Using cloud-based technology for material procurement is nothing new in the industrial machinery industry. Manufacturers have been purchasing indirect materials such as office supplies online for years. It’s fast, easy and scalable. Yet a few cutting-edge companies have found a new application for cloud-based procurement – using it to purchase direct materials, as well. Although this idea may not seem revolutionary on the surface, the resulting benefits could make the difference between business success and failure.
The manufacturing world continues to become more competitive. To stay in business, companies are aggressively examining their existing processes and systems in the hopes of uncovering opportunities to increase output without raising costs or negatively impacting performance. Leveraging cloud-based technology for direct material procurement is one answer some have found for lowering cost of goods sold (COGS) without affecting quality.
Raw materials and component parts account for most product costs in manufacturing industrial machinery. Direct materials such as steel, fasteners, electronics and sub-assemblies typically add up to a lot more than the labor. With material prices mostly set, driving down COGS requires companies to find better ways to eliminate waste and add value. Fortunately, technological advances help companies overhaul traditional processes such as parts procurement and supply chain collaboration.
The Typical Process
To better understand how technology is being used to improve operations, it is important to first review the existing machinery manufacturing process. At a high level, manufacturers begin by defining a customer’s needs and providing a price quote. From there, delivery dates and other details are worked out through back-and-forth communication until a purchase order is sent and a sales order created. Next, engineering verifies all specifications while purchasing orders the raw materials.
Finally, manufacturing fabricates or assembles all the parts, the product is delivered and service takes over with on-site installation or aftermarket service and maintenance. Each of these areas offers numerous opportunities to drive greater efficiencies through technology. However, purchasing raw materials, outsourced component parts and subassemblies, otherwise known as “direct material procurement,” is especially ripe for transformation.
Material procurement for manufacturing industrial machines and equipment is fraught with complexity. On the supply side, volatile markets and fragmented suppliers often make access to certain specialty parts difficult.
Additionally, working with global vendors in multiple currencies can create intricate pricing problems. From an industry perspective, the nature of industrial machinery products also presents unique procurement challenges. For example, it can be hard to obtain the large number of items needed in the necessary quantities due to regulatory and environmental requirements. The solution to overcoming these challenges is a system that allows companies to buy direct materials through the cloud, similarly to how indirect materials currently are purchased.
In today’s complex, connected economy, businesses are more reliant on their external partners than ever before. Sharing information and processes up and down the supply chain is critical for smart, insightful decision-making. In fact, data show that fully networked enterprises are not only more likely to be market leaders or to be gaining marketshare but also use management practices that lead to margins higher than those of companies using the Web in more limited ways.
Fortunately, cloud-based technology is making it possible for manufacturers to easily and effectively collaborate with digital communities of partners, peers, customers and prospects around the world. Cloud-based procurement is already being used for indirect material purchasing. Therefore, using the cloud to manage purchasing direct materials is a logical evolution with compelling benefits such as:
- Improved collaboration – The most obvious benefit is improved collaboration capabilities with suppliers.
- More efficient information management – Another benefit is the ability to streamline the management of contracts from a single location for greater productivity and compliance.
- Greater spending control – Using the cloud for direct material procurement also can provide buyers with the information needed to negotiate.
- Trend identification and analysis – Finally, companies can identify spending trends by analyzing company-wide buying practices using data stored in the cloud.