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Does Direct Procurement Need Its Own Tech Stack?

Direct procurement involves acquiring raw materials and components essential for your production process. Indirect procurement, on the other hand, generally deals with non-complex goods and services that support your operations.

This fundamental difference raises a crucial question: does direct procurement need its own tech stack?

Standardised procurement software suites often cater to source-to-pay (S2P) and source-to-contract (S2C) functions with a strong bias towards use cases in indirect procurement. These tend to place emphasis on driving cost savings, improving data quality and driving transactional efficiency. They also enable business stakeholders to self-serve for simple, low value and non-complex purchases.

However, direct procurement, by its very nature, is more complex. It requires precise inventory management, greater degrees of supplier collaboration, and increased levels of compliance and quality control.

There is an increasing consensus that these unique demands require specialised technology to serve these needs. Procurement tools for direct spend need to be tailored to work with your supply chain, quality and production teams.

Ensuring that your production line runs smoothly, without disruption and meeting customer demands, is what keeps manufacturing companies profitable. These requirements can – and often do – override opportunities to deliver savings by switching suppliers for raw materials and component parts.

 

How does tech for direct and indirect procurement differ?

Direct procurement tech and indirect procurement tech serve distinct purposes within procurement functions.

Direct procurement technology focuses on the acquisition of raw materials that are part of the product manufacturing process, requiring precise tools for inventory management and supplier collaboration. Conversely, indirect procurement tech handles goods and services necessary for daily operations, but not directly tied to production.

Software Features

Direct procurement suppliers and stakeholders will need to consider advanced inventory management systems, supplier relationship management (SRM) tools, and quality control mechanisms as part of their operations.

These tools ensure that the direct materials meet stringent quality standards and are delivered on schedule, which impacts the overall production timeline. Indirect procurement software, however, centres around purchase order management, expense tracking, and vendor management for non-production items.

The features for both of these different core requirements are, understandably, quite different.

Integration with Supply Chain

Direct procurement technology often requires seamless integration with the supply chain management (SCM) systems to optimise production schedules and meet market demands. This integration allows for real-time tracking of direct spend and the efficient management of direct procurement categories.

Indirect procurement systems do not necessitate such intricate integration since they manage operational and administrative expenditures. Interoperability between other departments’ tech stacks is therefore less crucuial. User experience (UX), on the other hand, is more crucial for indirect procurement tools which are accessed by many different requisitioners.

Risk Management

Managing risks in direct procurement involves ensuring consistency in the supply of critical components essential to production. Technologies that support direct procurement provide predictive analytics and risk mitigation tools to safeguard against supply disruptions.

Indirect procurement tech, in contrast, focuses on maintaining budget control and minimising costs associated with operational supplies. Only tools for sourcing and managing contracts for complex indirect services will need more risk management focus.

 

Where can tech make a difference on direct spend?

Direct procurement technology optimises crucial areas in managing direct spend. This section explores how tech can enhance efficiency in each area.

1. Inventory Management

Advanced inventory management tools track real-time stock levels and predict future needs using analytics. By integrating with other systems, these tools ensure optimal inventory levels and reduce stockouts and overstock situations. Examples of inventory management systems include Just-in-Time (JIT) and Material Requirements Planning (MRP).

2. Supplier Relationship Management (SRM)

Supplier collaboration platforms streamline communications and transactions between your business and suppliers. These platforms provide a unified interface for order management, performance tracking, and dispute resolution. Effective SRM ensures a reliable supply chain and fosters long-term partnerships with key suppliers.

3. Quality Control Mechanisms

Quality management systems (QMS) enforce stringent quality checks and compliance standards at various stages of the procurement process. Tech solutions in this domain automate inspection workflows, record defects, and ensure that only high-quality materials enter the production cycle. Examples of QMS include Six Sigma and ISO 9001 certification.

4. Risk Management Tools

Predictive analytics tools assess potential supply chain disruptions and mitigate risks by identifying vulnerabilities and suggesting alternative actions. These tools provide real-time risk assessments and scenario planning. For instance, if a key supplier faces a potential delay, the system suggests alternative suppliers or materials to prevent production halts.

