When managing direct spend, the difference is in the details

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KellyBarner_100.jpgBy Kelly Barner, Owner and Editor, Buyers Meeting Point

"Direct and indirect spend management is not the same thing, nor should they be treated as such. Anyone who tries to convince you otherwise is focusing on simple document transactions."

- Jennifer Ruscelle Petersen, Global Head of Advocacy, SAP Intelligent Spend & Business Network

Direct spending is not the same as indirect spending. Whether it means changes to third-party relationships, processes and data integration, or complexity and risk mindsets, procurement and technology and information sources must be prepared to meet the challenge.

Being prepared to create maximum value from direct spending means having strategies for managing supplier relationships, tailoring general procurement processes accordingly, and adequately assessing and mitigating supply chain risk.

The critical nature of direct spend suppliers

All key or strategic supplier relationships are 'important,' but there is a different importance implication when a third party's product or handiwork will come into direct contact with your customers. In many cases, these third parties are manufacturers themselves, and this has to impact how companies in different industries manage their direct supply chains.

For example:

The high-tech industry has engaged contract manufacturers and electronics manufacturing companies for decades. Their ability to collaborate more effectively with these suppliers over time directly affects their production plans, determining just how much flexibility and responsiveness they have with channel and retail customers.

Life sciences are driven by planning and quality-related processes, striving to work ever more closely with contract manufacturing organizations to ensure alignment throughout the entire production cycle.

Fast-moving consumer goods providers work side by side with co-mans (co-manufacturers) and co-packers so they can speed up time to market. It enhances their ability to test the target market effectively and launch new products without making massive capital investments to build or retrofit their factories.

The examples shared above are different from the industries they involve. Still, this type of supplier engagement in direct spending - close, almost integrated, working relationships - is becoming the norm across industries. Suppose a supplier's ability to perform is critical to a company's ability to generate revenue. In that case, the partnership must seamlessly transcend the traditional transactional relationship that continues to be pervasive in indirect spend management.

Technology-enabled processes for direct spend

Just as relationships between a company and its direct spend suppliers must be transparent and seamless, so do the processes that take products and services from design to the point of sale. Documents such as purchase orders (POs) are far too 2-dimensional to capture all associated importance and nuance.

Long before one creates a direct spend PO, manufacturers and their supply-side trading partners must be in sync, and retailers must align with their merchandise vendors and private label manufacturers. When a new recipe or product design or specification is in the works, the sourcing and contracting of components, ingredients, and raw materials ensure that trading partners can support your production plans. The selected suppliers become a critical part of supply chain planning and execution, from design to invoice and payment.

This close interaction deliberately brings procurement and suppliers into the product development process early, providing critical visibility into and control over final product costs. That control plays an essential role in determining the pricing of the offering, both for the sake of competitive advantage and target market share.

Integration is critical at multiple points in the production process:

If trading partners can't commit to forecasts or orders at the planning stage or when suppliers' inventory replenishment plans are outside the desired tolerance range, procurement will need to get involved. It is essential to identify and solve such bottlenecks if supplier partners can drive the levels of on-time delivery and performance your company requires.

New orders and supplier replenishment plans must flow directly into the company's ERP system. Otherwise, it is too easy for customer orders and inventory replenishment plans to fall out of sync, especially in a fragile, extended supply chain or one that is susceptible to disruptions from weather, labour strikes, regulatory changes, or geopolitical issues.

Contract manufacturers and critical suppliers also have a crucial role in managing quality. Otherwise, deliveries will fall short of customer's quality expectations, or transactions could be closed with no inventory available to fill them.

Although these integration requirements sound overwhelming, technology exists to handle the back and forth and real-time updating required. There is no need to bear the risk and time burdens of emails and phone calls when systems can bring companies operationally close, no matter how geographically distributed they may be.

Risk management through supply networks

Of course, even as we are making the point that direct spend suppliers are indispensable components of a healthy organization, we must remember that the more dependent we are on them, the more risk they represent.

Never in business history has this been more apparent than during the COVID-19 pandemic. We have had an unrequested - yet practical - real-life stress test to identify gaps.

Examples include:

• Managing raw materials supply
• Rapidly changing forecasts
• Finding and qualifying alternative sources of supply
• Meeting excessive demand

Resolving these weaknesses is a top priority for organisations

Complexity is inherent in modern supply chains, as is a risk. A supply chain with low complexity is probably too under-optimized to be competitive. In a crisis, managing this complexity requires business-critical integration points and end-to-end processes and analytics.

The above points make it undeniable that direct spending requires high levels of collaboration, integration, and transparency to be sustainable. Achieving any or all of these is not possible without a proper business network. A good business network is an agile and multi-faceted platform that solves strategic business challenges and resolves standard connectivity and information needs.

A good business network provides:

• Many-to-many connections that allow suppliers to reach multiple customers with one information effort.

• Business rules to ensure that processes and documentation adhere to stated governance. Examples include making sure forecasts are committed to within a specified tolerance and that a three-way match (PO, ASN, invoice) is established to ensure that no incomplete or incorrect invoices hit the ERP.

• Analytics that support the desire of customers and suppliers to track and improve performance.

• Connectivity to other networks to ensure that multiple business processes can be supported, even as new needs arise.

If procurement loves anything, it is categorizing spend. We categorize through multi-level taxonomies, nuanced processes, and expertise-based team assignments. Different types of spending represent various forms of value to the enterprise and are associated with market leverage and efficiency.

The top-level of addressable spend categorization is a binary one: is the spend direct or indirect? The answer relies on industry, company, and context. Procurement needs to study the number and nature of third-party relationships, the level of process and data integration required, and the plans that have to be in place to address complexity and risk.

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