Is your company ready to gain efficiency and reduce the cost of these purchases? Has your company developed and implemented a process to control this spend?
As your organization grows, its important to organize and control key functions especially MRO.
The cost to purchase MRO items [typically] exceeds the cost to purchase inventory items. Eberhard E. Scheuing, Ph.D., reported 6 – 10% of these dollars generate 60% of the transaction cost. (1) One company’s recent situation illustrates these facts. In a recent MSCS case study, an energy company was spending millions of dollars on MRO purchases.
These purchases were being executed by production operations personnel, not by a purchasing department. These purchases, based on estimated from the company, were costing the firm more than $145,000 in lost production time. Furthermore, many of the purchases were made at higher than average purchase prices.
(1) Releasing Value from Indirect Materials, Eberhard E. Scheuing, Ph.D., Session 1G, ISMs 90th Annual Institute of Supply Management Conference, May 10th, 2005, San Antonio, Texas.
Benefits from Managing MRO Spend
Organizing, controlling and optimizing your ‘indirect spend’ process is valuable to your company’s operation. Bottom line, it increases efficiencies and reduces the actual purchase costs of products and services. But before I illustrate how this is accomplished, let’s first clear up the terms ‘cost reduction’ and ‘cost cutting.’
‘Cost Cutting’ is eliminating an expenditure while discounting many of the effects when doing so.
Instead, the idea is to reduce the ‘non-value’ added costs while maintaining quality, delivery and service, or by achieving ‘cost reductions.’ By carefully choosing and vetting new suppliers, problems with this process are less probable.
The ‘end-result’ is that the departments continue to function, as needed without interruption, but the company increases efficiencies and reduces the actual cost of indirect expenditures.
The first step in managing the Maintenance, Repair and Operations purchases is the publishing of the company’s agency doctrine. The second step requires a ‘closed loop’ MRO process routing all purchases through the purchasing department for processing. Next, it is purchasing’s task to optimize this spend. Finally, it is necessary to ensure senior management support for the program.
The control of the purchases is important for a couple of reasons. First, the company must complete the ‘purchase order contract’ process with suppliers. This includes defining all products or services and agreeing on price and delivery. Equally important is managing the communication when making purchases. One group should act as the liaison between the company and its suppliers when conducting business. This controls the ‘buying’ process and avoids the typical ‘information pitfalls’ that occur when having multiple company personnel involved.
Spend optimization is achieved through the introduction of the processes above, i.e., the organization and control of the purchasing process. These two steps provide the basis for achieving spend optimization, i.e., competitively bidding products and services and leveraging the spend. But, what kind of cost reductions are really possible when making MRO purchases?
Take a company with an indirect or overhead spend of $12 million. This company could save approximately $ 120,000 with just one (1) % reduction in its purchase prices.
In a case study, MSCS recommended that the oil and gas company hire a separate Buyer and implement a Maintenance, Repair, and Operations closed-loop requisition process. The Company saved $119,000 in hard savings the first year when making MRO purchases. Likewise, more than $145,000 was achieved in soft savings by moving the administration of purchasing back into the procurement department.
Understanding the Category Management Process. The category management process is the careful and deliberate segmentation of products and services into different categories. The segmentation makes it easier to understand, source, and manage the products and services with suppliers. For more on this topic, please follow this link.
Reducing MRO Costs. A company with a revenue stream in the millions, can save hundreds of thousands of dollars each year in this area by applying fundamental purchasing procedures. For more on this topic, please follow this link For more on this topic, please follow this link.
Procurement Strategy. Executives today expect results. Successful companies satisfy customers with their products and services, making targeted profits while doing so. Because of this, the procurement group is expected to play a much larger role and bring value to the entire business enterprise. If you’d like to learn more about procurement and supply chain management programs, please follow this link.
Manufacturing and Supply Chain Services
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