mro demystified part iv · purchases, price points, and supplier relationships. it means accepting...

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MRO Demystified Part IV Long-Term Spend Management


An effective process for carrying out Strategic

Sourcing initiatives provides the foundation for

efficiently approaching MRO spend – or spend in

any category.

A single successful event, however, is not nearly

enough to maintain efficiencies and value

generation in the long-term. It’s important that

organizations never forget the ‘management’ side of

spend management. All too often, organizations

settle into their old bad habits shortly after they’ve

boosted their visibility and re-obtained some level

of control. This is a fatal flaw in the ‘set it and forget

it approach’ favored by under-resourced

Procurement teams and hands-off consultants.

Maintaining long-term control over MRO spend

means taking a proactive and strategic approach to

purchases, price points, and supplier relationships. It

means accepting that ‘good enough’ is anything but,

and working round-the-clock to make this

complicated spend category a value generator

rather than a nuts and bolts nuisance.

In this installment of MRO Demystified, we’re taking

a close look at some of the programs and policies

your organization should consider as you continue

refining your approach to Maintenance, Repair, and

Operations.

MRO Demystified Part IV: Long-Term Spend Management


Managing MRO Spend Breaking Bad Habits


One common approach to more strategic supplier

relationships and integrated technologies is Punch

Out Catalogs. Sometimes known as ‘tap-outs’ or

‘round-trips’, Punch Outs are an application-based

method of corporate purchasing that connects a

company’s internal eProcurement system to a

supplier’s website. The buyer leaves (“punches out”)

their internal platform and enters the supplier’s

online catalog. While the name may suggest conflict

between buyers and suppliers, Punch Outs are

actually all about closer, more transparent

collaboration. Employed effectively, they’ll eliminate

conflicts and miscommunications entirely.

Without a Punch Out, Procurement is tasked with

manually loading items into its cart after completing

a purchase order. Alternatively, they might have to

pre-load a master catalog and work through the

document to evaluate products, services, and

pricing. Organizations will even establish rules

within their system to flag invoices with inconsistent

pricing. Though well-intentioned, these safeguards

tend to create more work for Procurement.

As prices fluctuate, purchasing groups are

constantly tasked with validating them against

outdated catalogues.

Confirming pricing and choosing the right items are

the sort of tactical, time-consuming processes that

leading Procurement groups are increasingly looking

to automate. They’re also a big contributor to the

function’s reputation as a low-value entity carrying

out repetitive tasks.

With access to a Punch Out’s real-time, dynamic

catalog, however, Procurement teams receive live

updates on thousands of items. This expedites the

purchasing process considerably. With this

additional time on their hands, they can turn their

focus to carrying out more strategic, high-value

initiatives. What’s more, they can rest easy knowing

their pre-loaded carts will guarantee compliance

from suppliers and buyers alike. Punch Out catalogs

will offer only those items that adhere to contract

terms. In time, both unexpected price increases and

maverick purchasing will fade into your

organization’s less strategic past.



Punch Outs From steady to strategic


In a nutshell, introducing an Integrated Suppliers

program means adopting an end-to-end program

for managing purchases and relationships in the

category. Essentially, this cost-effective option

consolidates a company’s numerous MRO suppliers

into a single, manageable entity. Also known as

outsourced storeroom management, Integrated

Suppliers take control of the entire MRO purchasing

process on your behalf.

The efficacy of an Integrated Supplier apparatus will

depend largely on your organizations goals and

objectives. While it provides an opportunity to

eliminate many of the headaches associated with

MRO sourcing, many organizations will find they do

not provide enough visibility or control to function

effectively.

Depending on your organization’s unique spend and

volume needs, the category might be more

effectively addressed with in-house purchasing

efforts.

Opting into an Integrated Supplier program is not as

simple as handing over the reins. Your organization

will need to develop a clear, measurable baseline

for tracking supplier performance. You’ll also need

to staff an internal program manager to monitor

your integrated supplier and provide for long-term

alignment and compliance.



Integrated Suppliers Outsource vs. in-house

Pros

Ensures compliance from suppliers and buy-

ers

Guarantees year-over-year cost savings

Eliminates the need to perform manual tasks

Provides access to external category SMEs

Consolidates total MRO inventory

Reduces total transactions and invoice

processing costs

Cons

Forfeits decision making power

Limits opportunities to build internal exper-

tise

Reduces visibility into your organization

Could benefit suppliers at the expense

of your company


In the MRO category, one-off purchases are often

made in moments of crisis. The spend area includes

parts and components that – quite literally – keep

companies and their facilities running. Slow-downs

and stoppages are all the more common when

organizations don’t have an open line of

communication with their suppliers. A Vendor

Managed Inventory program encourages optimal

supply levels and open dialogue by putting the onus

of managing inventory levels on the supplier. As

with similar efficiency-boosting programs, this takes

considerable tactical burden off of your purchasing

team.

