With sharp cost increases an ongoing reality across many categories, savings targets may seem elusive to even the most experienced procurement organizations. Year-over-year price decreases have no doubt become increasingly hard to find. But by looking at a well-established spend category from a new perspective, they can be captured. Applying a strategic spend management approach to classically non-strategic maintenance, repair and operations (MRO) categories such as office supplies, industrial supplies and IT peripherals can have a significant, positive effect on your savings goals. What's the best way to develop and implement such a strategy for your organization? Consider the following.
The Problem with MRO Spend
Employees across your company need the right tools to get their jobs done. And it's your job to provide them. What sounds like a simple task is anything but. The IT department wants one-stop, online shopping for all IT peripherals. Your facilities manager wants separate contracts for janitorial supplies and cleaning services. And each manufacturing group has different discounts with the same industrial supplies distributor.
If you're like most buying organizations, management of MRO spend is decentralized, and sub-categories are often approached tactically rather than strategically. This is primarily due to the high number of line items involved in the category and the fact that most products associated with it are low value. In fact, the actual cost of an MRO transaction often exceeds the purchase price of the product or service.
One Man's Problem Is Another Man's Opportunity
This makes the overall procurement of MRO categories sub-optimal. But it also creates the conditions to reap significant savings that had previously been untapped. While the dollar value of any single MRO product or service is typically quite low, the average company's MRO spend at the category level is generally quite high. MRO categories such as electrical and electronics, general maintenance, and office supplies are often multi-million dollar spend categories that can represent savings of 5 to 35 percent, depending upon the depth of the solution implemented.
Below are four strategies you can implement to optimize your MRO spend management strategy and tap into savings you may have been missing.
Analyze Your Spend
A thorough analysis of your spend will allow you to determine what you buy, how much you're paying and who's getting most of your dollars. Performing this analysis is challenging and will take the efforts of not only the procurement team but also stakeholders from each business group it serves.
Data collection is the most time-consuming element of the task and can be frustrating. But it is critical to the success of your initiative. Stakeholders cannot easily make decisions, eliminate inefficiencies or improve performance without knowing what, where and how MRO categories are purchased. Calling suppliers and asking for annual spend reports and pulling data from your accounts payable (A/P) system are common practices. In order to compile an 80 percent representation of the category spend in one consolidated format, the following data must be included: manufacturer name, manufacturer part number, estimated annual usage and package quantity. In addition, most buyers are managing multiple sites that are buying MRO items and should provide delivery locations, acceptable substitutes and historic unit pricing. An incomplete data set is likely to force suppliers to provide substitute products and hedge on pricing due to lack of detail.
No matter how advanced your systems are you may never eliminate the need for manual data review. The data of all your purchases may be at your fingertips, but chances are that much of the data is incomplete or dirty. For example, IT peripherals are often purchased based on item description and do not reference the manufacturer part number or name in any portion of the category reports. Software solutions are viable options that will help you turn your jumbled data into something meaningful. Artificial intelligence, built into software, has the ability to extract granular details about products and services, classify products based on any number of taxonomies, and rebuild text to standardize descriptions.