Spend Matters welcomes this guest post from Amit Bidaye of A.T. Kearney.
Maintenance, Repair and Operating supplies (MRO) has been a challenging spend category for companies across all sectors — from chemicals to consumer goods. Poor spend data visibility, fragmented supplier base, high impact on plant uptime and non-compliant spending are just some of the challenges companies have to tackle while addressing MRO spend.
Despite these challenges, the best performers in this space have been able to achieve 8-15% savings benefits in recent years, based on A.T. Kearney-conducted research at recent MRO sourcing events. So how are the best performing companies managing such a complex category and delivering significant results? What are the top strategies that companies can deploy to strategically manage MRO spend?
Here are 3 strategic levers that companies can pull to address MRO spend and achieve value:
Choosing the Right MRO Supply Model
MRO model selection has probably one of the biggest impacts on future spend, and hence it is a critical lever to consider. There are primarily three supply market models for MRO:
- Specialist model: Choosing specialist distributors for each sub-category.
- Integrator model: Outsourcing all spend to one primary distributor who will either self-service all demand and/or utilize third party distributors for items they cannot supply.
- Hybrid model: Consolidating most categories with general distributors, but using specialist distributors for technical categories or niche supply requirements.
When it comes to selecting the MRO model, one-size does not fit all. Each model has its pros and cons. Companies that have sizeable spend on technical categories such as pipes/valves/fittings or bearings/ power transmission may benefit from the Specialist or Hybrid models due to better service and pricing received from specialty distributors. Companies that incur majority spend on non-technical categories such as industrial supplies, safety/PPE supplies etc. may benefit from Integrator model due to volume leveraging. It truly depends on category factors such as spend profile, service needs, stakeholder expectations and more. It is imperative that companies holistically assess these category demands and then undertake a robust market evaluation process to determine the best fit supply model and preferred partners.
Leveraging Preferred Supplier Programs
In addition to supply model selection, companies can also realize savings from fully leveraging spend across business units or geography. Many companies continue to have different suppliers across their key businesses. Even within the same business and sub-category, there are a significant number of tail spend suppliers being utilized. All this results in significant loss of spend leverage and leakage.
To achieve full benefits, it is critical to look at cross-BU leveraging opportunities with common distributors capable of meeting service needs for all relevant stakeholders. MRO market is maturing aggressively and there are a lot of supply options for companies to benefit from spend leveraging.
To reduce spend leakage outside of the preferred supplier programs, companies need to establish strong compliance reporting. Communicating the preferred program to stakeholders, identifying and transitioning repeat tail-spend vendors, carefully monitoring P-card usage are just some of the mechanism that can help to reduce spend leakage and ensure full volume leverage with preferred suppliers.
Beyond cross-BU leverage and tail spend reduction, companies can also look at leveraging spend nationally/globally with preferred suppliers. North America and Europe markets have matured in the last few years, with many top suppliers able to provide significant coverage. In addition, for certain categories such as Electrical or Pipe/Valves, distributors have started developing global capabilities thus offering additional leverage opportunities for customers.
Price Transparency Across All SKUs Purchased
A common challenge within MRO category is managing pricing for the huge number of SKUs purchased each year. Moreover, there is also a large percentage of SKUs that are bought new each year. For a large scale manufacturing company, it is common to see 30%-40% of spend being purchased as new spend (spot spend) where buyers do not have the benefit of pre-negotiated pricing.
To overcome this challenge, companies must first identify their core SKUs (those accounting for at least ~70% spend and are recurring purchases). For these core SKUs, companies can request preferred suppliers to offer competitive and transparent discounts/mark-ups and special pricing. These SKUs can be locked-in the contract upfront to ensure competitive pricing for end-users. For spot spend, companies can negotiate discounts off supplier list prices or fixed mark-ups. Although these discounts/mark-ups may not be as competitive as core SKU pricing, it will still ensure that companies are receiving leveraged and transparent pricing overall.
In addition to SKU pricing, companies should also consider receiving volume incentives from preferred suppliers to ensure benefits are realized from growing the annual program spend with preferred suppliers.
In summary, although MRO is complex category to manage, significant benefits can be achieved by prioritizing strategic approaches listed here.