PIECING TOGETHER
THE INDIRECT
MATERIALS PUZZLE:
The Current Landscape of Indirect Material
Management Solutions
MARGINPOINT CORPORATION | 2 South Pointe Drive, Suite 220 | Lake Forest, CA 92630 | 888-229-3685 www.marginpoint.com
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Table of Contents
Introduction ................................................................................................................1
What to Look For in a Solution ..................................................................................2
Navigating the Solution Landscape ..........................................................................5
Enterprise Resource Planning (ERP) .............................................................5
Procurement and Sourcing System ................................................................6
Warehouse Management System (WMS) ......................................................6
Enterprise Asset Management (EAM) ............................................................7
Facilities Management System.......................................................................7
Industrial Vending Solution .............................................................................7
Custom or Home-Grown Solution ..................................................................8
Business Process Outsourcing (BPO) ...........................................................8
Conclusion .................................................................................................................9
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PIECING TOGETHER
THE INDIRECT
MATERIALS PUZZLE:
The Current Landscape of Indirect Material
Management Solutions
Introduction
50% of
indirect
materials
will remain
unused or
inactive
over a 12
month
period,
Industrial organizations such as manufacturers, construction firms and
utilities have an inherent cost in their business; indirect materials. Because
this is often perceived as a necessary cost of doing business, many
companies have ignored the indirect materials process which has created
significant inefficiencies and waste resulting in overspending, shortages
and high management costs. For example, 50% of indirect materials will
remain unused or inactive over a 12 month period. As an executive or
manager responsible for indirect material spend at your company or site,
you recognize the need to address these problems and get your indirect
materials in order. But where do you turn? What solutions are out there to
help you tackle this problem?
Traditional solutions that companies typically implement are lacking in one
key area or another. The variety and complexity of current market solutions
make it difficult to navigate and understand which option is best for your
organization. In this paper MarginPoint will help you survey each stage of
the indirect materials process. It will compare and contrast solutions that
you may be currently using or have considered in the past to highlight their
strengths and weaknesses. By auditing your process, you will begin to
understand the importance of indirect materials management and to
understand how to evaluate the landscape of solutions available to address
your indirect material management needs.
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What to Look For in a Solution
Before we get into a discussion of the various solutions that are out there,
let’s first spend some time analyzing what you should look for in an indirect
materials management solution. The figure below provides a framework for
the key indirect material business processes that need to be effectively
managed. They span the entire indirect material lifecycle from
replenishment to usage and disposal. Ideally, a comprehensive indirect
material management solution would help you address needs in each of
these categories.
FIGURE 1: FRAMEWORK FOR KEY INDIRECT MATERIAL BUSINESS PROCESSES
1. Use – This stage is focused on managing usage of indirect
materials throughout the enterprise. This is the heart of an effective
indirect materials management system and drives all other related
material processes. It entails controlling usage of materials to
reduce waste or unauthorized use and tracking usage at a detailed
level (including who, what, when, where and why for all
consumption activity) to improve accountability and to drive
improvement opportunities. In fact, companies that simply start
tracking material usage at the individual user level can reap as
much as a 10% reduction in usage. Without visibility to actual
usage details, all of the other indirect material processes would be
virtually impossible to effectively manage since those other
processes rely on inputs from the Use stage. It would also be
difficult to identify savings and process improvement opportunities
without visibility to why, when, where and by whom the indirect
material is being used. You can’t manage what you don’t measure!
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2. Replenish – This is the stage in the indirect materials process
where required materials are procured. This is obviously an
important stage of the indirect materials process because it controls
what material enters your facilities. However, as mentioned above,
it is driven to a large extent by the information collected in the Use
stage to ensure that the right materials are replenished at the right
time and in the right quantities based on demand. The Replenish
stage includes the sourcing of material as well as the process of
procuring material from available suppliers as needed.
3. Stage – In this stage of the process, material is positioned at
appropriate places throughout a facility to be used as needed.
Material could be staged in a central crib location or at multiple
point-of-use locations throughout a facility. Like the Replenish
stage, the Stage process relies heavily on information from the Use
stage to help drive decisions on what to stock where and in what
quantities to make sure that the material required to keep the facility
running smoothly is available as needed. Also, this stage includes
the process for transferring/rebalancing stock levels among the
various stocking locations.
Companies
that simply
start tracking
material
usage at the 4.
individual user
level can reap
as much
as a 10%
reduction
in usage.
Dispose – This phase of the indirect material lifecycle is focused on
handling excess and obsolete material. In addition to managing the
replenishment, staging and usage of indirect material, an important
element of a comprehensive indirect material management solution
is the capability to deal with material which is no longer in demand.
This entails first identifying slow-moving items and then determining
how to effectively remove or dispose of such material. This is an
important yet often overlooked phase of the indirect material
lifecycle and can cause an unnecessary proliferation of material if
left unmanaged.