5. Integration with Supply Chain Systems

Seamless integration with supply chain management systems ensures synchronised operations from procurement to production. Technologies like Enterprise Resource Planning (ERP) and Advanced Planning Systems (APS) enable data sharing across departments, optimising production schedules and inventory turnover.

Direct procurement categories benefit significantly from these technological advancements, ensuring efficient management of direct materials and maintaining smooth production processes. Direct spend software enhances critical areas, crucial for companies to meet market demands and maintain high-quality standards in production.

 

Strategic Sourcing and Cost Management

When direct spend often accounts for up to half of a manufacturing company’s revenue, getting the sourcing and cost management piece right is crucial. There are a growing number of procurement software solutions out there catering specifically to direct materials sourcing and cost optimisation.

Let’s take a look at a few different areas where there’s a flourishing procuretech ecosystem.

 

Supplier Discovery Tools

Supplier discovery tools streamline how you identify, evaluate, and onboard suppliers for direct materials. Effective supplier discovery tools allow for swift identification of suppliers that meet your direct procurement criteria, such as quality and capacity. Advanced tools often include filters for various direct procurement categories, helping you narrow down the best suppliers efficiently. Automation within these tools ensures you consistently update supplier databases, maintaining current data crucial to your direct procurement process.

Examples of players in this space include:

 

Cost Estimation Software

Cost estimation software is crucial for accurate budgeting and financial planning in direct procurement. These tools provide granular breakdowns of costs associated with procuring direct materials, from raw materials to transportation. By using cost estimation software, you’re able to generate precise forecasts that aid in strategic sourcing decisions. Comprehensive cost analysis ensures you’re able to assess the impact of each cost component, facilitating targeted cost-saving initiatives and enhancing overall cost management.

Examples of players in this space include:

 

Subcontract Manufacturing Operations

Subcontract manufacturing operations necessitate integrated solutions to manage relationships with third-party manufacturers. Direct procurement technology aids in coordinating the timely sourcing and delivery of subcon operations.

You can monitor quality control mechanisms and compliance with production standards. Efficient subcontract management systems not only streamline your operations but ensure that subcontractors meet your specific standards, maintaining the integrity of your products.

Examples of players in this space include:

  • Partfox (for CNC machining)
  • Facturee (CNC machining, sheet metal production, 3D printing and surface technology)
  • Zetwerk (marketplace for Indian subcon manufacturers)

 

Supply Chain & Operations Planning

Direct procurement technology can help to optimise supply chain and operations planning. Efficient planning ensures timely delivery of direct materials essential for production processes.

 

PO Status Tracking Tools

Purchase order (PO) status tracking tools enhance visibility into the procurement process. Monitoring PO statuses ensures that orders for direct materials and spare parts don’t lead to production stoppages.

Visibility of this needs to be available to everyone, in real time. Not just stuck in a buyer’s email inbox, awaiting action. What if they forget to inform production or logistics? Or what if an Excel tracking spreadsheet for critical purchase orders is corrupted? These alternatives are way too prone to human error.

These tools provide real-time updates, alerting you to potential delays. Efficient PO tracking minimises production disruptions, ensuring seamless operations.

Kavida.ai’s new product Agent PO looks really promising here, along with established products such as Leverage and SourceDay, or for a more SME-targeted product, have a look at Anvyl.

 

Production Planning and Inventory Optimisation Software

Production planning tools are crucial in aligning procurement with manufacturing needs. These tools allocate resources efficiently, considering direct procurement categories. Maintaining optimal production schedules reduces lead times, ensuring timely completion of manufacturing tasks.

Inventory optimisation software balances inventory levels, crucial for managing direct spend. Excess inventory ties up capital, while insufficient stock delays production. This software uses data analytics to predict demand accurately, maintaining optimal stock levels. Reduced stockouts and overstock situations result in cost savings, enhancing operational efficiency. Effective inventory optimisation supports the direct procurement process by ensuring materials are available when needed.

Direct procurement technology, through these tools and software, streamlines the entire supply chain and operations planning process, ensuring efficient management and timely production.

Examples of players in this space include:

 

Quality, Risk and Sustainability

Whereas indirect spend tends to focus more on transactional efficiency, in direct spend it’s all about ensuring that critical non-price factors are monitored. Supplier quality has always been a mainstay, especially in industries such as automotive and machine building.

