As many already know, the indirect or nonproduction spend, also known as maintenance, repair and operating (MRO) spend, deserves the attention it has recently received in the trade press. In many organizations, MRO spend is estimated at 15 to 40 percent of sales.
[From iSource Business, September 2000]
As many already know, the indirect or nonproduction spend, also known as maintenance, repair and operating (MRO) spend, deserves the attention it has recently received in the trade press. In many organizations, MRO spend is estimated at 15 to 40 percent of sales. A North Star Consulting Group study of the Fortune 1000 found that nearly 10 percent of the organizations responding had no clear initiatives in the area of MRO spend. Of those 10 percent with a plan, however, more than 50 percent had either completed an initiative or were currently implementing one. Further evidence indicates that more and more companies are developing plans for an MRO program to save money.
Why the somewhat slow but growing commitment by organizations to improve MRO spend? In a word: savings. Projected savings were cited in the North Star study as the primary business driver, scoring 4.42 on a scale of 1 to 5, the highest of all responses. But what kind of savings should companies expect? And what will an MRO program look like in the future?
A Goal Within Reach
Purchasing and finance professionals know that even marginal reductions in goods and services costs go straight to the bottom line. Most would agree that reduced costs are easier to obtain than revenue increases.
For example, in the case of a generic manufacturing company, a 10 percent reduction in indirect goods and services costs can translate into a pretax earnings increase of 50 percent. For service organizations, where indirect spend represents a larger percentage of sales, the projected impact is greater. To put it in perspective, in order to produce the same increase in pretax earnings, sales revenue would have to jump by about 50 percent. In terms of the profit and loss statement, a $1 reduction in MRO spend can be equivalent to $5 of new sales. Consequently, many e-procurement solutions today target the MRO spend.
So how are the Fortune 1000 organizations managing this spend? According to the North Star study, national contracts, purchase cards, integrated supply, outsourcing and Internet buying are the most common methods.
This area of the study drew a particularly high volume of comments, with participants emphasizing the need to combine the methods to achieve their purchasing strategies. The following general themes emerged:
- Only 15 percent used a single method, while the others used a combination or hybrid approach.
- Purchase cards and Internet purchasing were considered as secondary or support methods.
- Approach flexibility was important, i.e., one size does not fit all.
- The method was matched with the requirement. For example, purchase cards were preferred for high-volume, low-value transactions.
In short, decision makers are tailoring MRO procurement solutions by mixing and matching. The study indicates that at this time, MRO does not lend itself to a singular approach. Today's technology will allow business executives and purchasing and supply management professionals to rationalize current methods into fewer, more powerful digital ones. Here is a closer look at each purchasing method.
The most popular method is negotiating a national contract with a preferred supplier. Almost 86 percent of respondents either use or are likely to use this most traditional method. Its advantages are well-knownleveraged volumes, ease of implementation and administration and the ability to service multiple locations. Downside risks exist but are manageable. Savvy negotiators build some sort of urgency into the agreement to keep price and service levels competitive. They watch for the new kid on the block or the new technology from the preferred supplier's competitors. And they always have a backup plan in the event that the preferred supplier fumbles somewhere along the way.