5. Control – Across all of the stages of the indirect material
lifecycle, the ideal indirect material management solution must
effectively control each of the processes with appropriate
transaction workflows and alerting to exception conditions as
they arise. The solution would ideally provide the capability to
establish normal operating parameters and performance targets
and then provide proactive alerts and allow corrective action if
actual performance deviates from the predefined plan.
6. Plan/Analyze – The ultimate objective of an indirect material
management solution is to meet the indirect material needs of an
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enterprise at a lower cost. In order to achieve this objective,
organizations must be in a constant cycle of continuous
improvement – continuously adjusting how they manage their
indirect materials to wring cost out of the process while
maintaining high service levels. The ability to analyze past
performance is crucial for this process to yield results. Therefore,
the ideal indirect material management solution should have a
robust analytics capability that enables users to closely monitor
performance and identify opportunities for improvement. Going a
step further, a solution that could recommend process changes
and automatically implement them would provide an extremely
powerful capability to a company’s arsenal of material
management tools.
All of the above areas represent important components of a
comprehensive indirect material management solution that should be
considered when evaluating the various solution options.
The ideal indirect material management
solution should have a robust analytics
capability that enables users to closely
monitor performance and identify
opportunities for improvement.
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☼
Navigating the Solution Landscape
Now that we have an idea of what we need our indirect material
management solution to do, let’s review some of the commonly available
solutions that are currently on the market and discuss some of the pros and
cons of each. The table below lists most of the commonly used solutions to
manage indirect materials.
Table 1: Solution Overview
Solution
Description
Enterprise Resource
Planning (ERP)
A company’s core system used to manage everything
from financials, HR, manufacturing, sales, distribution,
etc.
Procurement and
Sourcing System
Specialized systems that focus on streamlining a
company’s procure-to-pay process for all types of
procured materials and services
Warehouse Management
System (WMS)
Specialized inventory control system intended for
warehouses with high volumes of transactions
Enterprise Asset
Management (EAM)
Specialized system used to track and manage bigticket capital equipment (assets)
Facilities Management
System
Specialized system used to track and manage
facilities and facilities-related assets
Industrial Vending
Solution
Specialized inventory control solutions intended to
control and dispense industrial supplies at the pointof-use*
Custom or Home-Grown
Solution
This is a catch-all for any home-grown solutions
developed by companies for their own internal use
Business Process
Outsourcing (BPO)
As an alternative to figuring out how to manage their
indirect materials internally, some may choose to
outsource some or all of the indirect materials
management process to a third-party that specializes
in this type of service
Enterprise Resource Planning (ERP)
Most companies already have some sort of core ERP system to manage
financials and other core business processes such as purchasing,
manufacturing and sales. It’s entirely reasonable for companies to try to
leverage their existing ERP system to manage their indirect materials
processes. However, there are a few pitfalls to be aware of:
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It would be
difficult to
continue to
adapt ERP
to meet the
evolving
needs of
your indirect
material
management
processes
1. ERP will not be able to control and track the issuance of material at
a sufficient level of detail to drive the Replenish, Stage and Dispose
indirect material processes. As a result, ERP won’t be able to
effectively help companies figure out what indirect material needs to
be purchased and when. It will continue to rely on external inputs
for such data
2. ERP systems will be strained to accommodate the dynamic nature
of the indirect material master where items are continuously being
added, removed and updated. This is much more than ERP was
intended to handle
3. ERP tends to be fairly rigid and expensive to adapt to changing
requirements. Companies spend hundreds of thousands of dollars
to implement their ERP systems to handle their existing processes.
Any subsequent changes or upgrades are fairly onerous
undertakings. Therefore, it would be difficult to continue to adapt
ERP to meet the evolving needs of your indirect material
management processes
Procurement and Sourcing System
Procurement and sourcing systems are focused on optimizing and
controlling the standard procure-to-pay process from the selection of goods
and suppliers to the placement of purchase orders, reconciling goods
receipt against invoices and payment processing. Similar to ERP,
procurement functionality is applicable to the Replenishment process of
indirect materials. However, these systems do not address the inventory
management requirements of an indirect materials management solution.
Warehouse Management System (WMS)
Warehouse management systems are specialized systems implemented to
control the movement and storage of material within a warehouse
environment. The focus of such solutions is the efficient storage and
access to materials. WMS solutions are well suited to high volume
warehouse operations with streamlined picking, put-away, shipping and
receiving processes. While WMS solutions would be able to provide some
measure of control and visibility to indirect material inventory, it would not
be able to:
1. Track the issuance and consumption of materials at a granular
enough level to provide insights to drive performance improvements
2. Address the upstream procurement processes or the downstream
disposal processes
3. Provide consumption control capabilities to proactively manage
indirect material usage
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Only
5-10% of a
company’s
indirect
materials
spend flows
through a
vending
solution
Enterprise Asset Management (EAM)
Enterprise Asset Management systems are specialized systems designed
to ensure the most efficient utilization of a company’s big-ticket capital
equipment (assets). These systems can be found in manufacturing
facilities with expensive large-scale production machinery that needs to be
maintained in top condition for maximum uptime. They address indirect
materials to the extent that they are needed to support the uptime of the
assets that they manage. Therefore the perspective of such systems is to
ensure that the right parts and material are on-hand when needed to
support a variety of asset maintenance and repair activities. EAM solutions
are less concerned with the streamlining or optimization of indirect
materials.