Now, we’re increasingly seeing a boom in risk management and sustainability tools. This is a clear reflection of the growing geopolitical instability worldwide, as well as a push for more sustainable sourcing practices.

 

Third Party Risk Management (TPRM) Tools

TPRM tools are essential for direct procurement. These tools assess and monitor the risk profiles of suppliers in different geographies and industry sectors. TPRM systems evaluate financial stability, compliance records, and operational risks associated with your direct materials.

Using TPRM ensures that you mitigate risks early, preventing supply chain disruptions and potential compliance issues.

We have over 40 risk management tools listed in our software finder app, so the ones below are just a flavour of what’s out there.

Examples of players in this space include:

 

Supplier Quality Management (SQM) Software

SQM software is critical in the direct procurement process. This software tracks and ensures the quality of materials supplied. SQM systems can monitor performance metrics, conduct supplier audits, identify and inform suppliers of rejected materials, and manage their corrective actions.

Much is said about the invisible cost of poor quality, and how to measure this. SQM software is one of the first steps to ensuring better production line efficiency and product standards.

Examples of players in this space include:

 

Scope 3 Emissions Accounting

Scope 3 emissions accounting focuses on carbon emissions coming from your supply chain. For direct procurement, this requires deep involvement from Procurement. Calculating and tracking the emissions from your suppliers will be essential in the coming years, as legislation tightens and reporting requirements become compulsory.

Incorporating Scope 3 emissions accounting in your procurement technology also helps to support corporate sustainability goals. 

Examples of players in this space include:

 

Material Traceability

Material traceability is vital in direct procurement categories. This process tracks the journey of raw materials from suppliers to your production lines. Material traceability systems ensure compliance with regulatory standards and facilitate recalls if necessary.

It also ensures that raw materials from geopolitical hotspots are not embroiled in supply chain scandals.

Implementing these technologies in your direct procurement stack boosts quality, minimizes risks, and upholds sustainability standards.

Examples of players in this space include:

 

Niche Category Specific Tools

Niche tools are those for specific types of spend in the direct materials and purchased components space. Below are just a few examples of areas where tech is changing the landscape here.

 

Software for Drawing-Based Parts

By employing software tailored for drawing-based parts, you improve accuracy in procurement and ensure that specifications match production requirements. Not only this, but it can also help to facilitate a marketplace function between the buyer and potential suppliers. Especially useful if you’re interested in sourcing these parts outside of your home country or region.

Internet search engines are of limited use here. Directory websites of parts suppliers don’t help much either. Imagine if you could connect to suppliers who manufacture these specialist components.

Well, you can.

Check out what companies like Jiga and PartSpace are up to, for a picture on what’s available out there.

 

Software for Spare Parts Management

Managing spare parts is a nightmare.

Mistakes are everywhere with manufacturer and part numbers in your master data. Add to this obsolescence, or up-issued items which don’t get updated until someone actually needs to buy the part and realises it’s no longer available.

I know this because I used to manage the MRO category across 37 production sites for a large FMCG company. Each plant had different taxonomies and there were several different legacy ERPs. Everyone thought their system was the best system. Change was resisted at every opportunity.

Being able to leverage AI to clean spare parts lists, check items against bills of material (BOM) for new products, or to cleanse material master data from disparate descriptions and systems is an amazing opportunity to show value. What’s now possible compated to just a few years ago is mind-blowing.

Two great tools out there to give you clarity on your spare parts are Creactives and Sparetech.

 

Do you need specialised software for direct procurement?

Investing in specialised software for direct procurement is crucial for maintaining production efficiency and cost-effectiveness. By leveraging tools like supplier scouting, SQM software, and spare parts management systems, you can ensure precision in specifications and minimise downtime.

These technologies not only enhance collaboration and accuracy but also support strategic sourcing decisions and effective spend management. If you try to manage this with legacy procurement suites, I’m pretty certain you will realise that they are extremely limited.

In summary, I would say that YES, you need a separate tech stack for direct procurement.

But I would caveat this with saying that it should only be a top priority if:

  • Spend on raw materials and purchased parts is high;
  • Your supply chain is complex, and prone to higher than average risks;
  • You are in industry where production stoppages or disruptions have a big impact on loss of sales and profit.