Direct material procurement refers to the process of purchasing products that are directly used in the production of goods. These materials are fundamental to the manufacturing process and directly influence the quality and cost of the final product. Examples include chassis, windows, and wheels for automotive parts, fabrics for clothing, or electronic components for gadgets.
Choosing the right suppliers and software systems for sourcing direct materials is critical in developing the value proposition of the final end-product. It is not simply about getting the lowest price, but rather the best overall value. Assessing overall best value requires first identifying what the customer needs. Is it a premium offering with the highest precision components and materials? Or is it a mass-market product with a bigger focus on providing an economical price? Does the customer also need the product in a specific time-sensitive window? Or is the schedule more flexible?
All of these must be carefully considered and evaluated as getting any of these decisions wrong will result in dissatisfied customers. Consequently, effective direct material sourcing in manufacturing is vital to obtaining the right mix of quality, cost, and delivery. This includes partnering with the right suppliers and implementing the right procurement software solutions. Procurement software should enable an organization to easily track all material spend including build status tracking for inbound material planning & scheduling.
Direct procurement refers to all the components and raw materials that are used to make an end-product. These materials make up the cost of goods sold (COGS) and have strict quality control requirements due to their direct impact on the final product. Examples of direct spend include:
In contrast, indirect procurement refers to the spend that is necessary to build the product, but are not traceable to a specific product unit and are not present in the end-product. Examples of indirect spend include:
Strong Supplier Relationships: Building & fostering long-term partnerships with reliable suppliers is a cornerstone of a direct procurement strategy. It is also important to consider the trade-offs between having many suppliers versus having a few suppliers for each spend category. The balance comes with ensuring that there is adequate competition and not an overreliance on one vendor along with also consolidating enough spend to achieve sufficient bargaining power. Consolidating spend can help drive better contract negotiations to obtain preferential pricing, service & delivery options. It also helps incentivize collaborative innovation between partners.
Quality Control & Supplier Audits: Direct components and materials will directly impact the quality of the end-product. Subsequently, this requires strict process controls to ensure quality standards are met. Regular supplier audits are commonplace and are used to determine general approvals to conduct business along with subsequent approvals for a supplier to conduct specific processes or handle certain work. The goal is to ensure that there is oversight at the supplier to ensure all the supplier’s personnel are trained to the requisite level of competence in the given process.
Supply Chain Transparency: Having visibility into the activities of suppliers will help ensure that the right materials and quantities are delivered on-time to the master schedule and requirements plan. This means suppliers need to provide regular status updates on purchase orders. This can confirm that requirements are proceeding according to schedule or provide advance notification when goods are tracking late to schedule. Advance notification of late materials can help organizations devise workarounds to mitigate the impact of late components – typically by changing up the manufacturing order of operations to put the need date for the late part further out in the process.
Apart from order tracking, supply chain transparency can help with future capacity and demand planning as organizations can more efficiently allocate volumes. This can help prevent scenarios where suppliers take on too much volume and end up behind on schedule in the first place.
Continuous Improvement: Along with close supplier partnerships, continuous improvement and collaborative innovation can deliver considerable value for direct material supply chains. Supplier and buyer alike can provide innovative ideas to improve processes that produce products at a lower cost and higher quality. This enhanced process knowledge can give the buyer & supplier partnership a competitive edge in the marketplace.
Technology: Tying together all of this is the technology that enables organizations to partner and collaborate in an efficient way. Utilizing a direct procurement system can streamline the entire procure-to-pay process through the initial requisition to contracting, order status tracking, receiving, and invoicing. Cloud-based direct procurement software platforms will also provide reporting & analytics to identify trends & insights and monitor supplier performance.
Purchase orders for direct materials need to have several things specified:
In contrast to indirect material procurement, direct materials are in the end-product and thus carry unique challenges and risks.
Shortages
Products can often have a bill of material with thousands of parts. Each and every one of these parts needs to be ready on the production floor when it is required. Parts shortages can range from mild to severe in impact to production. Carrying excess inventory is costly and ties up cash but can be a necessary evil for critical components. Ideally, there is a solid assurance of supply with a quick response time. However, if this is impossible or infeasible, carrying buffer stock may be worthwhile to consider if the consequences or risk of a shortage for a particular part is severe.
Another potential strategy to mitigate shortages of direct materials is to choose parts in the bill of material that have several alternates. This can make it easier to obtain additional stock in case of a shortage, however, this is often infeasible. If alternate parts are not possible, then focusing on design to manufacture principles may be the best option as improving manufacturability that reduces supplier lead times can also help alleviate the pain of a shortage.
Quality Defects
Quality defects can quickly tarnish a company’s brand and reputation. This can impact future sales and growth prospects of a company. For this reason, strict quality controls for direct materials throughout the supply chain are essential. In the case a quality defect is discovered, it is far cheaper to discover it as far upstream as possible. The further along in the supply chain the defective components or materials go, the more cost is added and the more expensive it becomes. Ultimately, the most expensive quality defects are the ones that reach the end customer. These are the instances that can require expensive product recalls where a company takes back all the defective goods to repair the defect.
Cost Overruns
Direct materials make up the Cost of Goods Sold (COGS) and thus are directly responsible for the profit margins the company can make on what it sells. This is often a delicate balance as most firms do not have the pricing power to charge whatever they would like. As a result, companies must control costs, but at the same time, they cannot cut costs to the extent that it will lead to quality defects.
Direct procurement software is specifically designed for organizations trying to manage their direct material spend. These systems have several features that make it easy to: follow direct procurement best practices, manage the challenges and risks, create and execute purchase orders for direct goods.
Lasso is an all-in-one direct procurement solution that offers the full end-to-end set of features to procure and manage direct material spend. This includes requisitioning, sourcing, contracting, order status tracking, receiving, and invoicing. Lasso is also free to start – create your free account and get started with Lasso!
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