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.
Change Your Sourcing Strategy
By aggregating spend across multiple sites you can effectively drive standardization and consolidation of your current supply base. This requires pulling in the spend that currently resides outside of procurement and may inevitably involve conflicts, since local sites that have been purchasing individually may have long-term relationships that offer favorable pricing. By grouping the business in order to allow local suppliers to participate, you can minimize tensions and help build support for the change in strategy.
MRO supplies can be divided into a hierarchy of categories for supplier selection and management. Rather than implement a separate supplier for each category of filters, gaskets and welding supplies, you may be able to take advantage of several industrial distributors that have the ability to supply across multiple product families through local distribution centers. This will allow for lower delivery costs and more frequent shipments of smaller quantities. Smaller shipments have an impact on inventory carrying costs and will satisfy a just-in-time (JIT) inventory model. If a single supplier is not possible, then moving to the fewest number of suppliers while maintaining part coverage is the next option as long as delivery and quality standards can be met. With either strategy, distribution costs will be compressed and long-term cost reductions leveraged through product standardization and the use of alternatives.
When negotiating an aggregate supply agreement, it is common to enter into several rounds of negotiation that often result in 5 to 10 percent more savings on a supplier's initial price. Disclosing future levels of supply and your intent for a long-term relationship may help to secure increased category discounts. Suppliers may benefit from your efforts to standardize if you jointly participate in trilateral negotiations with manufacturers to secure additional cost reductions and better leverage your spend.
Tighten Contract Compliance
Maverick spend on services is typically 40 percent higher than it is for other indirect goods and 200 percent greater than direct goods. Enterprises report that procurement professionals use 20 percent more suppliers to source services than they do to buy indirect goods and 200 percent more than the pool they tap to source direct goods. In many cases, administrative changes, such as invoicing and supplier reduction, not price, will have the greatest impact on your total cost. By streamlining your processes, you can drive an additional 5 percent to your bottom line.
Implementation of new contracts can be tricky due to the amount of data that needs to be organized. Fortunately, software solutions allow for the automatic transfer of data into systems to drive compliance against buyer-negotiated contracts and selected suppliers. Once the contract is negotiated and pricing finalized, purchase requisitions, RFx documents and master agreements can be automatically uploaded into the system and easily shared and accessed across locations.
Evaluate an Outsourcing Partnership
In years past, outsourcing has typically been viewed as a way to lower costs through headcount reduction. Today, companies are seeing that the real benefits of outsourcing spend management for categories like MRO lies in improved category knowledge, enhanced process performance and reduced inventory levels. You may choose to outsource a portion of your MRO activities, such as inventory management and order placement, or offload the entire process. Many companies begin outsourcing by testing a low-impact commodity, such as office supplies, and gradually expanding into other commodities as they begin to see results.
With roughly 20 sub-categories combining to make up the overall category, it's difficult to have an in-house expert in MRO. A company dedicated to spend management can help you overcome this challenge through their specialization and economies of scale. Because the performance of spend management companies is typically measured on overall category savings, they are incented to improve process performance and reduce inventory levels while maintaining appropriate service levels. When evaluating a spend management company that performs outsourcing services, you should examine the tools and systems they'll use to drive improvements in your process and inventory these results.
Implementation Barriers to Overcome
No matter which MRO strategy you choose, you'll undoubtedly face challenges and resistance during implementation. Among the most common barriers are:
It Won't Work
There will be no shortage of folks offering reasons why your strategy won't work. For example, the IT department doesn't believe that anyone else has the technical know-how to understand their supply market, and manufacturing doesn't believe that you work closely enough with employees to know the "real" requirements. The most effective way to overcome this kind of resistance is to create a cross-functional team of stakeholders representing the needs of each group that will be affected by the strategy. Gather the team, explain your goals and outline how your strategy will help the company achieve its larger business objectives.
"We Need It NOW"
Perhaps the most common misconception about MRO sourcing is that it takes a lot longer to source items and really only saves a few bucks. Cross-functional team members also believe that new suppliers can't possibly understand the unique delivery requirements the way the incumbent does. Such thinking can be overcome by identifying the right supplier who is capable of delivering high-quality goods at the lowest total cost.
"But We've Always Done It This Way"
The hardest part of implementing a new MRO strategy is convincing people to change what they are doing, because in their minds the current process works. They already have a strategic relationship with a supplier, they don't have to wait for parts and changing suppliers may eliminate doughnuts at their weekly meetings. To them, maintaining the status quo is preferable because they don't recognize the costs associated with time spent running to the store or flipping through catalogs. And they are blind to opportunities to standardize and leverage spend. In this case, it is critical to communicate — even over communicate — your goals to the cross functional team to build consensus and ensure full support for the new strategy.
"We Have to Get Our Act Together First"
No one likes to start from square one. But nothing worthwhile is ever easy. A large amount of MRO spend may exist outside of procurement. And more than likely, the data exists in multiple systems, in multiple formats and represents millions of dollars across thousands of suppliers. By cleansing and consolidating this data, you can effectively outline your strategy, identify opportunities for savings, and ensure that savings generated are implemented across sites.
The challenges to designing and implementing a strategic approach to non-strategic spend categories such as MRO are admittedly significant. But by investing the time and resources to overcome them, you will be rewarded with savings, process improvements, increased category knowledge — all of which will help you achieve your spend management goals.
About the Author: Julie Ware is category manager, MRO & Services, for spend management solutions provider Ariba Inc.