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ABHILESH BABU

 * March 24, 2021
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WHY DO YOU NEED A DIRECT MATERIAL SOURCING SOLUTION?

Home » Why do you Need a Direct Material Sourcing Solution?


TABLE OF CONTENTS

 * The Outside-in Strategy 
 * What exactly is a Direct Sourcing Solution? 
 * Four Pillars of Direct Sourcing Solution 
 * The Need For A Direct Procurement Solution

Couple of decades ago, every company was very dependent on floppy disks to store
and transfer data. Now, floppy disks are extinct. Kids in school these days
aren’t even aware of such a technology. Something, which seemed so vital, was
quickly replaced and forgotten. That’s the ultimate threat faced by a legacy
technology – to be replaced. ERP is a legacy technology that is very much vital
to the functioning of a business. Moving from legacy technology and adopting an
emerging technology can be daunting for companies, but it is very much a
necessity. ERP is necessary to manage a company’s business processes like supply
chain management or financial management. But is it enough to provide the
edge?  

In my previous blog, I had discussed how the supply chain is becoming complex
and rapidly evolving with changing consumer needs. ERP systems can handle the
breadth of business processes, but do they offer depth? In a world where
everything is completely customized and catering to the customer’s taste, can
companies afford not to possess products that offer deep functional
capability for their operations? Procurement software would provide the required
in-depth functionality to the sourcing process and produce optimal
results. With maturing technology, now software products are well-defined
to fit the needs each industry. Direct procurement organizations cannot meet
their complex strategic procurement needs using just their ERP system, which can
handle only transactional procurement. They need to look for a Direct
Sourcing software that would meet their requirements and make the procurement
process much more efficient. In this blog, let’s see how a Direct Materials
Procurement Solution can make the direct spend management more efficient and
contribute to long-term business value using Strategic Sourcing. 


THE OUTSIDE-IN STRATEGY 

Amazon’s vision to be ‘the earth’s most customer-centric’ clearly shows the
power held by customers. Amazon had taken several steps towards this vision,
like item-level collaborative filtering that improves their product
recommendations. One of their recent moves is to transport goods to the nearest
warehouse as soon as the customers had added them to their cart. The shipping
time reduces, motivating the customers to buy the product at once. The instant
ability of Amazon to track the data and immediately convert it into action makes
them a master of supply chain management.  

Companies are shaping their business model according to the customer needs. This
outside-in strategy is hard to implement with a relatively rigid technology
like ERP. Forecasting and predicting trends based on historical data
has become a bottleneck in the fast-paced market. Concurrent changes have to be
immediately tracked and responded to. Companies must find alternative and
innovative ways to stay agile and efficient. Procurement solutions would allow
companies to adapt to the new normal. Cloud technology simplifying data handling
across the company followed by AI/ML that would allow automation
and data-driven decision making in the procurement process. Procurement
software products have the flexibility and capability to handle the needs of the
complex sourcing supply chains of today. 


WHAT EXACTLY IS A DIRECT SOURCING SOLUTION? 

Direct procurement might sound simple, as it is the sourcing of materials that
ultimately flow to customers as components of the end products. However, it is
an extremely complex domain and there is a lot at stake for the organisation in
terms of the quality, cost and timeliness of the final product. Direct
procurement helps in sustaining the inbound supply chain of the organization by
managing supplier relationship, sourcing and cost optimization. A Direct
Sourcing software solution should satisfy the traditional procurement objectives
such as continuity of supply, spend analysis and purchase orders. It must
also integrate forecasting for order quantities that can account
for ongoing changes in the market. It should possess the technology and
information sources that would accommodate the variations in third-party
relationships, processes and data integration, and risk associated with the
complex market. 


FOUR PILLARS OF DIRECT SOURCING SOLUTION 

Risk is innately present in today’s supply chain. If an organization is
facing no risk related losses, then possibly they must have an
under-optimized and poorly managed supply chain to even be considered
competitive. Building and defending a competitive edge in supply chain requires
for the company to be constantly optimizing it with the latest technologies
available. A typical direct procurement software should have transparency,
integration, collaboration and information that can generate more value to the
company.  

