In this thought provoking paper we talk about how in the last few years since the Great Recession, organizations have attempted to Optimize supply chain operations and position themselves for growth over the next 3-5 years. This includes tapping “low-hanging fruit” in the optimization journey, largely in the indirect sourcing transactional services such as logistics. Procuring “direct” material, however, seems to be a relatively untapped opportunity for organizations to continue optimizing their supply chains. Inevitably, companies can benefit significantly more by opting for an end-to-end framework rather than through incremental improvements to direct spend management processes.

1. MANUFACTURING
“Direct” Spend Management Advait Rahalkar -
Assistant Vice President,
Optimizing spend and Supply Chain Practice, Genpact
increasing direct material
availability
In the last few years since the Great Recession, organizations have attempted to
optimize supply chain operations and position themselves for growth over the next 3-5
years. This includes tapping “low-hanging fruit” in the optimization journey, largely in
the indirect sourcing transactional services such as logistics. Procuring “direct”
material, however, seems to be a relatively untapped opportunity for organizations to
continue optimizing their supply chains. Inevitably, companies can benefit
significantly more by opting for an end-to-end framework rather than through
incremental improvements to direct spend management processes.
Focusing On Availability and Spend Optimization • Lack of a dynamic inventory planning capability can result in
10-15% surplus inventory
The relatively flat or negative growth estimates in developed
economies and the slowing of growth in emerging economies • Ineffective expediting techniques can degrade supplier
has created significant uncertainty around demand for goods in on-time delivery by 5% or more
the global economy. Consequently, producers are unable to
• Lack of focus on tail-end spend can lead to non-realization
forecast the demand for products across markets with
of up to 10% or more of direct spend savings
reasonable accuracy. This uncertainty has had an impact on
demand forecasts for “direct’” material. Each such “broken” process can lead to capital becoming
locked in surplus inventory, or may result in non-availability of
At the same time, organizations wary of the demand fall-off
direct material to process customer orders.
since 2008 are attempting to avoid surplus inventories of direct
material while trying to maintain sufficient stock to minimize or The traditional approach has been to improve one segment of
avoid lost customer orders. the direct material management process to achieve incremental
gains in spend optimization and/or material availability.
The result is a significantly greater focus on two important
performance measures for direct sourcing: (1) availability of However, in order to become best-in-class in managing their
direct material and (2) optimizing the spend associated with it. direct spend and gain competitive advantage in the
marketplace, organizations need an end-to-end improvement
Taking an End-to-end Approach
framework. A typical such framework should address the
Inefficient process steps and broken linkages between processes following processes along the transformation journey to
often lead to poor direct spend management: industry-leading direct spend management:

2. • Forecasting techniques that
support improved Should-Cost Impact
• Inventory planning
business outcomes, For a client in the discrete
• Strategic sourcing of direct material as described below. manufacturing space, Should-Cost
analysts reviewed purchased
• Supplier performance management Should-cost sub-assemblies, developed the
Analysis should-cost analysis, and compared
• Procurement support it with existing prices. By doing so,
Should-Cost analysis the company was able to:
A successful approach to transformation of direct procurement provides the
addresses six key drivers: • Identify cost reduction
sourcing function
opportunities of 10-15%
1. Shared Services: The providers should have the ability to set with the details of
component costs, • Provide techno-commercial
up and manage highly flexible shared services operations,
inputs during supplier
either near-shore, on-shore, off-shore or a combination of labor inputs and the
negotiations
these. cost of a supplier’s
value add.
2. Performance Measurement: Shared services provide direct
procurement functions the ability to control performance The sourcing function can potentially derive the following
measures. Application of Lean Six Sigma frameworks allows benefits if provided with a detailed Should-Cost analysis:
for continuous process improvement. • Insights into the cost build-up for a component or a
sub-assembly
Direct Procurement Transformation - Structured Approach
• Assistance with make vs. buy decisions
Operational Flexibility
• Information useful to negotiation discussions with suppliers,
Maximize Value Generate Value especially when products and services are bundled
Shared
Services
• Reductionin the cycle
A Tail-End Spend analysis
Value Lean time for completing the
Engineering Optimization for an aerospace
procurement process by
Levers for component manufacturer
transformation eliminating the cost
identified cost savings up
LCC* discovery phase for the
Sourcing Spend to 20-22% for fasteners,
Support Analysis buyers
gaskets, rings and other
Should Cost Should-Cost analysts, C-class parts
Enhance Profitability Analysis Increase visibility
however, need to be
supported by an
Baseline Cost
understanding of the buying environment.
* Low Cost Country
© 2012 Copyright Genpact. All Rights Reserved.
Detailed Should-Cost analysis for components and
sub-assemblies. can identify up to 20% in cost reductions.
3. Spend Analysis: Direct material spend analysis provides Tail-end Spend Analysis
significantly higher visibility into key suppliers, supply sources,
maverick spend and contractual compliance. Tail-End Spend is a component of the overall direct spend that is
not addressed by sourcing leaders or commodity managers.
4. Cost analysis: Identification of various cost components such Reasons for tail-end spend remaining unaddressed could vary
as materials, labor and supplier value-add provides significant from a paucity of resources or a lack of data analysis tools to
assistance in supplier negotiation and make-versus-buy negligible impact on annual deflation targets.
decisions.
Tail-End Spend typifies the 80:20 rule in that approximately
5. Sourcing Support: Sourcing support, especially from low-cost 80% of the spend is consumed by 20% of parts and
countries, helps drive cost reduction and higher profitability. sub-assemblies. The remaining 80% of parts and services, which
can potentially run to thousands of unique parts and
6. Engineering Services: The ability to leverage “value-engineer”
sub-assemblies, consumes about 20% of the direct spend. In
components can result in actionable recommendations for
large buying organizations, this bottom 20% is called tail-end
optimal material changes or manufacturing process changes.
spend and might be left unaddressed. A significant number of
Each of these six levers for direct spend management should be C-class parts is likely to be part of such tail-end spend.
supported by enabling technology tools and well-defined

