Direct material procurement woes and how to fix them
While new technologies have served to improve indirect procurement, direct materials procurement remains tied to MRP and ERP systems. This needs to change.
It is fall. Here in the Eastern United States, where I am based, the hot and humid days of summer are finally giving way to cool and crisp weather. As fall becomes winter, supply chain leaders are planning their budgets and building strategies for 2017. As they do so, one thing they need to consider is a redesign of their direct material procurement operations.
Direct procurement ties directly to manufacturing conversion processes through a bill of materials. Indirect procurement, by contrast, is not an input to the manufacturing processes; it includes such purchases as office supplies, professional services, and temporary labor.
In the last decade, new technologies have driven significant improvement in indirect procurement. Examples include improved control of "maverick" spend, increased use of qualified vendors, electronic bidding, and price comparisons.
This is not the case, however, with the purchase of direct materials. Direct material purchases are still controlled by material requirements planning (MRP) and traditional buying processes. The trouble is that the MRP signal, while precise, is inherently inaccurate due to the bullwhip effect. As demand latency and error have increased over the years, MRP has become an even less dependable signal.
Another issue is that traditional technology and buying processes focus on reducing costs and not on creating greater value or mitigating risks—both of which are important for creating a top-performing supply chain. While the systems deployed through conventional MRP in enterprise resource planning (ERP) enable buying, they do not help increase visibility of supplier viability, reward innovation/contribution of new ideas, or drive improvements in corporate social responsibility.
Indeed our research shows there are gaps between what companies think is most important in selecting a direct materials supplier and what procurement technology currently provides. As shown in Figure 1, the greatest gaps are in the areas of financial viability, driving innovation, measuring and nurturing the relationship, and corporate social responsibility. These risks in supply chain are growing unchecked.
Figure 1
According to our research, demand volatility and supplier viability are increasing risks for today's supply chain leaders (see Figure 2). The management of the supply base is also a requirement for addressing another area of risk, product quality. The focus over the last decade on transactional systems, auctions, and portals, however, has not been equal to these challenges.
Figure 2
Seven strategies
Below are seven suggestions for improving direct material procurement to make it more focused on creating value and reducing overall supply chain risk.
Design and build collaborative workflows. In discrete manufacturing, it is critical to have collaborative workflows between suppliers and the globally dispersed parties within a large organization. These workflows, however, are not present in ERP systems. For example, one of the large gaps with the technologies currently being used today is the sharing and review of design documents. To address this gap, companies should consider using a combination of product lifecycle management solutions (like Oracle/Agile, Enovia, and Siemens Teamcenter) and direct materials technologies (like Directworks, Pool4Tool, and SupplyOn).Using these two type of technologies together will help companies vies and collaborate od design specifications.
Be easy to do business with. Today, fewer than one in four purchase orders are processed hands-free, vendor setup times take an average of 48 days, and most suppliers feel "portaled to death." Companies need to start analyzing their current processes to see how they can make it easier for their suppliers to do business with them. Minimize the time for vendor setup and ensure that vendors can get the data they need. For example, one aerospace and defense manufacturer that I work with has a hotline staffed with an experienced engineer to answer "quality of design" questions from suppliers. The focus is on making it easy for the supplier to get the right answers.
Tie manufacturing planning to direct material sourcing strategies. Less than 5 percent of companies have successfully connected their supply planning processes to direct material requirements planning. To accomplish this, consider technologies like E2open and Kinaxis to translate manufacturing requirements into sourcing requirements. Also consider transmitting manufacturing schedule changes through networks to ensure a system of record.
Take responsibility for your data quality. For most suppliers, the translation of demand into requirements is problematic. In the last decade, demand accuracy has decreased, and despite the investment in many technologies, the quality of the demand signal to the supplier has not improved. Hold yourself accountable. Consider tying incentives to better demand signals. For example, if you can give the supplier a better demand signal, can it give you a better discount?
