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Taming Your MRO Spend:Five steps to less complexity, lower costs

Here's a way to gain control: a core blueprint for reducingyour costs and satisfying your user communities at the same time.

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Does MRO procurement seem hopelessly complex and specialized? Here's a way gain control: a core blueprint for reducing your costs and satisfying your user communities at the same time.

If you've ever been challenged by the procurement issues surrounding MRO - Maintenance, Repair and Operations - you are not alone. Even the most seasoned procurement pros find this arena daunting and highly frustrating, especially inenterprises with substantial production, manufacturing and processing activities.

The task of keeping the enterprise supplied with the myriad parts, materials, and services needed to keep the machinery humming sometimes seems to resist all the usual procurement best practices and disciplines. It's a high-spend beast that is difficult to tame.

Taming Your MRO Spend

-Pump Kits-Strainers

Figure (1) shows a typical MRO category tree for a manufacturing company:

Why MRO procurement is so complicatedWhen it comes to MRO, the user community typically has strong and emotional attachments to their parts and suppliers; they have a much greater stake in avoiding downtime and outages than in saving on inventory and adhering to procurement processes. It’s not about the 9% savings, it’s about keeping the line running.

What’s more, by its very nature, MRO encompasses a complex mix of highly technical products and specialized services that can be difficult to understand and to manage.

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Taming Your MRO Spend

For example, in a typical industrial operation, MRO can involve:Ÿ A large spend spread over many sites and categories Ÿ A Large number of SKUs. A Fortune 100 manufacturing operation may require 25,000 to 50,000 unique

MRO SKUs, many of which are used only on certain equipment.Ÿ Unpredictable demand. With MRO items, it’s difficult to accurately predict usage requirements. Some 70%

of the MRO items in inventory may turn less than once every two years.Ÿ “Just in Case” mentality – “I can't afford to wait for this part so I'll by some just in case.”Ÿ A Large number of suppliers, including local vendors at each siteŸ Decentralized MRO processes (sourcing, request/order, inventory management) with inconsistent

practices and processesŸ Maverick spend, due to lack of process controlŸ Spot buys. Unplanned purchases for items not set up in inventory can account for as much as 50% of the

annual spend.Ÿ Data management across plants is a challenge Ÿ Part level information typically is inconsistent/incomplete Ÿ No common part numbering schema/taxonomy Ÿ Same item identified many ways in different systems

How to reduce costs and consolidate the supply baseFor most enterprises, the ultimate goal in MRO is to find a way to reduce the spend, without compromising or hampering the users responsible for maintenance and repair throughout the organization.

In a way, the approach is classic, best-practices procurement, with a few critical twists and strategies required for this uniquely troublesome area.

Here is a blueprint and approach we have found particularly effective in working with scores of companies with demanding and sometimes intractable MRO procurement issues.

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Taming Your MRO Spend

How to reduce costs and consolidate the supply base

Locate the biggest savings opportunitiesThe first step is to determine precisely what the organization is spending on the various MRO sub-categories and supply solutions – captured and categorized according accordance to the organization's category tree, and by site

This segmentation allows you to identify, at a high level, which MRO categories offer the greatest savings opportunities. In most cases, those opportunities will lie in the categories with the highest spend, and those where large numbers of suppliers can be consolidated and leveraged for more attractive pricing.

The spend analysis typically involves extracting invoice data from the organization's accounts payable system(s) to identify MRO suppliers and map them by site and category – a process that can often be more complex than expected.

1)

Site Category

Mfg. Site A Motion – ($1MM)

Wesco ($5MM)

Ferguson ($5MM)

McJunkin ($2MM)

Wilson Supply ($5MM)Supply Force ($2MM)HD Supply ($1MM)

Applied Ind. Technologies- ($2MM)Kaman ($5MM)CBT ($2MM)

Graybar ($.5MM)All Phase ($1MM)

Motion – ($2MM)SKF – ($5MM)Timken($5MM)

Mfg. Site B

Mfg. Site C

Electrical SuppliesPower Transmission& Bearings

Pipes Valve & Fittings(PVF)

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Taming Your MRO Spend

First, the different Account Payable systems may have varying degrees of data integrity. The same supplier, for example, may be variously identified as Grainger, WW Grainger, and W.W. Grainger.

