Here’s a thought that’s been knocking around my head after speaking with so many of the folks who are responsible for plant product purchasing: some good deeds never go unpunished. I bring that up because we all know that ERP systems are the lifeblood of any good manufacturing operation, keeping front and back end operations and related data in lock-step. That’s a great thing for many organizations.
But there has been some collateral damage in the race to automate. Indirect plant purchasing has kind of gotten lost in the shuffle, ironically, leading to a hidden expense that repeats over and over again (every 60 or 90 days, depending on your purchasing schedules). This is because inventory management modules, typically “bolted onto” ERP packages, almost as an afterthought, do not adequately separate Direct versus Indirect product purchase recommendations.
ERP will tell the plant manager when he’s at capacity or needs to purchase (direct) production supplies. But what about indirect products such as ear plugs, hand tools, brooms, that are used to manufacture the products the company makes and protect the workers who make them?
Obviously ERP will automate critical processes and provide access to vital data, but they can be limiting in certain situations because the majority of things it monitors are driven by operations and production. "What has been consumed", "What will be consumed?" are the rules to follow with direct products/production.
But Indirect Products are not held to a production schedule, but are instead driven by criteria such as "how many employees" and "what are their needs?" and "how big is this new customer order?" Is there something that will be more efficient than the current product, that can cut time down on their current process?
A good example of this in play would be if there is a change in production or perhaps new hires are introduced on the line — a human would recognize those “production baskets” and may alter the purchasing schedule, but the ERP system would not be set up to do such. A human would recognize this issue.
The result is that many companies have over time grown into a costly pattern, lumping together the two types of purchases — which had always been separate prior. This is probably a good indication that the company should, in general, examine its inventory management and replenishment guidelines for additional areas of improvement/efficiency.
With the above in mind here are some quick tips to help better manage your Indirect Product Purchase process and reduce costs at the same time:
- Separate Products — for starters, separate the purchasing of direct materials and indirect materials. That is key to managing to recognize there is a difference, you don’t want to lock into the same buying patterns.
- Get a Proper View — choose the right software so you get a better window into indirect purchasing. There are a number of packages that can help you manage indirect product purchasing, CribMaster and SupplyPro are two software packages that are specifically designed to manage indirect product purchasing.
- Make Purchasing Decisions on Consumption versus Prior Purchases — direct purchases will be high repeat purchases that you know you will need every month, let’s say steel as a raw material, versus indirect purchases that may be low repeat or one-off. In a classic example, you may only need 1-2 heavy duty brooms for the entire year, but certainly do not want to purchase one broom per month. It would be hard for an ERP system to reconcile that order, but the software packages like the ones we mentioned above will make those recommendations.
- Separate Responsibilities — A lot of companies make mistake having a single buyer for both indirect and direct products. Instead, separate responsibilities. When you have a buyer that has both responsibilities he will focus more on the direct products. Janicki Industries is a good example of a company that recently separated direct vs. indirect product purchasing, significantly reducing “surplus inventory which can be dead inventory very quickly.
- Don’t be Price Foolish — companies many times get locked into old products they’ve been purchasing for years; or they get locked into purchases strictly based on price. For example we have been recommending recently a new sanding disk that costs more per unit, which companies can balk at from sticker shock. But then we explain that with this new tool you will get higher throughput and more production, resulting in a net gain. One caveat: replacing old products can be a challenge, for example we work with a Northwest-based aerospace company and because it is so large, it can be hard to integrate new products into the mix.Sometimes when you are that large it can be a struggle identifying areas where profitability/efficiencies to product can be found.
Mitch Davis is VP Strategic Accounts, Stellar Industrial Supply