Make purchases based on independent demand. Carol Ptak and the Demand Driven Institute are doing some very promising work redefining MRP to be driven from an independent demand signal (actual demand for a finished product, which would include point of sale data, distributor data, or end-customer demand). Where possible, use channel demand in determining requirements and push for technology vendors to adopt demand-driven material requirements planning (DDMRP) principles. Consider a DDMRP pilot with your strategic technology vendors.
Drive and align reward systems. Currently few companies are using incentives to encourage suppliers to be innovative. It's time to reward suppliers for sharing innovation through open innovation networks. Build systems to enable visibility between new-product launch requirements and the qualification of new suppliers. For most companies, this is a major gap. Create a flowchart that shows the relationships between the identification of a supplier for a new product and the time required to to onboard a new supplier and review/refine the specifications for qualification. Work to shorten the review times and make the processes more efficient.
Invest in new technologies and approaches for direct material procurement. Companies need to recognize that supplier relationship management systems are a fit for indirect procurement but not for direct materials procurement. Building effective processes for direct procurement requires companies to redesign their processes from the "outside in" and partner with best-of-breed solutions. Don't fall into the trap of believing that solutions applied to indirect procurement can meet the needs of direct procurement. They are distinctly different.
One of my goals is to encourage supply chain leaders to consider a redesign of their procurement processes in 2017. Direct materials procurement is a good place for them to start.
Mega-retailer Amazon says its newest fulfillment center, located in Shreveport, Louisiana, uses 10 times more robots than previous warehouse designs, and relies on artificial intelligence (AI) to direct the eight different models deployed in its bustling operation.
“Over the years, we’ve built and scaled the world’s largest fleet of industrial robotics that ease tasks for employees and improve operational safety while creating hundreds of thousands of new jobs along the way,” the company said in a blog post Wednesday. “For the first time, we have introduced technology solutions in all key production areas at the site, meaning our employees will work alongside our growing fleet of robotic systems seamlessly in a way that wasn’t possible until now.”
The Shreveport site spans five floors and more than 3 million square feet—equivalent to 55 football fields—making it one of Amazon's largest sites. It will employ 2,500 employees once it’s fully ramped up.
The technology at the center of the huge building is called Sequoia, a “multilevel containerized inventory system” that can hold more than 30 million items, making it five times bigger than Amazon’s first deployment of that system in Houston, Texas.
As inventory and packages move through the facility, Robin, Cardinal, and Sparrow—an AI-powered trio of robotic arms—sort, stack, and consolidate millions of items and customer orders. The latest version of Sparrow uses computer vision and AI systems that give it the versatility to handle over 200 million unique products of all different shapes, sizes, and weights.
And Proteus, which Amazon calls its “first fully autonomous mobile robot,” navigates carts of packages to the site’s outbound dock so they can be loaded into trucks, while safely moving around employees in open spaces. The remaining three robot models include larger AMRs called Hercules and Titan and a packaging automation system that creates custom-sized packages to fit each order’s dimensions.
Although the increased automation allows the facility to handle more orders than older sites, Amazon insists it is not replacing workers’ jobs. “As we deploy this new generation of robotics across our network, we expect our headcount to continue to grow and we’re really excited by how this technology also creates more opportunities for skilled jobs. In fact, our next-generation fulfillment centers and sites with advanced robotics will require 30% more employees in reliability, maintenance, and engineering roles,” the company said.
According to Amazon, it trains workers for skilled jobs by helping them earn certifications through a corporate “Career Choice program” and a “mechatronics and robotics apprenticeship” that provides hourly wages up to 40% higher than entry-level roles.
For example, millions of residents and workers in the Tampa region have now left their homes and jobs, heeding increasingly dire evacuation warnings from state officials. They’re fleeing the estimated 10 to 20 feet of storm surge that is forecast to swamp the area, due to Hurricane Milton’s status as the strongest hurricane in the Gulf since Rita in 2005, the fifth-strongest Atlantic hurricane based on pressure, and the sixth-strongest Atlantic hurricane based on its peak winds, according to market data provider Industrial Info Resources.
