Make Procurement Strategic (Again) - Modern Distribution Management

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Make Procurement Strategic (Again)

Material resource planning has sufficed in distribution for decades, but it's time to invest in technology that will further improve procurement strategies.

Time was, wholesale distribution harnessed something approaching the best IT technology available for strategic advantage in procurement. That technology was material resource planning (MRP). These systems started rolling out in the 1950s and had largely matured by the 1980s.

MRP is still a mainstay four decades hence. For a long time, it sufficed. Customers placed orders predictably. Lead times were mercifully long. Demand was mostly consistent. And the underlying technologies couldn’t handle much more than MRP anyway.

No longer. Business has transformed, new business challenges have emerged, and technologies have evolved. Those technologies can help wholesale distributors meet the challenges of business transformation as well as those of new and emerging market realities with more sophisticated approaches to procurement. These that can cut costs, improve agility, and, ultimately, boost profits. The big hurdles now are recognizing procurement as the strategic function it is – rather than the operational function it has become – and a willingness to invest in technology to realize the gains that can yield.

Three forces

In a relentlessly sales-oriented culture, procurement has, in the corporate imagination, slid into commodification. It shouldn’t be that way, and, because of the driving forces just mentioned, it’s a good bet that it won’t be that way for long.

The first force is business transformation. Globalization, the commoditization of product-centric businesses, no/low-inventory competitors, new logistics services, shorter product lifecycles, high product proliferation and high product customization are changing the rules of business as I type.

The second are business challenges. Geopolitical instability, rapidly evolving business requirements, high supply chain complexity, long-lead-time parts, impatient customers, complex substitution scenarios, and the need to manage limited supply are making what was a fairly predictable balancing of supply and demand anything but.

The third is technology evolution. In-memory databases allow for on-demand MRP runs, scalable platforms let companies gain insight from granular data with ease, ubiquitous connectivity fosters unprecedented collaboration, and the mainstreaming of data science opens the door to a growing selection of industry-specific advanced analytics and optimization tools.

Consider the example of manufacturing customers. Manufacturers are dealing with seesawing production due in large part to dependency on global supply chains and volatile pricing for all sorts of inputs. Add to this the complexity of production machinery itself, with a diversity of components prone to breakdowns that need rapid repairs with a wider array of replacement parts. Buyers at wholesale distributors serving manufacturing customers have had to become global procurement specialists, handling trade, commodity risk, currency hedging, import regulations and more. It’s a monumental task.

Supply chain health

This sort of complexity begs for supporting technology to help buyers make better decisions while feeding into dashboards that provide management clearer views of the overall state of the supply chain with respect to lead times, cash on hand, days inventory on hand and other KPIs. These systems go beyond the sales and operations planning (S&OP) and inventory planning and optimization solutions that, say, a lumber distributor might today use to predict regional demand spikes during the Atlantic hurricane season. Call them supply chain health indices.

Transportation issues, pricing volatility and supply chain tangles have wreaked havoc on lead times in ways that distributors have had difficulty managing. Tools that provide quick visibility into lead time changes lets buyers make rapid adjustments, enabling more stable procurement flows and lowering supply chain risk.

With respect to days inventory on hand, the pandemic may be over, but wholesale distributors are still sitting on enormous surpluses of inventory in certain areas. A sharper understanding of inventory status, paired with fresh sales projections, can help you make smarter decisions as far as running promotions that move product out of warehouses.

Perhaps more interesting – and certainly more strategic – is how technology can help buyers take advantage of commodity-price volatility or promotions to make better use of buying opportunities. If a buyer serving wiring manufacturers sees a dip in copper price, an investment buy makes sense – but you need to be able to pay for it, transport it and store it. Similarly, a technology supplier may offer preferred access to a hot new product on the condition that the distributor also buy some number of units of an older item that will be a tougher sell. Today’s systems can provide visibility into the variables at play and help buyers make the right decisions for their companies.

MRP has had its decades in the sun. Now, technology can enable much more. Modern systems can improve supply chain visibility, reduce the time and effort required in materials planning, improve employee efficiency, make the materials management process proactive rather than reactive, provide the insight needed to reduce inventory levels, negotiate more effectively with vendors, and cut purchasing costs. It’s time to reverse procurement’s long slide into the operational domain. Let’s make it strategic again. Wholesale distributors won’t regret it.

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