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MRO Demystified Part II The Value of a Spend Analysis


Spend Analysis

Why do so many companies fail to optimize

MRO spend, even after committing to do

better?

Naturally, there are a few different reasons

for this. Look first at how thoroughly MRO

purchasing profiles are examined prior to

any changes in standard operating

procedures (SOP). Leadership tends to take a

top-down approach by consolidating spend

to one or two preferred suppliers, ignoring a

more comprehensive look at historical

purchasing and usage. Volume discounts

reign, and other elements are ignored –

preferred suppliers are often chosen based

solely on this one factor. Then they issue

corporate mandates to ensure compliance.

This approach is rarely successful. More

often, this quick and dirty approach inspires

resistance, compounds inefficiency, and

leads Procurement to miss out on savings

opportunities. In short, these companies are

going about MRO the wrong way.

Approaching MRO the right way requires

going back to the basics.

The foundation of effective MRO spend

management is a thorough Spend Analysis,

coupled with an examination of purchase

patterns and review of end-user insights.

Armed with this data, organizations can

ensure they partner with MRO suppliers who

can offer cost savings as well as long-term

end-user satisfaction.

Getting Started

Begin by defining your goals. What do you

want a spend analysis to accomplish? For

Procurement, the answer is support for the

identification of strategic sourcing projects

and ongoing spend management. The

answer is not, however, an all-encompassing

analysis that speaks to the myriad needs of

all organizational silos. Short, sweet, and

stripped down, this analysis has one and

only one purpose – provide Procurement the

ammunition needed to identify

opportunities for cost savings.

You don’t know what you don’t know

MRO Demystified Part II: The Value of a Spend Analysis



Keeping your eye on the prize of cost savings

– the next step, and major potential

stumbling block – is selecting a taxonomy, or

predefined nomenclature and hierarchy, for

categorizing purchases. The right taxonomy

lays foundation for standardizing spend data

across an organization and makes identifying

opportunities for cost savings and ongoing

process improvement possible. Procurement

organizations may consider building a

taxonomy based on how their suppliers

categorize their product line to simplify the

mapping process later down the road.

Ultimately, keep an eye on these goals at all

times, and toss out anything that can’t be

universally applied across a company’s spend

profile or, at the very least, point

Procurement in the direction of savings

opportunities.

There are plenty of popular, generic options

out there. Finance might favor the United

Nations Standard Products and Services

Code (UNSPSC) – a four-level deep taxonomy

of products and services used for

ecommerce purposes.

It’s not hard to see why.

A taxonomy like UNSPSC comes equipped

with its own predefined structure that,

critical to Finance, is utilized by all the

external organizations that team works with

regularly.

Faced with the daunting task of collecting,

cleansing, and categorizing years of spend,

organizations can easily feel tempted to

select a system that’s already done some of

the work for them.



Laying the foundation for success


Selecting the Right Taxonomy

UNSPSC Applied to MRO Spend

UNSPSC comes prebuilt with a level of

granularity at your fingertips. MRO

includes several sublevels that can make

the process of mapping spend to the

taxonomy less of a herculean

undertaking, such as:

Building & Construction Machinery &

Accessories

Industrial Manufacturing &

Processing Machinery & Accessories

Manufacturing Components &

Supplies

Material Handling & Conditioning &

Storage Machinery & their

Accessories & Supplies


In the case of Marketing spend, imagine a

company engages a commercial printer for a

number of purchases, including promotional

tchotchkes to hand out at conferences in

addition to their usual brochures. A

taxonomy like UNSPSC – which categorizes

each purchase based on its printing method -

will view these two items to as entirely

separate. Whether you choose offset or

digital printing, each run will possess a

distinct UNSPSC code. This level of detail

isn’t necessary for a Procurement

professional who’s simply concerned with

identifying and engaging a new commercial

printer.

UNSPSC and other taxonomies are rigid and

one-size-fits-most by design. That means

they’re great for Finance’s purposes, but not

so great for Procurement. Procurement

requires a taxonomy that reflects the way

organizations engage with suppliers,

delegate spend ownership, and tackle

sourcing initiatives. Assessing spend for the

purposes of identifying cost reduction

opportunities is an iterative process.

The right taxonomy will allow Procurement

organizations to group spend on a category

and subcategory basis to identify viable

areas for savings.

For MRO, this means grouping spend into

areas such as Industrial Supplies, Welding,

Machine Parts, and more to gain visibility

into spend volume per subcategory - quickly

bringing to light subcategories of high

volume to explore further, as well as helping

to eliminate spend categories with low

spend volume that do not require

Procurement’s attention. From there,

Procurement can dig into these

subcategories and collect the necessary

information that can support a sourcing

strategy.



For Procurement, going to market for

commercial printing services means

understanding how much spend is

associated with the category as a whole.

The distinction between printing methods

is just one example of information not

pertinent to Procurement that’ll

complicate things.

UNSPSC Applied to Marketing

Spend


With Procurement’s goals set and a

classification system established, it’s now

time to dig into historical purchasing data in

pursuit of cost reduction opportunities.

Moving from the general ledger and

accounts payable into procurement cards

and more granular data sources,

Procurement eventually works its way down

to the line-item level. Members of the

Procurement team supplement these efforts

by engaging relevant stakeholders and end-

users. For organizations who’ve taken a

decentralized approach to the category, this

means communicating with facility managers

across numerous locations. While tedious,

these conversations provide early, valuable

insight regarding incumbent supplier

relationships.

The name of the game in MRO spend

analysis is volume. Wading through historical

purchases is rarely quick, but it tends to

prove especially time consuming in the MRO

space. Organizations often rely on their

suppliers to collect, store, and eventually

provide data. If a supplier is not forthcoming

or has taken a lax approach to data

collection, Procurement will need to work

doubly hard to reach the proper level of

visibility.

While frustrating, such situations make for

an especially instructive spend analysis

process. Weathering a number of setbacks

forces Procurement to learn from past

mistakes and commit to process

improvement. Procurement should not only

look to establish relationships with more

transparent, dependable suppliers, but also

establish internal systems where data

collection requires less supplier input.

What’s more, any problems resulting from

analog data sources present the perfect

business case for digitizing Procurement’s

data collection practices.

By the end of an MRO spend analysis,

Procurement will be equipped with a

targeted list of subcategories from which

market baskets should be built. This

differentiates MRO from more rate card-

focused categories like Marketing Services. It

also promises a uniquely taxing data

collection process. There is good news,

however, for Procurement teams looking to

carry out MRO initiatives. Once they’ve done

the hard work of constructing a market

basket, they’ll find developing go-to-market

initiatives comparably straight-forward and

objective.



Identifying Opportunities Turning data into action


About Source One, a Corcentric company Source One is a top provider of spend management solutions ranging from spend analysis and

strategic sourcing through category management and Procurement Transformation. Since

1992, Source One has helped industry leading enterprises optimize their approach to count-

less indirect spend categories including MRO, Facilities Management, IT & Telecom, Profes-

sional Services, and more. Serving as an extension of client resources, Source One’s category

subject matter experts deliver best practices, market insights, tools that drive greater value

out of the bottom line. To learn more about Source One, a Corcentric company, visit us online

at: www.sourceoneinc.com.

mro demystified part ii - sourceoneinc.com...mro demystified part ii: the value of a spend analysis...

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