This post is based on material from the Spend Matters research brief, Everything You Wanted to Know About MRO Sourcing But Were Afraid to Ask (registration required – temporary free access to the content is underwritten by BravoSolution until December 2013). This brief contains excerpts from the Spend Matters PRO brief MRO Sourcing is Changing Fast: What’s Your Strategy? and MRO Sourcing: Forget Negotiations, Start With Good Visibility and Data.
Technology can play a critical role in helping procurement organizations manage MRO spend more effectively and create implementable savings programs with additional benefits (e.g., supplier rationalization). But companies shouldn’t start with sourcing or eProcurement tools – let alone clever supplier technologies to manage demand (e.g., Grainger kiosks). They should start with spend analytics, but any old generic spend visibility program applied to MRO won’t do.
As an example, effective spend analytics combined with collaboration and planning tools can help companies truly understand their baseline MRO spend (which represents recurring costs, although not necessarily at constant frequencies) associated with a given capital build-out. But getting to this phase requires having clean data. In this regard, managing MRO line-level information is analogous to building a catalog. One must, for example, have a common unit of measure and be able to map ERP part numbers to distributor numbers to manufacturer numbers – not an easy task!
At the same time, it can be useful to go beyond standard spend taxonomies (e.g., UNSPSC) to look at MRO spend in new ways. It's helpful to see not only how many fasteners I buy, how much I spend, with whom, and across what SKUs, but also how those fasteners actually go into a bill of materials (a motor, assembly, etc.). While traditional spend analysis might suggest that the best parts to pursue from an MRO cost reduction or supplier rationalization strategy are a specific set based on price variance and availability, it might be that re-sourcing a given lot of fasteners would require re- tooling or re-qualifying (e.g., PPAP, first article testing) a product or product line. A traditional spend analysis view won’t necessarily tell you this.
Insight into cost breakdowns is important as well, including distributor models. For example, in MRO there are service providers (e.g., “diverse” suppliers like DSSI) who themselves may buy from distributors and manufacturers. In situations like this, there are now two levels of opaqueness and potential lost margin. Your plumber might buy from Grainger, instead of you buying from the manufacturer on behalf of your plumber. Now, replace “plumber” with BPO, “integrated supply” firm, 3PL/4PL, MSP, CM/ODM, etc., and it's the same issue. However, with MRO, you can get to the SKUs and drive to a catalog for easier closed-loop management if you invest the time in data visibility and analytics up-front. Make sure that both SKU names and descriptions are cleansed.
Read the full Spend Matters Research brief: Everything You Wanted to Know About MRO Sourcing But Were Afraid to Ask (free, registration required). Temporary access to this material is underwritten by BravoSolution until December 2013).