Tuesday, 20 September 2016

[Guest Blog] Bruno Alvarez - Some thoughts on Direct Materials Sourcing

Bruno Alvarez is regarded in Latin America and the Americas as one of the Leading Contracting and Procurement Experts in the region. Bruno’s background comes from the Energy and Gas industry and working at global “Fortune 500” companies such as Royal Dutch Shell, Duke Energy, ICI and Zeneca.


Indirect materials sourcing is simple in comparison to direct materials sourcing, or at the very least it's simpler. 

When considering direct materials sourcing, you need to remember just how different it is to the everyday sourcing of non-essential items. Direct materials sourcing can have had a major impact on the production process especially in terms of strategy.

Why?

This is because you will typically find that direct material sourcing falls into two groups, those items that are Bottlenecks and those that are Critical. 

- Critical also known as Strategic includes items that have a high-profit impact in addition to a high supply risk. These types of products are typically purchased from a single supplier and if the supplier ceases to deliver, then it may halt the entire supply chain.

- Bottlenecks include items that have a low-profit impact and a high supply risk. Typically these types of products are essential for the production process, but can be difficult to obtain. 

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Simply put, direct materials tend to have a very high impact to a business. Often I find that they are the core of the business and fall into either being;

The main ingredient - The core material of a product
The differentiator - The Major Selling Point (MSP) 
The market edge - The Unique Selling Point (USP)

Therefore when considering direct materials sourcing you need to consider how it may affect your production as a whole especially in the case of the long-term strategy and risks involved.

But what can you do?

In these situations you can aim to work closely with the vendors to improve relationships and develop partnerships, create a buffer stock or lower the complexity of the product. By doing this you can work to make the material more competitive to source and potentially broaden your supplier market. This may soften any issues that your sole vendor presents and bringing in a healthy competition to your incumbent supplier.

There are many other strategies that can also be used. However, the start for all of them is to identify what is a ‘Direct Material’ and understand that they should be treated or strategized as such. Awareness of your needs is the first step.

Bruno Alvarez
Procurement Professional - SS&PK
LinkedIn: Bruno Alvarez


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