Every organization, big or small, needs to source Maintenance, Repair and Operation/Overhaul (MRO) items. In the present scenario when everyone is looking for cost-effective strategies, one of the key enablers is the effective sourcing strategy for MRO items which directly impact its bottom line.
While most companies have streamlined management of materials directly used in manufacturing, many have not fully addressed MRO management. In fact, only a handful of manufacturing companies are managing the sourcing of MRO parts effectively. And most companies don't have the range of expertise, information, and tools to effectively source all strategic and tactical buying categories. Additionally, many purchases never get sourced at all.
These often overlooked items, can significantly drive up costs and eat into profits. For the most cost-effective sourcing of MRO items, the focus should be on the entire supply chain and not just in one process.
Avoid missed opportunities
Large manufacturing companies depend on complex and costly machinery to manufacture products. The next frontier for optimizing processes of manufacturing industries is in managing MRO. MRO procurement for these companies involves sourcing and buying not only production consumables—such as lubricants, thinner, jute and fasteners—but also specialty items such as limit-switches, instrumentation spares, cables, and motors.
And while they have made great progress in improving efficiency and reducing cost in areas ranging from scheduling manufacturing equipment to inventory management, some still make the mistake in concentrating only on the sourcing aspect. They don’t realize that a major chunk of MRO item cost gets lost in the ‘faulty inventorization,’ ‘payment terms with the supplier’ and ‘negligence in addressing the continuous improvement activities in the value chain.’
Improper MRO management leads to either stock-out situation, accumulation of excessive inventory or leads to a situation where the organization fails to leverage the sourcing tools for cost reduction.
Apply the right sourcing levers for supply chain cost-reduction
Strategic sourcing is different from the traditional transaction structure in that it is basically value creation through knowledge creation, knowledge acquisition and knowledge transfer (see Figure 1) and believes that 90 percent of cost saving can be achieved through various methods of commodity aggregation, supplier aggregation and value engineering. But which commodity/item should given priority for the study and which strategy should be applied for which category of items are just two of the issues which cannot be generalized. Answers will vary from ‘type of organization’ to ‘buy value’ and ‘the end use of the product.’ Table 1 provides an overview of product portfolio matrix that can be used in a large manufacturing setup.
In strategic sourcing, which sourcing lever should be used for which item is situation dependent. These levers cannot be standardized according to the commodity but rather should be decided judiciously (Figure 2 shows some of those levers). Additionally, new sourcing levers can be created as and when situation arises.
Leverage Volume (Consolidation)—There are many commodities, which are similar in nature and can be procured throughout the organization. Consolidation of the entire buy offers a big volume to the suppliers and in turn a good volume discount can be expected. The combined specifications of different units might not be exactly same. The challenge is standardization and sharing the best practice of one division with the others. In the process of standardization the supplier base is also reduced. The emphasis is on offering entire volume to one (or few) capable supplier and get volume benefits.