Unlocking Sustainable Value in End-to-End Direct Materials Management

How middle market companies can leverage volatility to create competitive advantage

Direct material costs continue to rise, and middle market companies across industries are feeling the pressure.

Ongoing uncertainty due to US tariff policy, the aftermath of COVID-19 and the Ukraine-Russia war is prompting many companies to rethink supply chain strategies. Tactical firefighting has become the norm, resulting in limited resources available for other initiatives that could drive sustained growth.

Companies relying on short-term responses could find themselves permanently disadvantaged. Those that properly reassess sourced materials management can achieve competitive advantage through lower total landed costs, assured supply, enhanced visibility and collaborative supplier innovation that fuels growth. Success hinges on comprehensive end-to-end improvement of commercial, process and technical value levers, enabled by cross-functional team alignment, advanced capabilities and agile operating model.

THE MARGIN COMPRESSION CHALLENGE

Cost of Goods Sold (COGS) escalation driven by supply market capacity constraints, persistent inflation, global trade policy and tariff impacts has fundamentally altered materials supply models’ economics. Direct materials account for 30 to 70% of total bill of materials costs, meaning even modest percentage improvements can have a significant bottom-line performance impact.

The current economic and geopolitical environment compound these pressures. Raw materials and packaging markets have experienced significant demand-supply balance shifts that complicate long-term planning. Near-term tactics like spot buys, expedited freight and reactive supplier switching may provide temporary relief but can also erode margins, destabilize supply chains and make for poor long-term strategies.

Instituting scenario-based strategies that stretch across value engineering, manufacturing optimization and sourcing diversification can help reduce total landed costs. But many middle market companies lack the specialized skills, analytical tools or operational frameworks necessary to capture the resulting opportunities. Leaders who recognize the need to transform their approach to direct materials management are more likely to position their organizations for sustained success.

A HOLISTIC APPROACH TO MATERIALS MANAGEMENT VALUE CREATION

Companies can create competitive advantage by taking an end-to-end view of direct materials management. Doing so requires orchestration across supply, process and demand elements that enable incremental value creation. Taken together, improvements in these areas can achieve cost reductions between 10 to 25%.

	Commercial (3 to 6%) Forward-thinking category management extends beyond price negotiation to encompass total cost of ownership scenario modeling, true supplier performance management and collaborative innovation. Top teams have shifted from cost-cutting to long-term financial performance drivers, pivoting focus from traditional savings to sustainable long-term value. Leading companies will leverage advanced analytics to identify category-specific opportunities, refine contract structures and capture demand aggregation benefits across business units.
	Process (2 to 4%) Operational efficiency in direct materials management demands disciplined processes that balance cost, quality, service and risk objectives. Achieving this balance requires integrating demand planning with procurement, continuous improvement initiatives and inventory optimization across the value chain. AI-based advanced analytics, automation and e-sourcing platform spending demonstrates an anticipated 14% compound annual growth rate through 2025, reflecting the critical role digital tools play in achieving process excellence.[1]
	Technical (5 to 15%) Material specifications, product designs and manufacturing processes can significantly impact total costs but often remain siloed from commercial sourcing and procurement activities. Cross-functional collaboration among sales, R&D, engineering, operations and sourcing can unlock meaningful returns by reducing material usage, changing specifications and material types and standardization through focused design-to-value initiatives.

IDENTIFYING KEY ENABLERS AND REMOVING INTERNAL CONSTRAINTS

Strategic Alignment and Agile Teams
Cross-functional goals and accountability for materials-driven margin gains are critical for benefits realization. Top stakeholders should agree on and measure a core set of key performance indicators (KPIs) focused on margin improvement and supply chain resilience. If a company relies on complex raw materials for its products, any changes to supply sources require early input across stakeholder teams whose collective subject matter knowledge will help inform decision making.

Capability Building
Middle market companies may lack elements of specialization required for sophisticated direct materials management. Advanced analytics and technical value engineering are critical competencies. Trade tensions and other supply chain disruptions have also made strategic category management a top-of-mind priority, and businesses must become more proactive in managing and driving collaborative improvement with suppliers.[1] Companies should aim to close foundational maturity gaps to navigate current conditions, including but not limited to

• Centralizing contract pricing clause and incoterms management
• Identifying mitigation options, such as customs value reduction and Harmonized Tariff Schedule (HTS) audits
• Evaluating top suppliers’ financial health and alternative supply sources / footprint models
• Resetting inventory and safety stock strategies with a working capital decisions matrix

CURRENT MARKET CONDITIONS DEMAND BOLD DECISIVE ACTION

Direct materials management will increasingly separate market leaders from laggards over the next three to five years. Companies that evolve supply chain functions from a tactical cost center into a strategic value driver will be poised to capture disproportionate benefits, even amid persistent volatility. Tariff uncertainty, geopolitical supply chain shifts and evolving technology can be challenging, but successfully managing these hurdles can reward organizations with advanced capabilities and integrated operating models.

Middle market companies that move decisively can position themselves to navigate future disruptions from positions of strength. Those that delay transformation risk compounding disadvantages as competitors lock in favorable economics and build capabilities that drive sustained margin improvement and supply chain resiliency.

KEY CONSIDERATION FOR A HIGH-IMPACT VALUE AGENDA IN 2026 AND BEYOND

• What near and longer-term actions can optimize total landed costs and resiliency
• Are current supply models and category plans sufficient to address 2026 volatility scenarios
• What capability gaps exist today and how to prioritize critical needs with sustainable benefits
• How can AI and technology solutions deliver tangible results for the organization

Footnotes

[1] Focal Point: “The Future of Procurement: Trends and Predictions for 2025”

[2] Institute for Supply Management, “Procurement in 2025: Strategic Priorities Survey