Outsourcing Indirect Material Management – what you need to know to make a good decision

As the entire manufacturing community (U.S.) eagerly climbs out of the hole left by Covid, intelligent C-level managers are looking over the battlefield to see how the pandemic has changed their world. What they see are opportunities to lower costs in many ways not readily seen in the past. Like employee reassignments, brick and mortar consolidations, and now more than ever..outsourcing where possible the non-value added costs necessary but are a expense to business operations.

With that in mind, I will be creating/posting a series of blogs that detail how companies can find significant cost savings, avoidance, and reductions, in the world of Indirect Material, and how simple and fast those savings can be realized.

To start, there are four very different types of inventory managers for hire. It is hugely important to know and understand the differences and capabilities of each one and be able to compare their attributes to what the client is challenged with and/or attempting to accomplish.

• An INDEPENDENT Indirect Materials Manager (IMM/Integrator)
• A Distributor who also manages MRO (Distributor Integrator)
• A Purchasing Group
• A Software program (purchased) that receives input and provides output

While I can make an argument for using anyone (or combination of) in given situations, it takes a keen eye to understand what the client is looking for or expecting from their Indirect Material performance verses what they will receive by implementing any one of the four mentioned.

There are many reasons to consider these options via outsourcing or in-house management, but the one, the primary reason should be…ACCOUNTABILITY. Without accountability there is no accuracy, and without accuracy there is problems in every aspect of manageability.

Data cleanliness, item set up, purchasing, disbursements, reporting, projections, analysis, vendor management, and so on are NEVER going to be accurate if there is no accountability. You absolutely must know who is using what, where its being used, how many and in what time frame, and is it the right product for the application. It is the primary aspect a client should expect when choosing one solution over the other, and certainly if the solution includes using in house assets. This is already an expense environment, don’t make it worse by further burdening the spend category with inaccurate information and systems.

Additionally, to obtain a complete and thorough accuracy across the entirety of the category spend, it is critically important to have these three aspects working simultaneous:

• An ERP system robust enough to run automatically and manage all communications and transactional activity.
• A Process and Procedures base stable enough to manage every items’ activity throughout the life of product need/supply in an automated environment.
• Trained personnel able to audit every aspect of the automated product journey, with the knowledge to understand adjustment need and reconfigure without system malfunction.

Knowing this, there will be a greater opportunity for a successful category management program, one that both the client and the manager will find satisfaction with.

Before we get to what is needed to know by both the client and the prospective manager in order to make an accurate and proper Scope of Work, and use that info to support a quote for a program lets make sure we are all on the same page regarding WHY the environment is right for consideration of a third party materials manager.

First let’s establish some points of agreement

• Is Indirect Material a depreciating asset or an expensed liability?
  • Kind of like owning or leasing (do you want to own a liability?)
• Is there greater value in employing assets to work exclusively on expensed liabilities, or to contract the job to an expert?
  • Do your committed assets provide as much annual saving as a contracted professional team?
    • Salary, legacy costs, benefits, vacations, legalities, physical location, job costs, VERSES hiring a contract team to handle.
    • Thousands of invoices (cost/invoice) VERSES one per month
    • Using current employee assets on non-expense related performance

If we agree that Indirect Material is an expensed liability (something you really don’t want to own any more than you absolutely have to).

If we agree that employing personnel (assets) to work and manage liabilities is an added loss to the Indirect spend category.

If we agree that every cost in the Indirect Material category is potentially an avoidable expense.

If you are considering how to answer these questions so as to support your current strategy, you’ve already acknowledged to yourself you should consider discussing the idea with a qualified IMM, and we’re just getting into the concepts, reasons and purposes for considering an outsourced solution.

Please read on, the nuts and bolts are next.

Lets start by identifying what each of the four options are and what their SWAT analysis looks like.

