As long as Microsoft Excel and OLAP cubes have been around there have been many different approaches to spend analysis and visibility. And it seems like every time you pick up a magazine, go to a conference or read a book a new approach comes along that promises to make traditional analysis more accurate, efficient and repeatable. But all these approaches have the same limitation when it comes to direct materials spend: an over-reliance on transactional data.
It makes sense to analyze past transactional spend data to make future procurement decisions. And there are several software solutions that can help analyze spend by suppliers, product group and a myriad of other variables in support of the ultimate goal of providing data that can actually be used to redefine an organization's purchasing strategy. Many organizations succeed in developing the right spend strategy for their indirect and services purchases using this approach.
But for direct materials, transaction data only provides half of the story. What organizations really need to analyze their direct materials spend is a new approach: product cost management analytics (PCMA). The data that feed PCMA rely on engineering attributes and specifications derived from engineering data (often in computer-aided design (CAD) format). Why does this matter? For most research and development departments within manufacturing organizations, the cost to manufacture a part is an afterthought — design engineers usually focus on product performance and functionality over cost. Because of this, a substantial portion of a product's cost becomes locked in during the design phase. But through PCMA, procurement departments at manufacturing organizations now have the ability to "reverse engineer" a product design from a cost perspective, extracting information from design drawings to determine which features impact the price of the product. This methodology, also referred to as feature-based analysis, helps to determine what a product "should-cost."
In a complex manufacturing program, a company may look at a list of thousands of parts sourced from different world markets. An effective PCMA program can single out the uncompetitive parts and enable the procurement organization to look at the entire spend rather than go through an enormously long list piece by piece. For example, PCMA can identify the 5 to 10 percent of parts that are out of alignment on price, and determine the factors that are driving the misalignment, so that a procurement organization can focus on the parts on which they actually need concessions and the reasons they need them. Then they can work with their current suppliers — or competitively bid out the parts — to enable targeted cost reduction, which is ultimately more productive than re-sourcing the entire spend.
The power of this approach can enable organizations to finally gain true visibility into their direct material spend in a rapid fashion. And with this newfound knowledge and visibility into product cost, procurement organizations can identify and prioritize the largest savings opportunities across their direct material categories. Thanks to PMCA, organizations no longer have an excuse for relying on transactional data exclusively when it comes to building visibility over their most strategic spend categories.
— By Brett Holland
About the Author: Brett Holland is chief operating officer at Akoya Inc., a Peoria, Ill.-based provider of solutions for managing direct materials spend. More information at www.akoyainc.com.