In many cases, a VMI will see a vendor set up shop

on the site-level. With direct access and insights into

your company’s resources, they can set minimum

and maximum purchase levels and automate the re-

order process. With this subject matter expert so

close by, your facility and warehouse managers can

work to develop their core competencies rather

than sweating over the state of their stock rooms.

Many suppliers will even offer consignment – that

is, inventory they still own – to reduce your carrying

costs.

Like Integrated Supplier programs, VMI relies on

trust and oversight. It’s not enough to select a

vendor, introduce a VMI system, and expect a

positive change. Vendors make mistakes. Some will

fail to accurately anticipate demand, others might

look for opportunities to serve their bottom-line at

your expense. It’s essential that you vet vendors

thoroughly before committing to such a program

and maintain a management framework that

guarantees reliable services. A good Procurement

organization will set up a system of checks and

balances to ensure their suppliers operate with the

appropriate level of autonomy – no more and no

less.



Vendor Managed Inventory Checks and balances


Consolidating the supply base is often the golden

ticket when it comes to tackling MRO spend. As

we’ve emphasized again and again, one of the

category’s prevailing challenges is its breadth.

Whereas spend within certain categories might

include a handful of products and services, MRO

tasks even small organizations with managing

hundreds of SKUs. When the supplier base is equally

diverse, organizations have their hands full keeping

things under control.

Procurement teams can uncover consolidation

opportunities by carrying out a Strategic Sourcing

event. Once they’ve done so, they can work to build

a supply base that offers competitive pricing and

serve their unique needs. Instead of a few-dozen

‘good enough’ suppliers spread across a wide

geography, they’ll start to build a bench of best-in-

class providers who’ll serve them on a local level.

The possibilities for relationship building are

limitless. Procurement can engage directly with

their new preferred supply base to develop

programs that are dependable and adaptable for

both parties. They’ll also quickly cut administrative

costs and boost their visibility into the category.

An organization should not, however,

indiscriminately cut ties with suppliers. Like any

strategic sourcing initiative, consolidation efforts

require effective planning, a wealth of information,

and a commitment to long-term monitoring and

management.



Supplier Consolidation The Golden Ticket


Getting a handle on tail spend is an important

consideration during any Supplier Consolidation

initiative. How should organizations work tail spend

into the process?

1. Identify tail spend suppliers to consolidate into

your preferred supply base.

2. Gather historical purchasing data from these

suppliers.

3. Categorize your data at the line item level and

identify the most strategic option.

4. Facilitate a supplier quoting process.

5. Determine the savings you’ll realize by

consolidating.

6. Communicate these numbers throughout the

organization to earn buy-in.

7. Add the supplier(s) to your new preferred

catalog and establish controls for off-contract

purchasing.

It’s worth noting, however, that this traditional,

manual approach is rapidly evolving. While it’s

important for your team to know this 7-step process

forward and backward, innovative automation is

rapidly transforming this space.

Best-in-class procurement departments are

cognizant of changes being made within the MRO

space and take advantage of technological

advancements that further alleviate manual

processed and their associated costs.



Tail Spend Management Rein it in


Taking a world-class approach to MRO means

accounting for the unexpected and finding a balance

between flexibility and compliance. Unfortunately,

you’ll never eliminate the need for emergency

purchases. No machine or employee is infallible. It’s

important that site-level purchasers have the

freedom to address unexpected hiccups and risk

factors.

These contingency plans cannot, however, open the

door to rampant, off-contract purchasing. Your

organization still needs controls in place to limit non

-compliant spending to whatever degree possible.

As a best practice, your organization should

consider appointing trusted on-site managers with

override authority. If they exercise their rights

responsibly, they’ll keep your organization from

falling prey to overly-strict or overly-lenient policies.

Conclusion In a category that is highly decentralized and

overseen by multiple spend owners, sourcing MRO

can feel daunting at the onset. The first step on the

road to effective and sustainable MRO spend

management is recognizing that there’s no one-size-

fits-all approach. In a category that could consist of

dozens or even hundreds of individual projects,

obtaining competitive pricing is the easy part.

Ensuring that competitive pricing translates across-

the-board requires consistent communication,

collaboration, and ongoing monitoring. With a

constant eye on the prize, Procurement teams can

not only not only target quick-win cost reduction

opportunities but also establish strategic MRO

spend management operations capable of

producing savings year-over-year.



Approval Structures Addressing emergency purchases


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 iv · purchases, price points, and supplier relationships. it means accepting...

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