3. A structured approach is needed to address tail-end spend. Companies can leverage a range of best-practices for achieving
Classification, excellence in demand forecasting:
Forecasting Excellence cleansing of data,
• Deploy a single system of truth: Master data for forecasting
spend analysis,
For a healthcare equipment needs to be clean and up-to-date.
recommendations
manufacturer, a new approach
significantly improved the demand and execution of • Make forecasting a continuous process rather than
forecasting process. recommendations to event-based. Forecasting analysts should be able to update
realize deflation forecasts based on new information available regarding
The direct material management
process did not have a robust benefits for clients customer buying patterns and key market trends.
forecasting process for its inventory make for a
organizations across the globe. The comprehensive Supplier Performance Management
client needed to improve availability approach that drives
A supplier performance management framework to effectively
of material and reduce surplus better results overall.
inventory. monitor performance, report, and address issues proactively
This includes entails:
Forecasting analysts developed a
forecasting approach for the (re)-classifying parts
• KPIs for supplier deliveries and supplier issue resolution
inventory organizations and into commodities
redefined key master-data values based on acceptable • Strategies to communicate demand changes or expedites
like safety stock levels and lead conventions,
times. • Prioritization of supplier communications
followed by removal
These improvements resulted in of inaccurate data to • Weekly/monthly reports and supplier performance scorecards
doubling the forecast accuracy, ensure that spend
instituting a standard business The supplier performance management framework is supported
analysis, a
process for forecasting, and by a workflow management tool that enables work allocation
subsequent step, is
reduction of ~ $1M of surplus and reconciliation and analysis of supplier transactions. The tool
inventory. conducted on
is capable of processing inputs from all standard ERP systems
“clean” spend data.
and allows for rapid customization to accommodate specific
Spend analysis
client requirements.
results in identification of opportunities for demand
consolidation across manufacturing sites, reduced maverick The supplier performance management framework has been
spend, improved contract compliance, and in some cases, effectively deployed to manage direct procurement support
standardization of part specifications to consolidate part processes for high volume C-class parts.
demand. The final step is to engage with potential suppliers,
gather quotes, and foster realization of the value identified in Better Outcomes From Better Processes
the spend analysis phase.
Organizations are increasingly keen to focus direct sourcing
A Tail-End Spend analysis conducted for an aerospace efforts on fewer and more impactful spend categories. Service
component manufacturer identified C-class parts (fasteners, providers can support such a strategy by deploying end-to-end
rings, gaskets, etc) savings opportunities in the range of direct spend frameworks for smaller categories that would
20-22%. otherwise remain unaddressed by sourcing functions. Spend
categories within C-class parts are potential candidates for such
Driving Excellence In Demand Forecasting service provider engagements. A well-thought approach that
addresses forecasting, inventory planning, strategic sourcing and
Quite often, organizations continue to use demand forecasting
procurement for C-class part categories can allow service
techniques that do not provide the flexibility needed to operate
providers to drive deflation and provide significant value to
in the current competitive environment. It is not surprising to
otherwise unaddressed “direct” spend.
find demand forecasting conducted as spreadsheet-based,
manual activity. The problem with such processes is the difficulty
of adjusting forecasts or the lack of any ability to broaden the
input data to create new forecasts. Moreover, the inability to
consolidate forecasts for direct material across divisions makes
demand forecasting even more complex.

4. About Genpact About the Author
Genpact, a global leader in business process management services, uses process to Advait Rahalkar
help its clients power intelligence across their enterprise to run smarter operations, Assistant Vice President, Supply Chain Practice, Genpact
make smarter decisions and use smarter technology. Genpact’s Smart Enterprise
Processes (SEPSM) framework, its unique process thought leadership combined with Advait Rahalkar is Assistant Vice President in the Supply Chain Practice at Genpact,
deep domain expertise in multiple industry verticals, results in better business a global leader in business process and technology management, where he is
outcomes. Genpact’s Smart Decision Services deliver business insights to its clients responsible for building solutions associated with sourcing for direct materials and
through targeted analytics, reengineering expertise, and advanced risk services. Advait has over 10 years experience leading direct and indirect sourcing
management. Making technology more intelligent by embedding it with process operations and applying lean-six sigma frameworks to improve sourcing business
and data insights, Genpact also offers a wide range of technology services. Driven processes. He holds a masters’ degree in Business Administration and is a
by a passion for process innovation and operational excellence built on its Lean and Mechanical Engineer.
Six Sigma DNA and the legacy of serving GE for more than 14 years, the company’s
professionals around the globe deliver services every day to its more than 600
clients from a network of 58 delivery centers across 17 countries supporting more
than 25 languages. For more information,
visit www.genpact.com, Follow Genpact on Twitter, Facebook and LinkedIn.
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