Second, MRO spend can involve thousands of local suppliers that may each be used by a single site; making it difficult to identify what products and services they provide.

2) Develop a sourcing strategyHere, the idea is to determine which go-to-market solutions might offer the best potential for savings, without compromising operations in any way.

The most common decisions and questions:

Do you go through distributors, or directly to the manufacturers?In most cases, a mixed approach will be best, depending on the categories. Commonly used MRO items such as bearings, belts, fasteners, electrical and plumbing components, cleaning supplies, and hand tools are typically sourced through distributors. While more complex items used in maintaining and repairing specific equipment are typically purchased from the manufacturer.

Your distribution options:

Category Killers. These are large distributors that focus on a specific category such as; Pipes, Valves&Fittings, Safety Supplies, Electrical Supplies, Power Transmission and Bearings. They carry a broad range of manufacturer products in their specialty and also have product and technical specialists who help with technical issues.

Consortiums. These are groups of smaller distributors have formed to support industrial customers that are looking for a single national or regional solution. These consortiums, such as Supply Force, negotiate directly with customers to establish standard pricing and service agreements for all of the company sites. Once an agreement is signed, the local distributors then service the individual locations.

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Taming Your MRO Spend

General Distributors. These are the Wal-Mart’s of the MRO world, stocking a broad range of different products that they can deliver quickly. However, they charge a premium for this “one stop” convenience, and typically don’t offer the level of technical support of local distributors.

Integrated Supply. With an Integrated Supply solution you essentially “outsource” the management of your MRO to a third-party integrator. Depending on the scope of the agreement, the integrator can provide the full range of material management services, from sourcing of the material to day-to-day transaction processing to invoice processing and payment of suppliers. In some cases, they also take over in-plant functions such as managing the storerooms.

In practice, you will probably need a number of these solutions, based on cost issues, on the operational and technical needs of the sites, and even the politics of the organization.

To make better decisions and to gain stakeholder support, it is always helpful to communicate early and often with the plant managers, maintenance supervisors and engineers who use the MRO products.

Failure to engage the users throughout the process will undermine the success of the strategy. The the best-negotiated pricing agreement in the world is useless if no one uses it.

3) Going to MarketAfter the strategy decision, collect and organize all of the data necessary to “go to market.” And ask the users to identify all of the technical service and customer requirements that must be included in the RFP.

Devise a representative Market BasketSince it would be impossible to include all MRO items when evaluating the pricing of various suppliers, it’s helpful to have suppliers offer quotes on a representative sample of MRO items in a given category.

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Taming Your MRO Spend

To create this you can work from data from an ERP or MRP system that has good item-level descriptive information and purchase information including either USPSC coding or an internal category coding schema. If not, a “data mining” exercise is required to cobble together the data from other sources.

Typically, this entails identifying key suppliers for the category or categories we are sourcing and requesting they provide the relevant information on past purchases.

In either situation, to go to market you will need to have, at a minimum: manufacturer, manufacturer part number, item description, quantity purchased, unit of measure and the last price paid.

After identifying the range of items to be included in the market basket, the next step is to determine how to request supplier pricing.

You can ask for prices in any of three ways:Manufacturers cost plus a mark upSell price at a specific gross marginA list price minus a discount.

The idea is to have all suppliers quote in the same way, so you get a consistent sell price (either delivered or without delivery charge) that you can compare across suppliers.

You also want the supplier to provide the pricing framework they will use to price all other items that are not included in the market basket.

Understanding and negotiating this pricing formula is critical because you do not want the supplier to treat the market basket items as a “loss leader” to win the business and then charge significantly more for the non-market basket items later.

