Procurement Outsourcing, MRO Spend, and Inventory Consignment

Many manufacturers buy MRO in their plants and factories, including spare parts, pumps, valves, instruments, etc. MRO can be a significant spend category. While it is certainly a category that can be managed by outside Procurement Outsourced providers, it takes additional value added services to turn into a consignment, or “pay on consumption” model.

In talking to companies that use this model for MRO, I have found the chief interest is not taking this spend off their balance sheet as long as possible, but the professional management of buying hundreds of standard MRO items and managing the procure to pay process so in essence the manufacturer only deals with one vendor.

The basic model is a firm specialized in this area will contact the suppliers, negotiate with the supplier, issue purchase orders to them, pay them, finance the inventory, etc.

This model is basically a derivative of the vendor managed inventory models of the past but with a few twists:

  • Firms involved in this space will engage with engineers (or other staff of the manufacturers) to forecast needs
  • The firm issue POs to vendors and the manufacturer only has one invoice to pay monthly. Instead of having many vendors to deal with, the manufacturer has one. The manufacturer pays a consumption fee monthly, which includes the management time, finance costs, volumes consumed, logistics handling, etc.

From my awareness, these programs are not big enough to have a material impact in terms of inventory reduction at large companies. But they do provide operational advantages in the form of reducing the interaction of procurement with hundreds of small MRO vendors to one BPO relationship that can handle not just the sourcing but the logistics.

A specialist MRO outsourcing vendor that can provide this type of logistics support may have some advantages in negotiating with suppliers (it depends on their volumes of course). If they can use economies of scale, that advantage could be passed to the manufacturer. You would also hope that working under this model a manufacturer may be able to reduce inventories, especially if the BPO provider can pull standard items from other sources.

It all sounds good on paper, and of course what really makes it work is to have the proper system integration to manage inventory automatically. This can be done via EDI.

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Voices (2)

  1. Abraham PU:

    Well we can also explore one more level up which is MRO Integrators. Not only they do what BPO’s offer, they also offer guaranteed savings along with inventory management and dead stock management. They do the following activities:
    a) Current State Analysis (To Identify Gaps)
    b) Suggestions for standaridisation
    c) Process implemenation for raising a single PO
    d) Invenroty Analysis & Forecast
    e) Guaranteed savings analysis
    f) Consolidation Analysis (Multiple Sites, Multiple Suppliers)

    MRO Integrators are prevalent in mainly developed regions like NA and EU and have lesser penetration in emerging markets

    1. anthony hsieh:

      Which firm are you using for MRO integration?

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