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Direct Materials: Making the Right Moves to Stay Competitive

July 6, 2022
A new approach to direct materials management can help companies capture the value they’re overlooking.

What it takes to “manage direct materials” has changed significantly over the past two years. The conversation has shifted from optimizing sourcing costs—which is, of course, still important—to securing supply and building greater resiliency and sustainability.

Thus, effectively managing the materials and components that go into the products a company creates requires something far different and more complex: an end-to-end approach that cuts across every supply chain function, a company’s business units, and the geographies the company operates in and serves.

What’s the Answer?

A new integrated approach to direct materials management, with data and analytics at its core, can help companies bring together the key internal players needed to begin capturing the full range of value from direct materials that currently remains trapped in their supply chain—across design, planning, engineering and sourcing, to manufacturing, fulfillment and servicing finished goods.

What is that Value?

“Value” is more than cost reductions or margin increases. It can also be measured in terms of resilience and responsibility. For example, optimized product design can bolster resilience if components can be easily interchanged for alternatives if the original suddenly become scarce. And designs are more responsible and sustainable if they better meet demand, reducing waste by keeping non-value adding products off the shelves and out of inventory. Here are just a few examples of the hidden value in the direct materials supply chain:

Design: 50%+ of a product’s cost can be determined in the design phase. Reducing product complexity and optimizing the product portfolio can generate a 30% increase in value.

Production: In many manufacturing industries, 60%+ of sales value is attributed to direct materials. Savings efforts go directly to the bottom line, increasing profitability at a 1:1 ratio.

Sustainability/responsibility: Consumers are demanding companies become more responsible with decommissioning products they produce. Reducing carbon emissions and increasing circularity could create 20% more value.

How Can Companies Capture the Value They’re Overlooking?

Leading enterprises are using integrated direct materials management (IDMM), a collaborative, cross-functional and data-driven approach that ensures resilient, cost-effective and responsible direct materials flows.

IDMM is built on three pillars: 1) strategic cost management; 2) new ways of working; 3) responsible and resilient sourcing. Its foundation, though, is the use of data and analytics to provide a consistent approach, a prescriptive and predictive view, and deeper insights into direct materials and supplier management across the enterprise.

How Do the Three Pillars of IDDM Deliver Value?

Let’s take a closer look at each pillar—what it means and the moves you can make.

1. Strategic cost management: Maximizing the return on spend

This is all about the basics: getting the most out of your direct materials spend—typically, by generating maximum savings on what you buy. A company has multiple levers at its disposal in how it manages sourcing and supply chain performance from planning through service to maximize savings and boost profitability. The most impactful include:

• Global strategic sourcing (reshoring vs nearshoring vs offshoring)

• Should-cost modeling

• Commodity risk price management

• Product complexity management

• Value engineering

• Design-to-margin.

2. New ways of working: Creating an operating model for interconnected ecosystems

Procurement needs to change how it operates, infusing the right combination of digital tools and enablers to build the digital capabilities needed to increase operating model effectiveness and efficiency. These include a new digital core to simplify and standardize operations; technologies such as robotic process automation, artificial intelligence (AI), and blockchain to fuel innovation; and a cloud platform and connected applications to manage complexity and scale.

To drive your supply chain to become more digital, look at:

• Global operating model design

• Digital procurement

• Automation

• Variabilization of cost structure

• Workforce of the future.

3. Responsible and resilient sourcing: Minimizing risk and maximizing visibility

Companies need to minimize supply and supplier risk to ensure they can effectively meet demand while reducing negative impacts on society and the planet. While structural visibility is a requirement, companies must work toward dynamic visibility in order to strengthen supply chains and increase resiliency to disruptions. In fact, only about 40% of respondents in our recent report, “The Benefits of Supply Chain Visibility, said they use data prescriptively.

IDMM’s focus on responsible sourcing initiatives helps companies balance traditional and new procurement priorities to deliver not only on profitability and growth, but also on responsible business practices across the supplier base. Creating structural flexibility and resiliency across your supply chain to mitigate business risk, while being responsible, starts with:

• Supply chain resiliency testing

• N-tier visibility

• Inbound supply chain control tower

• Raw material tracking and traceability

• Responsible and sustainable sourcing (ESG considerations)

• Co-innovation with suppliers to drive responsible practices.

As the preceding suggests, transforming direct materials management requires an enterprise-wide commitment and isn’t easy. But it has the potential to deliver major value.

Why Do Companies Need to Make IDDM a Priority?

The large scale of disruption and change companies face today requires a new approach. Companies need to think more holistically about direct materials beyond sourcing costs. They need to consider how they can positively influence direct materials from product design to servicing, and more tightly connect functions, business units and geographies. That’s what’s required to stay competitive. And that’s what IDDM can deliver.

IDDM can enable companies to shift from their traditional siloed direct materials approach. It can provide a clear, end-to-end view and a consistent way to manage direct materials to optimize costs while ensuring supply and fostering greater sustainability and resiliency. And its modular approach can be implemented in full or partially, depending on a company’s specific pain points and objectives.

The bottom line is that IDDM can help companies respond to the growing need to manage direct materials differently from how they did before the pandemic hit—and make the moves that will not only help them capture the significant value they’re currently leaving on the table, but also prepare them for the next big disruption.

Adam Robbins is principal director, Supply Chain & Operations, North America Direct Materials lead with consulting firm Accenture.

Anshul Singhal is managing director, Supply Chain & Operations, Global and APAC Direct Materials lead with Accenture.

Antal Kamps is senior principal, Supply Chain & Operations, EMEA Direct Materials lead with Accenture.

Alexis Perez is senior manager, Supply Chain & Operations, Market Development & Initiatives with Accenture.

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