Direct Sourcing is much more than purchasing; it is an extension of the product life cycle.
You design, manufacture and sell a product… be it an Automobile, Aircraft, Refrigerator (or any of the high-tech gadgets that go in them), a Candy bar or your off-the-shelf Pain-Killer medication.
Unless you are one of those rare companies with a very strong vertical integration, I guess around 70% of your product value is actually coming from your suppliers…
With such a significant part of your product actually in your suppliers’ hands, your Direct Purchasing Process & Supplier Relationship Management ought to be a very important part of your Product Strategy.
Direct Purchasing Process for a Product is beyond just procurement. It is not just punching a part number or item code to send out a Purchase Order.
- How strategic is the part in the overall product?
- How strategic is the supplier for the part and for the business?
- How do you manage the relationship with the supplier?
- How controlled and transparent is the process?
- How easy is it for other stakeholders to Understand, Participate & Collaborate?
- How do you manage costs in the immediate future and in the long-run?
- What are the Capital Requirements to produce the part?
- What is the ROI for the part?
Another key question, for example, is, when a part is in the middle of the sourcing (anywhere between RFP to Receipt) and if the part is revised by engineering, how do you handle it today? Different teams have different ways of coping with this; and if the product approach is missing, then we will be looking at two functions fighting over a moving target. Successful teams fall back on a product approach to prioritize and move on.
That’s why we need the right system for managing the Direct Sourcing Process. That’s also why it has been very difficult for the generic procurement tools to cater to the Direct Purchasing Process.
Every part in a program requires its own strategy and project management… it starts with the part conceived by the design engineer and the specifications and requirements for each part. Sometimes, the requirements for a single part could be quite extensive with several dozen critical parameters and dozens of tests before confirming readiness for production. Add to this the expectation that the manufacturing process for the part ensures repeatable part quality over several years of production.
Direct Purchasing is actually managing the lifecycle of the part (and ultimately, the lifecycle of the product), where the folks in-charge here are from Sourcing, Suppliers, Supplier Quality, Procurement & Supply Chain.