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:
Optimizing spend and
increasing direct material
availability
Advait Rahalkar
Assistant Vice President,
Supply Chain Practice, Genpact
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
Taking an End-to-end Approach
The relatively flat or negative growth estimates in developed
Inefficient process steps and broken linkages between
processes often lead to poor direct spend management:
economies and the slowing of growth in emerging economies
has created significant uncertainty around demand for goods
in the global economy. Consequently, producers are unable to
forecast the demand for products across markets with
reasonable accuracy. This uncertainty has had an impact on
demand forecasts for “direct” material.
At the same time, organizations wary of the demand fall-off
since 2008 are attempting to avoid surplus inventories of direct
material while trying to maintain sufficient stock to minimize
or avoid lost customer orders.
The result is a significantly greater focus on two important
performance measures for direct sourcing: (1) availability of
direct material and (2) optimizing the spend associated with it.
• Lack of a dynamic inventory planning capability can result in
10-15% surplus inventory
• Ineffective expediting techniques can degrade supplier
on-time delivery by 5% or more
• Lack of focus on tail-end spend can lead to non-realization
of up to 10% or more of direct spend savings
Each such “broken” process can lead to capital becoming
locked in surplus inventory, or may result in non-availability of
direct material to process customer orders.
The traditional approach has been to improve one segment of
the direct material management process to achieve
incremental gains in spend optimization and/or material
availability.

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

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

4. About Genpact:
About the Author
Genpact Limited (NYSE: G), a global leader in business process and technology
management services, leverages the power of smarter processes, smarter analytics and
smarter technology to help its clients drive intelligence across the enterprise. Genpact’s
Smart Enterprise Processes (SEPSM) framework, its unique science of process combined
with deep-domain expertise in multiple industry verticals, leads to superior business
outcomes. Genpact’s Smart Decision Services deliver valuable business insights to its
clients through targeted analytics, reengineering expertise, and advanced risk
management. Making technology more intelligent by embedding it with process and
data insights, Genpact also offers a wide range of technology services. Driven by a
passion for process innovation and operational excellence built on its Lean and Six
Sigma DNA and the legacy of serving GE for more than 15 years, the company’s
55,000+ professionals around the globe deliver services to its more than 600 clients
from a network of 58 delivery centers across 16 countries supporting more than
25 languages.
Advait Rahalkar
Assistant Vice President, Supply Chain Practice, Genpact
For more information, visit www.genpact.com, Follow Genpact on Twitter, Facebook
and LinkedIn
Copyright © Genpact 2012.
All Rights Reserved. www.genpact.com
Advait Rahalkar is Assistant Vice President in the Supply Chain Practice at Genpact,
a global leader in business process and technology management, where he is
responsible for building solutions associated with sourcing for direct materials and
services. Advait has over 10 years experience leading direct and indirect sourcing
operations and applying lean-six sigma frameworks to improve sourcing business
processes. He holds a masters’ degree in Business Administration and is a
Mechanical Engineer.