Between that mass migration and the storm’s effect on buildings and infrastructure, supply chain impacts could hit the energy logistics and agriculture sectors particularly hard, according to a report from Everstream Analytics.
The Tampa Bay metro area is the most vulnerable area, with the potential for storm surge to halt port operations, roads, rails, air travel, and business operations – possibly for an extended period of time. In contrast to those “severe to potentially catastrophic” effects, key supply chain hubs outside of the core zone of impact—including the Miami metro area along with Jacksonville, FL and Savannah, GA—could also be impacted but to a more moderate level, such as slowdowns in port operations and air cargo, Everstream Analytics’ Chief Meteorologist Jon Davis said in a report.
Although it was recently downgraded from a Category 5 to Category 4 storm, Milton is anticipated to have major disruptions for transportation, in large part because it will strike an “already fragile supply chain environment” that is still reeling from the fury of Hurricane Helene less than two weeks ago and the ILA port strike that ended just five days ago and crippled ports along the East and Gulf Coasts, a report from Project44 said.
The storm will also affect supply chain operations at sea, since approximately 74 container vessels are located near the storm and may experience delays as they await safe entry into major ports. Vessels already at the ports may face delays departing as they wait for storm conditions to clear, Project44 said.
On land, Florida will likely also face impacts in the Last Mile delivery industry as roads become difficult to navigate and workers evacuate for safety.
Likewise, freight rail networks are also shifting engines, cars, and shipments out of the path of the storm as the industry continues “adapting to a world shaped by climate change,” the Association of American Railroads (AAR) said. Before floods arrive, railroads may relocate locomotives, elevate track infrastructure, and remove sensitive electronic equipment such as sensors, signals and switches. However, forceful water can move a bridge from its support beams or destabilize it by unearthing the supporting soil, so in certain conditions, railroads may park rail cars full of heavy materials — like rocks and ballast — on a bridge before a flood to weigh it down, AAR said.
The North American robotics market saw a decline in both units ordered (down 7.9% to 15,705 units) and revenue (down 6.8% to $982.83 million) during the first half of 2024 compared to the same period in 2023, as North American manufacturers faced ongoing economic headwinds, according to a report from the Association for Advancing Automation (A3).
“Rising inflation and borrowing costs have dampened spending on robotics, with many companies opting to delay major investments,” said Jeff Burnstein, president, A3. “Despite these challenges, the push for operational efficiency and workforce augmentation continues to drive demand for robotics in industries such as food and consumer goods and life sciences, among others. As companies navigate labor shortages and increased production costs, the role of automation is becoming ever more critical in maintaining global competitiveness.”
The downward trend was led by weakness in automotive manufacturing, which traditionally leads the charge in buying robots. In the first half of 2024, automotive OEMs ordered 4,159 units (up 14.4%) but generated revenue of $259.96 million (down 12.0%). The Automotive Components sector was even worse, orders 3,574 units (down 38.8%) for $191.93 million in revenue (down 27.3%). Declines also happened in the Semiconductor & Electronics/Photonics sector and the Plastics & Rubber sector.
On the positive side, Food & Consumer Goods companies ordered 1,173 units (up 85.6%) for $62.84 million in revenue (up 56.2%). This growth reflects the increasing reliance on robotics for efficiency in food processing and packaging as companies seek to address labor shortages and rising costs, A3 said. And the Life Sciences industry ordered 1,007 units (up 47.9%) for revenue of $47.29 million (up 86.7%) as it continued its reliance on robotics for efficiency and precision.
The warm waters of the Gulf of Mexico are brewing up another massive storm this week that is on track to smash into the western coast of Florida by Wednesday morning, bringing a consecutive round of storm surge and damaging winds to the storm-weary state.
