Tame that MRO spend!

December 15, 2010
Franca Romano

PURCHASINGB2B MAGAZINE, NOVEMBER/DECEMBER 2010: Anyone who’s been through a recent round of maintenance, repair and operations (MRO) tendering can tell you it’s a thorny category to handle. In a typical industrial operation, MRO buying can involve a large spend spread over many sites and categories, a high number of SKUs, unpredictable demand, a large number of suppliers (including local vendors), inconsistent part-level information, spot buys, to name just a few issues.

Even procurement veterans can find themselves frustrated by the process of sourcing the quality and quantity of items to minimize downtime in busy production, manufacturing and processing facilities.

According to a recent whitepaper from procurement services firm Global eProcure (GeP), the stress comes from the high stakes involved. “It’s not about the nine percent savings,” the paper, “Taming your MRO spend”, reads. “It’s about keeping the line running.”

For most companies, the ultimate goal in MRO is to reduce spend without compromising the maintenance and repair processes. GeP recommends following five steps, based on classic procurement best practices but tailored to the “uniquely troublesome” MRO area.

Step one: Find the biggest savings opportunities
Determine exactly what the organization is spending on each MRO sub-category, captured in accordance to the organization’s category tree. Fuelled by invoice data, such segmentation allows you to recognize which categories offer the biggest savings opportunities. In most cases, this will be found in the categories with the highest spend and with large numbers of suppliers (which can be consolidated).

Step two: Create a sourcing strategy
Determine whether it’s better to go through distributors or source directly from manufacturers. In most cases, GeP advises that a mixed approach is best; common MRO items like bearings, belts, fasteners, electrical components and hand tools are usually sourced through distributors, while more complex items can often be better sourced from the manufacturer.

Step three: RFP time
Once you’ve established your strategy, collect and organize the data you’ll need to go to market. Since it’s almost impossible to ask vendors to provide the price of every MRO item they provide, ask bidders to offer quotes on a representative sample of items.

There are three ways to ask for prices: manufacturer’s cost plus mark-up, sell price at a specific gross margin, and a list price minus discount.

Whichever you choose, it’s best to have all suppliers quote the same way. It’s also smart to ask about a vendor’s service requirements, the authors say. Make sure the request for proposals (RFP) includes comprehensive information about delivery, product coverage, technical support and customer service.

Step four: Evaluation and selection
To evaluate each supplier’s product coverage and pricing competitiveness, create a scorecard for each proposal and compare the results. Then evaluate the supplier’s non-price-related capabilities. At this point, be sure to involve end-users. It should soon become apparent which suppliers don’t meet your standards. Once you’ve created a handful of finalists, you can start the interviewing and negotiating processes. Here, it’s time to finalize the pricing agreements, which may require more bidding.

In the end, the authors say, the final selection should come down to three things: pricing competitiveness (not necessarily the lowest price, but the most competitive considering all the factors), product and geographic coverage (can the vendor deliver products in a timely manner?), and technical support (does the supplier have the capabilities to provide the necessary technical services?).

Step five: Spread the good news
Once you’ve chosen your MRO supplier(s), you can’t communicate it enough to the organization. Carefully explain your rationale and why you arrived at your decision. According to GeP, a bit of pushback is normal here; it’s impossible to please everyone. Work with the supplier to address any concerns. And, of course, manage the supplier relationship to make sure pricing and service commitments are being met throughout the process.

“In the end, a successful MRO sourcing process can deliver big dividends for the organization,” states Tom Gallagher, vice-president of consulting at GeP. “Good MRO supplier partners drive more than price savings, they can help reduce demand, reduce inventories and bring improvements to the manufacturing and maintenance processes that can deliver significant value across the company.”

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