Utilize the Right Sourcing Lever to Manage Your MRO

Avoid the pitfalls of improper maintenance, repair and operations (MRO) management and use the right sourcing levers for maximum profit and reduced spend


Direct Sourcing from OEMs—The more the number of stakeholders in the value chain between manufacturer and supply manager, the more is the mark-up on the price. Keeping this in mind, the strategic sourcing personnel takes a conscious decision to buy the material directly from the manufactures. The major challenge is to convince the manufacturer to bypass its existing dealer/supplier network and continue getting the after sales service. It can become possible if the buy value is significant.

Third -party solution providers—An organization can outsource some of its sourcing activities (which are not core in nature) to third-party sourcing experts called integrators. The integrator acts on behalf of that organization and make sure of the optimality of the solution. Through this, it is possible to reduce overheads in the form of labor, time and related procurement expenses. Some of the areas which could be outsourced by a manufacturing organization include cleaning jobs; air conditioner maintenance; corporate travel; document delivery services; temporary staffing; and IT hardware maintenance.

Optimization of Specification—This is one of the most important sourcing levers with enormous saving potential. Every improvement in sigma level comes with a price tag, so the strategic sourcing personnel must see whether the specification that has been supplied is the required one or even a lower specification will serve the purpose. Specification data, collected during the internal and external analysis, is optimized using this lever. Various issues related to optimizing the cost with respect to specification is questioned here, if required various trails shall be conducted to arrive at best possible specifications.

Long Term Contract—Upon assurance of business for a loner period, the supplier can offer many value added services and discounts. The supplier gets time for doing value-engineering activity for reducing its cost and the same can be shared with the organization. A manufacturing organization prefers long-term contract for its core items like refractories, gas supply, lubricants, rolls and packaging. The selection of supplier, identification of key performance indices and management of contract are the key activity in long-term contracting. Some of the performance parameters that can be addressed through long term could be reduction in specific consumption of the material; standardization; reduction in rejection limits; free testing & inspection; and training to the employees.

Reverse Auction—It’s a tool used in industrial business to business (B2B) procurement. It is a type of auction in which the role of the supply manager and supplier are reversed, with the primary objective to drive purchase prices downward. In an ordinary auction (also known as a forward auction), supply managers compete to obtain a good or service. In a reverse auction, suppliers compete to obtain business; and a supply manager contracts with a market maker to help make the necessary preparations to conduct the reverse auction. This could include finding new suppliers; training new and incumbent suppliers; organizing the auction; managing the auction event; and providing auction data to supply managers to facilitate decision making. Fundamentally, reverse auctions are zero-sum games—the supply manager' s savings is the supplier' s loss of revenue. It is a double edged sword in that it is a potent tool if applied with prior planning; but on the other hand, reverse auctions shall not be done sourcing of differentiated parts and components where suppliers have specialized capabilities and few suppliers can meet quality and reliability standards.

Total Cost of Ownership (TCO)—TCO is the actual price of any commodity, i.e., basic plus hidden costs. The hidden costs are not related to price but are related with yield, transportation, specification, production capacity and inventory-carrying costs. In most of the cases, hidden costs can run as high as 40 to 50 percent of the TCO. The strategic sourcing personnel quantify important elements—such as warehousing expenses, field failures, freight, cost of poor forecasting and power consumption—and develops a complete understanding of TCO. Based on this, a decision is taken so that price reduction in one area will not simply crop up price elsewhere.

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