Facilities Management System
Similar to EAM solutions, Facilities Management systems are specialized
systems designed to ensure the efficient utilization of facilities (plants,
offices, and warehouses) and facility-related assets. Also like EAM
solutions, facilities management solutions address indirect materials only to
the extent that they are required to support the primary mission of
maintaining facilities. Such solutions will typically provide for tracking and
replenishment of indirect material. However, such systems are not
concerned with the optimization of indirect materials usage.
Industrial Vending Solution
Industrial vending solutions are specialized inventory control solutions
intended to control and dispense industrial supplies at the point-of-use.
One of the key value propositions of this technology is the ability to position
material in a controlled manner within a vending unit in close proximity to
the locations where the material is required to support the various
operations. These solutions provide a strong measure of control over the
materials given the ability to restrict access and they provide a detailed
accounting of when, where and why the material is consumed. They also
provide for streamlined replenishment of materials based on usage.
The main issue with these solutions is their limited applicability. In simple
terms, only certain items can fit into a machine. As a result, only 5-10% of
a company’s indirect materials spend flows through a vending solution.
The remaining 90-95% falls outside of the scope of a vending solution and
requires an alternative management solution.
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Custom or Home-Grown Solution
As they say, “necessity is the mother of inventory”, so of course another
available solution option to manage indirect materials is to develop a
custom solution tailored to meet the specific needs of the business. Such
solutions can run the gamut from simplistic (use of spreadsheets) to
sophisticated (custom developed web applications and interfaces) and
depending on the scope of the solution could address many of the
requirements for an indirect material management solution. However, with
a home grown solution comes:
1. High cost of ownership which will typically erode much of the value
that they were designed to create
2. A small army of IT folks to develop, manage and maintain complex
solutions
3. Internal cost and resource constraints will cause solutions to lag
behind the business requirements to the point where the business
needs have completely outgrown the solution
Business Process Outsourcing (BPO)
For companies that see indirect materials management as a non-core
capability, outsourcing may be seen as an attractive option. There is no
shortage of available outsourcing partners that have the resources and
expertise to effectively manage all aspects of the indirect material lifecycle.
Such an option can certainly make solid financial sense especially for
companies that do not have sufficient economies of scale to justify building
this capability internally. However, for companies with sufficient scale where
there is a large ROI or for companies that recognize the potential to turn
their indirect materials management capabilities into a source of
competitive advantage, outsourcing may not be the best option.
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Conclusion
The solutions outlined above attempt to address portions of the indirect
materials lifecycle. Clearly, some are more effective than others in
addressing the subset of indirect material business processes that are in
their respective sweet spots. What you may come to realize is that most of
solutions on the market today fall into one of three following categories:
1. They are intended to address a separate business problem from
indirect materials. They may have some indirect material
functionality to support their primary focus. However, indirect
materials management is secondary to their main objective.
2. They address a portion of the indirect materials management
challenge. They are effective for what they intend to accomplish but
are missing elements that you would need for a comprehensive
indirect materials management solution.
3. They may address a current short-term need but may not adapt well
as your business needs change and evolve.
There is no single well-established comprehensive solution for indirect
materials management. If you choose to leverage one or more of these
existing solutions to address your indirect materials, you should expect to
play the role of system integrator, in which you will have to figure out how to
piece together the various solution components into an overall integrated
solution. Even if you are successful, you will inevitably have to make a
number of compromises along the way that will reduce the overall benefit
that drove you to tackle this challenge in the first place.
As the indirect materials opportunity increases in visibility at the highest
levels of organizations, companies are pressing providers for better options.
As a result, more innovative solutions are coming to market. MarginPoint
recommends looking for a provider with significant domain expertise that
will address your indirect material management needs and integrate into
your existing systems to create a comprehensive solution. Companies will
see the tremendous value in taking an integrated and comprehensive
approach to indirect materials management and will not settle for putting
the indirect material management puzzle pieces on their own.
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About MarginPoint
MarginPoint is a leading provider of cloud-based indirect material
management solutions. We are uniquely focused on integrating the end-toend indirect material lifecycle to deliver the highest possible ROI for our
customers. Our software as a service (Saas) allows companies to deploy
without up front or significant IT investment. More than 400 companies rely
on MarginPoint to reduce their indirect material spending and streamline
their process.
MarginPoint
2 South Pointe Drive, Suite 220
Lake Forest, CA 92630
888-229-3685
Visit our website: www.marginpoint.com
Email: info@marginpoint.com
© 2013 MarginPoint Corporation. All rights reserved.