Ÿ

Ÿ

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Taming Your MRO Spend

Requirements other than priceIn the selection of a MRO supplier, non-price service requirements and the supplier's ability to satisfy these requirements are just as critical as their pricing.

At this point, it’s critical to engage all stakeholders to determine precisely what requirements must be included in the RFP, such as:Ÿ

the required standard and emergency delivery times?Ÿ Product coverage. Does the supplier carry all of the product lines that the users require? If not

how do they propose to satisfy these requirements?Ÿ Technical Support. Can the supplier provide the sites with the technical support that the

complex MRO categories require? Product training, troubleshooting, calibration services, warranty management, inventory services ?

Ÿ Customer Service. How does the supplier propose to support each of the user sites? What is their program management structure? What reporting capabilities do they have? How often do they have formal program reviews? What are their implementation capabilities?

Once these requirements are known, you need to develop a formal evaluation process that weights each supplier's response, to determine their ability to provide the support required by the users.

Delivery. Can the supplier deliver to all of the sites covered by the agreement? Can they meet

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Taming Your MRO Spend

Evaluate and Select SuppliersThe first step is to evaluate each supplier's product coverage and pricing competitiveness, by creating a scorecard for each pricing proposal and then comparing the results.

Table 1 shows an example of a product coverage and pricing scorecard for a Power Transmission and Bearing supplier.

From there, the next step is to evaluate the supplier's non-price capabilities. It is imperative to involve representatives from the user community since they are the ultimate customer and need to be part of the decision process.

Using a structured supplier scorecard will allow the participants to consistently evaluate the supplier's response to non-price requirements criteria.

4)

% Item Covered $ Savings % Savings

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Taming Your MRO Spend

Total Sale

At this stage you can often eliminate a number of suppliers, since it will be apparent which suppliers (1) do not have the breadth of product or geographic coverage, (2) are not price competitive, or (3) cannot meet the technical requirements.

You should be left with a handful of “finalists” suppliers who meet the requirements set out by your stakeholders. Your final selections will require a series of face-to-face meeting with the finalists to if verify they have the capabilities documented in their proposals.

Involve your user community in these negotiation sessions, to ensure that their technical and customer support requirements are addressed and that they are part of the decision process.

At this stage, you also need to be finalizing the pricing agreements. This may entail another round of market basket bidding or a reverse auction to get the best possible pricing. Additionally, the pricing framework for non-market basket items needs to be finalized.

In the end, the final selection of the MRO category suppliers will come down to:Ÿ

necessarily the lowest but competitive when considering all of the other factors.Ÿ Product and geographic coverage. Can they provide the products needed by the user and

deliver them in a timely manner to meet their requirements?Ÿ Technical support. Does the supplier have the capabilities to provide the user community with

the technical services they require?

Pricing competitiveness. Does the supplier provide a competitive pricing arrangement? Not

5) Tell the organizationOnce the supplier selection process is completed, it is necessary to communicate -and preferably over-communicate -the decision across the organization, carefully explaine the rationale, and what benefits the company can expect.

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Taming Your MRO Spend

In our experience, it’s wise to expect some pushback; it is nearly impossible to please every single user across the organization. As user issues arise during the early implementation, it will help to work very closely with the supplier to proactively address any user concerns.

Naturally, it is also necessary to manage the supplier relationship throughout the process to ensure that the commitments, pricing and service are being met.

In the end, a successful MRO sourcing process can deliver big dividends for the organization.

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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Taming Your MRO Spend

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© 2011 GEP. All Rights Reserved.

®GEP (Global eProcure) is a leading procurement services firm dedicated to helping enterprises add value and reduce costs through procurement and supply chain transformation. With a comprehensive portfolio of services and solutions, GEP helps many of the world's largest organizations uncover savings opportunities, and deliver these savings to the bottom line. We have managed over $50 billion of spend on behalf of these clients, across industry sectors and geographies.

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