Managing the MRO Monster

Implementing a strategic approach to sourcing non-strategic categories


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.

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