3 reasons you must digitize the ‘First Mile’ of your supply chain. And 3 reasons it is challenging to do so.
The ‘first mile’ in supply chain management refers to the sourcing of raw materials, whether it is agricultural produce or materials such as coal, limestone, steel, copper from growers/miners. The challenge is that direct material procurement or raw material sourcing is anything but simple — there are several complexities. Not only does it require a global reach and the need to deal with multiple layers of complexity and risk, but its success also hinges on real-time visibility and communications.
Several factors including processes, policies, counterparties such as suppliers, traders, etc. play a role in determining first-mile readiness of supply chains. For instance, how well are businesses able to work collaboratively with suppliers to discover alternatives, adjust production timelines, and minimize impact to the bottom line in the event of disruptions.
First mile supply chain challenges
While sourcing challenges are present across industries, these can be more pronounced in the case of commodities and direct materials simply due to the massive scale of operations. Here, sourcing involves making purchases in bulk, which bring into the picture large shipments and the need for collaboration among disparate stakeholders. Quality control is another huge challenge, especially due to lack visibility.
For manufacturing companies, the first mile is where raw materials are sourced, consolidated, and produced before moving on to downstream wholesalers and distributors. For businesses like electronics manufacturers, auto manufacturers, chemicals, and oil & gas, the first mile is also a high-stakes game, often accounting for up to 70% of revenues.
Legacy systems are bogging down the first mile supply chain
While organizations have invested in modernizing their supply chains, the ‘first mile’ has remained untouched. Companies tend to invest heavily in last-mile logistics, boxed in by legacy platforms and outmoded processes that make efficient procurement impossible. ERP systems have been slow to meet the requirements of direct materials management, which often involves accounting for multiple types of product categories with specific quality parameters that legacy processes cannot adequately support.
Being first mile ready can influence everything from cost of raw materials to risk levels. Digitizing the supply chain can have a positive effect on the bottom line by reducing redundancy in processes and streamlining collaboration.
While parameters such as quantity and quality of raw materials impact first mile effectiveness, one other crucial factor is automated collaboration. This means the ability to get the right information and send it to the right parties even without request (proactive rather than reactive). For instance, this could mean alerting the truck driver on speed limits or air conditioning requirements of the shipment. Even the slightest glitch in information access can mean the lack of vital insights — leading to delays, bottle necks etc.
Challenges of modernizing the first mile supply chain
Events such as the Suez Canal crisis as well as the recent container crisis have exposed the vulnerabilities that exist in raw material sourcing today. In most organisations, material planning and sales forecasting are closely linked to the procurement process. Once procurement is completed, these align closely with the production plan.
The complexity is even greater when an organisation is dealing with traded items and buying them through an instrument such as an exchange. The organization’s strategy then needs to be closely tied to the position they have taken on the exchange — long or short, for example.
Direct materials that an organisation purchases often do not come from a common source. Even if the origin is common, the materials undergo various processes with processors, aggregators, and synthesizers, which makes it that much more complex to source. Besides, raw materials must be conditioned to meet the quality requirements on the shop floor. This is often the single most differentiating factor for a manufacturer. Ensuring that the right material is available at the right time and with the right quality is crucial for production predictability as well as profitability.
While there is considerable consensus on the need to transform first-mile business practices with better sourcing strategies, there are several things holding back organization. One drawback is the highly complex and inflexible systems that they are using currently. Besides, there are several external/ecosystem challenges that make it more difficult to bring in the much-needed flexibility and collaboration to ensure effective sourcing.
- Poor visibility into your supplier base:
While visibility is certainly a big advantage especially in the new normal, a recent survey of Chief Procurement Officers found that 90% of respondents rated visibility across their extended supplier networks as being ‘moderate to very low’. Not only does the lack of visibility into multi-tier suppliers make it especially difficult to trace inputs and track variances, but it also makes risk management more difficult. In scenarios where downstream quality issues need to be addressed quickly to meet contractual obligations, poor visibility can be a big hurdle. Antiquated practices such as tracking by spreadsheet, collaboration through email, and issue resolution via phone calls and faxes is inefficient and result in delays or worse.
