts with Mills and/or Distributors

Ideally, an OEM establishes standard raw material purchasing agreements with Mills and Distributors and allows its Contract Manufacturers to purchase off those agreements. Transparency is essential to ensure that such agreements are followed.

On the flip side, if a raw material supplier cannot fulfill orders placed down the supply chain, the OEM is aware of the situation in advance and can properly address any potential delays.

An aggregation program gives the OEM significant leverage over raw material suppliers and contract manufacturers. It goes without saying, the OEM could switch suppliers should suppliers fail to deliver the promised level of service. However, suppliers are also incentivized to participate in these programs because their costs are reduced through better planning – a win-win throughout the supply chain.

4) Enforce the agreed purchasing behavior

Aggregation programs provide considerable benefits to the OEMs, contract manufacturers, and to the raw material suppliers. However, reaping the benefits depends upon all parties within the supply chain doing what they have agreed to do and properly utilizing and executing upon the agreed “terms of engagement.”

If contract manufacturers fail to purchase forecasted materials from the agreed upon source, the value of the demand forecast is questioned and the service centers are left holding the proverbial bag when it comes to excess inventory. For this reason, it is imperative that the OEM have a robust means of monitoring and enforcing agreed upon terms of engagement (across Contract Manufacturers, Distributors and Mills.)

5) Provide a means to validate material sizes, forms and specifications while keeping bills-of material up-to-date 

No two Contract Manufacturers make a part the same way and therefore no two bills of material (even for the same part) are ever the same. For this reason, the OEM must provide a simple, easy way for Contract Manufacturers to update or “validate” bills of material.

For example: Say an OEM needs 1,600 pieces of a specific aluminum part in the coming year. The blueprint suggests that the optimal way to manufacture the part is to machined it out of an 8.0” long piece of aluminum grade 6061, 2.0” diameter round bar. However, the minute the OEM outsources that part to an external contract manufacturers, it loses visibility into the actual form and size of material actually purchased. For instance, one contract manufacturer may choose to purchase material in different form or size than another (2.25” vs. 2.0” for example).

In addition, any sustainable program will require a thoughtful and systematic way of accommodating changes in the supply chain such as:

  • New Part Introductions
  • Engineering changes to existing parts
  • Transitions of parts from on Contract manufacturer to another

So how does it work?

We understand – this sounds like an Industry 4.0 unicorn, right? Likely, you’ve been managing your raw material procurement data with a team of folks sharing a macro-crazy Excel spreadsheet. This is where Supply Dynamics can help. Our Part Attribute Characterization service and SDX multi enterprise platform enables OEMs to captures contract manufacturers’ raw material data for each part without asking the part supplier to do all the heavy lifting.

In this way, OEMs can accurately forecast raw material requirements and manage the timely purchase and supply of material requirements across the enterprise.. All of this allows for better pricing and contract terms, shorter lead-times, and higher levels of performance from the supply chain.

For too long OEMs, contract manufacturers, and raw material suppliers have relied on historical data or guesswork to forecast future raw material demand. By better understanding the raw materials used in its products and sharing information with the sources of those materials OEMs can achieve step-change improvements in their cost of doing business, and actively monitor purchases of program-related materials. In addition, they can improve overall supply chain efficiency and ultimately improve on-time delivery of more profitable products.

You will be Assimilated: The Collective Intelligence of Procurement

For those who remember “The Borg” from Star Trek, you’ll remember the notion of a dispassionate alien mind-being that would suck up your individual mind to subsume into the collective intelligence.  Resistance is futile. 

bluecrayola/Shutterstock.com

Crazy stuff, right?  Or maybe not.

Flash forward to today.  For most people, your every move is being tracked by your smartphone, social media apps, web browsing, and credit card transactions.  Ever wonder why Google and Amazon are basically giving away their helpful devices and AI assistants?  You are being watched.  You are the product (not the customer).  You are the raw materials of a collective intelligence being built upon your individual experiences and desires.  In other words, the proverbial machine is watching and learning from you (in order to sell to you, er, rather, to “better meet your needs”).

But, this is all consumer stuff, right?  B2B is different, right?

Sort of – but it’s not THAT different.  And with all the regulatory pressures coming on consumer data privacy, as compared to much of the privacy that you sign away your rights to when you enter an employment contract, the tables may actually turn here. If you’re using a popular cloud-based Procurement system, you are also being watched (many providers analyse your system behaviour to figure out how you navigate the system and how to help you… yes, the chatbots are coming). If you use a procurement “business network” or eMarketplace (e.g., Amazon Business), your suppliers are signing away some of their intellectual property – whether they know it or not.  And smart companies are trying to gain a market intelligence advantage through digital business strategies in the supply chain. There’s a reason why GE created Predix; why Flex funded Elementum; why DHL sells supply chain risk technology; and so on.  Adoption creates insight and intelligence… and advantage.

All this isn’t necessarily bad for you though.  It serves up price benchmarking, risk intelligence and improved system usability.  It also signals how the world is moving away from “empty apps” that push documents around in workflows and move towards systems that are building intelligence to make your apps “smarter”.  This intelligence is typically built using machine learning fed by large data sets that help improve repetitive tasks like spend classification. Of course, AI is a bigger topic, and there are 23 distinct areas in AI for procurement and supply chain that we’re following that I can’t cover in a single blog post!  For example, contract management is a great example where AI is already having an impact and this will be very disruptive in the Legal services (e.g., Legal BPO) area.