Transparency: 

Companies require a sourcing solution that would provide end-to-end insights
into the processes. State-of-art analytics that offer real-time understanding of
the sourcing processes is required. It would assess the information collected
from suppliers and companies for the optimization of product
lifecycle. The software should be able to track the data collected and perform
analytics on PPV (Purchase Price Variance), BOM (Bill of Material) and
supplier information to formulate and update their strategic sourcing process

Collaboration:

Superior supplier management is absolutely necessary for an organization to
succeed in optimizing Direct Sourcing. The solution should have an interface
that would allow the several suppliers to reach the companies with one
information effort. It includes compliance monitoring of the supplier partners
and strong contract management. Companies must have strong relationship with key
suppliers throughout the product lifecycle to minimize risk and optimize value. 

Integration:

In Direct Sourcing, there needs to be a tight interaction between the suppliers
and the companies. Any change whether in the demand planning or engineering
design of the product or quality of supply needs to be instantaneously
communicated to them. It should also have connectivity to other  software used
by the company including Product Lifecycle Management (PLM), ERP, MRP etc., to
support other business processes. It would help in seamless transference of
information between the systems, avoiding errors or delays, and accelerate time
to market.

Information:

Adequate information such as cost breakdown of the raw materials, supplier’s
product categories, supply quantity, Part Cost Breakdown, Volume
Pricing and PPV is of extreme importance to a Direct Sourcing software. A
solution which can consolidate demand across various products across the
organization enables buyers to have better bargaining power and strategize their
sourcing process. It also includes the most valuable data of the organization
which is the direct spend. Apart from having the in-depth and wide information
collected from suppliers, other systems and market, a Direct
Sourcing solution should also have the facility to accommodate any change in the
information immediately in real-time. 


THE NEED FOR A DIRECT PROCUREMENT SOLUTION

Supplier’s ability to deliver goods on time with proper compliance, adhering to
the stated business processes and expectations, drives the company’s performance
in Direct Sourcing. When a company’s Direct Sourcing isn’t efficient, it would
create a ripple effect affecting the entire supply chain with increasing
amplitude in every next step. Direct Sourcing requires a more
focused approach compared to in
Direct Sourcing. . Medical device manufacturing companies experienced a huge spike
in demand due to COVID. Hospitals and medical device companies re-engineered the
ventilator’s design, allowing one ventilator to tend to multiple patients. Even
with this innovation, companies struggled to meet the demand. They weren’t able
to integrate the new design in their Direct Sourcing processes easily. In the
Indian Automotive Industry, there was a sudden shift to adopt BS VI norms,
forcing companies to alter the entire engine design of the vehicles. OEMs
struggled to collaborate with the limited suppliers who were producing the
required components to satisfy Bharat Stage VI emission norms. 

Several disruptive events increasing over the years have made the supply chain
vulnerable. These could be non-economic shocks such as climatic catastrophes or
economic shocks such as Brexit that impact on the supply chain cost
and performance. Moreover, companies are in constant process of revamping their
product design to satisfy the changing consumer’s needs. In addition to this,
companies are facing intense competition in their respective
industries. Organizations have to become more agile and make their supply chain
resilient to survive and be competitive. Companies have
to bring this change from the point of source for the supply
chain – Procurement. A Direct Sourcing software would secure a company’s
position in the industry and give them a competitive edge. It would help in
streamlining the business processes even in a volatile market and capture the
value in supply chain.  

MeRLIN is a Strategic Sourcing software product that has unique and
excellent Direct Sourcing features. PLM interface,
Engineering Change Management, BOM Management and Catalog Management with
advanced analytics makes it an ideal Direct Sourcing software that would
transform the procurement process. Its ability to seamlessly integrate with ERPs
and enhance collaboration with suppliers providing in-depth visibility across
the sourcing process would satisfy the procurement team’s objectives and
help them keep in pace with evolving market conditions.


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REQUIREMENTS

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March 5, 2021 No Comments


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