Before reaching the U.S., Hurricane Milton will rake the northern coast of Mexico’s Yucatan Peninsula with dangerous weather. But hurricane watches are already in effect for parts of Florida, which could see heavy rainfall, flash and urban flooding, and moderate to major river floods, according to forecasts from the National Oceanic and Atmospheric Administration (NOAA).
As it revs its massive engines with fuel from the historically warm Gulf of Mexico, Hurricane Milton could possibly hit Tampa as a Category 5 storm, according to the FEWSION Project at Northern Arizona University, which tracks supply chains throughout the country.
With that much power, Milton could shut down the port and seriously disrupt the fuel supply into western and central Florida, which could then hinder recovery efforts. That’s because fuel supplies for much of Florida, especially central Florida, arrive from Texas and Louisiana through the Port of Tampa. That means that anyone who depends on generators or fuel for critical functions should plan for an extended period without access to fuel. And recovery crews and logisticians should consider bringing their own fuel when responding to the storm, FEWSION said.
One of those disaster recovery efforts will be led by nonprofit group the American Logistics Aid Network (ALAN), which is already mobilizing its forces for Hurricane Milton, even as it devotes other energy to the Hurricane Helene response. “In an ideal world we’d have plenty of time to focus all of our efforts on Hurricane Helene clean-up and recovery,” Kathy Fulton, ALAN’s Executive Director, said in a release. “But in the real world, major hurricanes don’t always wait for their turn. As a result, we are officially activating for Hurricane Milton.”
In the meantime, many weary residents of the region are thinking of moving to another part of the country instead of getting hit by vicious storms several times a year. Nearly one-third (32%) of U.S. residents aged 18-34 say they’re reconsidering where they want to move in the future after seeing or hearing about the damage caused by Hurricane Helene, according to a survey commissioned by real estate brokerage Redfin.
“Scores of Americans flocked to the Sun Belt during the pandemic because remote work allowed them to take advantage of the region’s relatively low cost of living. Some thought Appalachia was insulated from hurricane risk, not realizing that the area is prone to flooding and that hurricanes can sometimes cause flash flooding far away from the ocean,” Redfin Chief Economist Daryl Fairweather said in a release. “Americans are beginning to realize that nowhere is truly immune to the impacts of climate change, and we’re starting to see that impact where people want to live—even people who haven’t experienced a catastrophic weather event firsthand.”
The report is based on a commissioned survey conducted by Ipsos on Oct. 2-3, fielded to 1,005 U.S. adults. After making landfall in Florida in late September, Hurricane Helene wreaked havoc across Appalachia, becoming the deadliest storm to hit mainland America in almost two decades. In North Carolina, the death toll has surpassed 100 and the city of Asheville has been devastated.
Shippers and carriers at ports along the East and Gulf coasts today are working through a backlog of stranded containers stuck on ships at sea, now that dockworkers and port operators have agreed to a tentative deal that ends the dockworkers strike.
In the meantime, U.S. importers and exporters face a mountain of shipping boxes that are now several days behind schedule. By the latest estimate from Everstream Analytics, the number of cargo boxes on ships floating outside affected ports has slightly decreased by 20,000 twenty foot equivalent units (TEUs), dropping to 386,000 from its highpoint of 406,000 yesterday.
To chip away at the problem, some facilities like the Port of Charleston have announced extended daily gate hours to give shippers and carriers more time each day to shuffle through the backlog. And Georgia Ports Authority likewise announced plans to stay open on Saturday and Sunday, saying, “We will be offering weekend gates to help restore your supply chain fluidity.”
But they face a lot of work; the number of container ships waiting outside of U.S. Gulf and East Coast ports on Friday morning had decreased overnight to 54, down from a Thursday peak of 59. Overall, with each day of strike roughly needing about one week to clear the backlog, the 3-day all-out strike will likely take minimum three weeks to return to normal operations at U.S. ports, Everstream said.