Independent Indirect Materials Manager
This is a pure outsource service provider. They are not a distributor of goods and are not a manufacturer of anything. What their core competency provides is a focused, performance based, complete program for taking the responsibility of the category spend and returning monthly a summary bill (one invoice) along with a detailed summary of what was purchased for the client, and what vendors were paid that month. They are responsible for the management and flow of the product from vendor to dock, from crib or tool stores to end user. They have the capability to use their own expert ERP systems, bring process and procedures that are proven successful, and supply personnel trained in every aspect of the indirect world. Typically, they cleanse data, set up stores (where necessary), manage vendor base, item set up accuracy, warehouse and disbursement scheme and strategy, manage budgets, timely reporting. They set the ERP system to be utilized in an automated fashion and understand what and where to audit to identify system issues. This reduces the labor load and the expense of managing the category.

They provide a contractually negotiated cost savings target, annual and budgetary savings, cost and spend reductions.

Strengths: Single point of contact for all aspects of the category spend, Experts in managing Indirect, No product sales responsibilities, no vendor kickbacks.

Weakness: perceived value due to low understanding of how their application applies, fear of letting someone take over the entire category spend.

Opportunities: eliminate waste costs and spend. Reduce liability in flat line expense category. Return money to bottom line profit.

Threats: organizations that do not understand and consider Indirect as a necessary evil and have lost sight of the money bleeding out the back door.

 

Distributor Integrator
A distributor of products who also provides the services of managing select inventory.

This group supports the sale, and supply chain of inventory that likely has initiated at the warehouse of the selected distributor. Typically, they can do the purchasing, replenishment, cost savings, and usage reporting.

Strengths: usually carries inventory at a central location. Low periphery costs (ERP/personnel). Product knowledge personnel on staff.

Weakness: limited purchasing relationships with product supply other than their own lines. Limited knowledge of proper management tools and techniques.

Opportunities: product selling to organizations turns into management of provided products

Threats: must hit sales goals for represented vendors, potential overstock of products. Substitution of products to their own lines to increase profits. Selling products they do not represent has potential for added costs or additional mark up. Often compensated by vendor base for sales levels.

 

Purchasing Group
Performs the functions of acquisition/purchasing. Usually intends on negotiating lower cost strategies for cost savings or finds least expensive product to substitute. Provides annual cost savings goals/targets. Reduce vendor base by consolidating spend. Supplies own ERP system specifically designed to the needs of purchasing. Relies on buy signal from in plant ERP to purchase.

Strengths: applies purchasing techniques to aggregate spend, reduce vendor base. Supports savings programs.

Weakness: No in plant personnel. No in plant communications. No process and procedure to stratify both in plant and purchasing need and functionality.

Opportunities: supports purchasing functions for decentralized strategies.

Threats: no way of connecting the end user to the product being purchased or vice versa. Limited cost savings.

 

Software Programs/ERP Systems
Many to choose from. All function in similar fashion. If data can be imported, data can be exported.

 

Strengths: For companies who have no system or need to upgrade, this option could assist with the management of materials. Without an ERP system its very nearly impossible to accurately and properly manage an Indirect category spend.

Weakness: a system provides for info in/info out. If the info in is inaccurate then so is the info out. No process or procedures for in plant/purchasing information integration. No trained, knowledgeable indirect in plant personnel to perform daily and necessary functionality.

Opportunities: least expensive option. Sell an ERP system to individuals needing support throughout the management lifecycle with hopes it can provide success in some aspect.

Threats: without the Trilogy (ERP system, Process and Procedures, Trained Personnel), having one or two of the three requirements leaves the system lacking the capability to be managed properly.

 

Now that we have a better idea of what we need to know to be able to consider the proper outsourcing channel(s) to pursue once we’ve made that decision, in future blogs we will talk about the need for an SOW (Statement/Scope of Work) and its importance to the success of the program, a properly formatted Quote package based on that SOW, and equally important expected responses by prospective channels.

We will also talk about the roles of Purchasing, Product Engineering, Finance, Maintenance, and of course material disbursement to end user (nearly an entire science in itself).

If at any point along the journey you have a question or comment, please do not hesitate to contact me directly. Our consult service costs are pretty reasonable. (They’re free).