Still, building your collective intelligence for your firm doesn’t necessarily require AI.  You can avail yourself to some good old-fashioned knowledge management built up from the various collectives that are all around you:

  • The internal corporate collective. Learn from consulting companies and build presentation storyboards of your procurement projects that created change and value – and use them to win over skeptical stakeholders.
  • Your supplier collective. Your current supply suppliers, previous suppliers, “almost suppliers” (who bid on your business), and potential suppliers via crowdsourcing are a wealth of knowledge – if you know how to tap them through supplier innovation programs and proper supplier management processes.
  • Your customer collective. This includes not just internal stakeholders, but external customers as well.  For example, Lenovo uses its social customer mining tools to identify key customer/demand information that can be passed upstream to suppliers.  On the flip side, many similar intelligence tools are being deployed on the supply side with varying results (that’s a whole topic for another day).
  • The installed base collective. Your procurement app providers, consulting providers, and managed service providers are likely working hard to extract and productize your individual intelligence into a re-saleable collective intelligence. Choose a provider that is working on building collective intelligence into its overall platform strategy.
  • Your peer/community collective. There are lots of communities out there right now where you can learn from your peers – and many of them are free. You’re learning right now by reading this on Procurious, so you’re already well on your way!

We even practice what we preach at Spend Matters when we tap into this collective intelligence of procurement technology users by capturing end user satisfaction (think Net Promoter Score on steroids) and using it as an entire axis of our “SolutionMap” vendor scoring model/methodology.  And, yes, there’s a freemium version (it has eight procurement technology areas mapped out based on five different buyer personas from which you can select)!

The bottom line is that although we all start with a certain amount of individual intelligence, it’s the collective supply market of intelligence that is all around us if we can learn how to tap it, build it, and wisely bring the right intelligence back to our individual selves (and we’ll even be able to augment that individual intelligence into our own personal bots and ‘digital twins’).  And since procurement should be enabling stakeholders to also tap that collective intelligence of supply, it couldn’t be a more important competency to build right now.

So, go bravely into that supply market and assimilate yourself into the collective intelligence of procurement and be smarter and better from that experience.  It’s really what life is all about, isn’t it?

This article was contributed by guest author Pierre Mitchell, Chief Research Officer and Managing Director at Azul Partners.

Why Instant Supplier Information Access Can Fire Productivity

Procurement needs to maximise its productivity if its going to meet business needs. Having access to real-time supplier information is a step in the right direction.

GaudiLab/Shutterstock.com

When I started my career in procurement over 40 years ago, we used notebooks to store all of our supplier information.

Go ahead – be shocked or have a little chuckle about how ‘primitive’ we were! But guess what? Things haven’t changed nearly as much as people like to think.

Today, most procurement teams have modernised their supplier information management by using some type of a shared database. These solutions, while centralised and searchable, still rely on internal team members manually entering and then searching for supplier knowledge.

And while most companies are doing the best they can with scarce resources, it is important to remember that it is possible to make progress without actually resolving any key business issues, or becoming the slightest bit more strategic.

Value in Scalability

We had notebooks and you have a database. But if the information isn’t (a) current and (b) fully leveraged, it doesn’t really matter where it sits.

The true transformative value of any technology is its scalability. How much of an effect does it have on the amount of work each person can accomplish?

tealbook, a platform that centralises supplier provided information, internal supplier knowledge, data from Dun & Bradstreet, and aggregate intelligence from industry peers, has set this challenge of scalability as their target.

Making it possible for procurement to accelerate the discovery process through instant supplier recommendations, and improving the match between business needs and prospective suppliers, gets at that need for scale.

With better suppliers available sooner, procurement can achieve a step change in their productivity. This also helps to move the needle on the all-important metric of spend under management.

Productivity – Focusing Your Efforts

Let’s say you’ve got 20 people working 40 hours a week, 50 weeks a year. That gives you a maximum of 40,000 procurement hours per year. You’ve got to ask yourself how many of those hours the team spends looking or searching for something to satisfy an information need. Every hour not spent on value-added activities is an opportunity to improve productivity.

When we look at procurement’s productivity in the context of supplier discovery, we have to focus our attention on how much time procurement spends searching for the right suppliers before a sourcing project can get off the ground.

In order to decrease the time required for discovery – and increase the quality of the suppliers invited to participate – we need to make sure we’re searching a resource dense with suppliers and supplier information, preferably using a common language search rather than archaic codes.

Whether you’re looking at a supplier discovery platform or a more traditional supplier marketplace, the point is to focus your efforts where they are most likely to generate positive results.

There’s a huge advantage in somebody being willing to take the time to centralise the right information and maintain it. The resulting resource will make a dramatic improvement to what procurement is able to deliver, how often we can deliver those results, and just how BIG those results are.

There aren’t many companies adding employees, so if you can find a solution that dramatically changes the amount of work each employee can do, you’ve really got something strategic.

Meeting Real-Time Supplier Information Needs

Today, an increasing number of corporations want to believe that their procurement teams operate strategically. As that reputation spreads, more and more projects will come from the business.

In order to handle the increased demand for our time and skills, procurement has to be really good at making decisions about how to spend time and allocate scarce resources.

If we are going to facilitate purchases, strategically source every category, AND meet the real-time needs of the business, technology has to be capable of actual heavy lifting, not just function as an electronic supplier notebook.

In my next post, we’ll go beyond the supplier information modernisation process to look at the strategic value of a marketplace approach.

Gregg Brandyberry is a recognised pioneer in procurement and sourcing technology. He has over 40 years experience in industries such as automotive, textile, manufactured goods, electronics and healthcare.

He is the former Vice President of Procurement – Global Systems and Operations for GlaxoSmithKline, and a Senior Advisor for A.T. Kearney’s Procurement and Analytic Solutions organisation.