Improving Cost and Efficiency of Plant Operations

Spend Matters welcomes a guest post from Sachin Yadav of GEP.

Do you have duplication of OEM spare parts in your storeroom? Do you frequently find obsolete equipment spare parts? Are there too many versions of the same OEM spare part in the storeroom? Then your inventory could be costing you more than you think. MRO (Maintenance, Repair and Operations) and Capital Equipment are two key strategic categories for every manufacturing company. Both of these categories are driven by operations. Procurement only gets a guest appearance in sourcing and decision-making. In this article, I will take a look at how procurement and supply chain together can improve cost and efficiency of plant operations.

Complexity of capital equipment purchasing usually depends on the industry and the manufacturing process across every plant. For a company with a large portfolio of products in the market, equipment purchasing becomes very complicated and inefficient because of large variations between production lines within the plants. Most such manufacturing facilities have several brands of capital equipment on their production floor performing exactly the same function, which leads to high level of inventory in the storerooms.

Capital equipment purchase is usually driven by business requirements and a stringent schedule, which makes it challenging to develop sourcing strategy while most of the MRO spend is to keep the plants operational. However, if procurement and supply chain take a step back and look at it holistically, they can identify some long-term solutions to these issues. Here are some tips to prioritize your approach.

Standardization of equipment and spare parts: Spare parts standardization is a big step in reducing long-term inventory and maintenance costs for equipment. More often than not, spare parts in manufacturing plants come from different manufacturers. Almost all manufacturing plants have several brands of spare parts on their production floor with the subsequent surplus of critical spares in the storeroom. For every brand of spare parts, the plants need to spend time and money of training. It also means extra cost related to tools, calibrators, and programmers. Procurement will need to maintain extra vendors on file with the insurance, credit, and shipping requirements that also go with them. It takes some time and effort up front to establish standards, but the payoff can be continuous. The short-term cost of buying from a local stores might be cheaper, however the long-term effect is usually negative. Standardization of equipment across plants also helps in standardization of spare parts (especially stock items) and can reduce overall inventory and maintenance cost of the organization.

Early procurement involvement: Procurement should be involved at an early stage of the purchasing process. Procurement has the visibility into currently installed equipment base and inventory and it can also drives synergies between MRO and capital categories. Both procurement organizations can use a common supplier to develop standards for OEM spare part used in the equipment. It will help in reducing the number of brands across equipment as well as spare parts.

Focus on Total Cost of Ownership: While buying capital equipment, most procurement organizations focus on total installed cost (Initial purchasing cost) instead of total cost of ownership (which includes long term maintenance and running costs). Long-term cost of spare parts is seldom included in the decision-making as it falls under MRO and doesn’t affect capital budget. Procurement should conduct this analysis before every purchase and engineering can help procurement by providing reliable data for this analysis.

For more interesting thinking on procurement, visit the GEP Knowledge Bank.

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