- Ineffective supplier collaboration
While the digital economy has the power to drastically simplify collaboration, technology maturity across far-flung supplier networks is very inconsistent. With legacy systems ill-equipped to provide appropriate collaboration and communication support, collaboration reverts to traditional tools — from text to email to phone calls. These transactions, if captured at all, are likely being documented in spreadsheets, making integration with the system of record difficult. With key information present only in siloes, accessing even basic information such as the status of a bid, a shipment, or a payment becomes time-consuming and inefficient.
- Lack of insight
Sourcing of direct materials typically involves multiple entities and processes. It is a strategic where sourcing partners, brokers, consolidators, carriers, and customs all have a role to play to enable fulfilment. In manufacturing, the lack of access to up-to-date and accurate data makes it exceedingly challenging to track exceptions such as late shipments, missed emails, and miscommunications, which are quite common. This results in exception requests being missed, inaccurate data being uploaded into systems of record, and in turn, overpaid or underpaid suppliers. At the same time, fractured processes and siloed data also hinder visibility for vendors, which means they are likely to be in the dark on dependencies that trigger logistical risk.
Change is imminent
The pandemic has been an important driver of change. For instance, a recent study revealed that 34% of Chief Business Officers (CBO) are inclined towards IT automation and 27% are in favor of automation and process flexibility.
The ideal software suite for first mile supply chain tracking must be light weight with capabilities in AI/ML, analytics, IoT, and blockchain. It has enough intelligence to anticipate the impact of a Suez Canal type crisis. For instance, the right algorithms and dashboards can help inform relevant stakeholders about an upcoming crisis and also suggest alternatives such as secondary suppliers and also facilitate quick negation and spot buying through quick supplier onboarding.
With the current global uncertainties adding a new layer of complexity, digitization of the first mile is quickly becoming popular.
Strengthening the file mile supply chain
For organizations looking to strengthen their first mile supply chain, some things that they must invest include:
1. Building a better supplier network
For some companies, managing risk might involve creating a more diverse, more local, supplier network rather than relying on a few global suppliers. Others may have complex specifications that can be met by only a few qualified suppliers. To assure the long-term availability of critical direct materials, manufacturing businesses are finding new ways to onboard suppliers faster, build stronger relationships with their sourcing partners — all with standardized processes supported by technology. With improved insight and better communication, buyers are better able to understand a given supplier’s capabilities, identify potential bottlenecks, and prepare contingency plans, if necessary.
2. Automate critical processes
The complexity of direct materials sourcing requires an automated, streamlined approach to critical processes — from sourcing events to purchase orders to invoice processing. With a complete view of processes across your supply chain, you have deeper visibility into what is working and what is not. By automating critical processes, organizations can streamline work, improve communications, and reduce errors that can cause delays. Automated tracking of POs through a shared, interactive dashboard, real-time integration with ERP/MRP systems, and automated matching of invoices, POs, and receipts can help your organization improve productivity across critical direct spend categories. You can apply changes to established processes and measure the impact of those changes to drive continuous improvement. And you can apply AI/ML algorithms to the data you are generating to further refine processes and surface intelligence.
3. Drive collaboration and insight
As businesses grow more complex and their reach extends further, the need for secure and accessible collaboration will only increase. Businesses who succeed in creating spaces where employees, partners, and suppliers can collaborate in a self-service way will flourish. By eliminating siloes and externalizing information from multiple parties, manufacturing businesses will be able to increase visibility across their supplier networks, resolve issues faster, improve supplier performance, and drive real value for the organization.
Digitizing the supply chain presents a plethora of advantages including better visibility and streamlined collaboration that results in lower cost of raw materials, lower risk, and reduced redundancy in processes over the long term.
If you are interested to know more about optimizing first mile readiness for direct materials, do watch this Webinar.