December 28, 2018

Simplifying MRO: Quick Ways to Reduce Cost

Simplifying MRO: Quick Ways to Reduce Cost

Across sectors, Maintenance, Repair and Operating supplies (MRO) has been quite a challenging spend category. Factually, the value of individual MRO products is relatively low, which results in the purchases being viewed as quite inconsequential. Poor spend data visibility, a supplier base that is fragmented, non-compliance etc. are just some of the issues that companies have to address when it comes to MRO spend.

Hence, what seemed like a relatively inconsequential category on the onset, when all the purchases are added up the year-end, reveals to represent monumental costs, that have quite a significant impact on an organisation’s profitability. It thus becomes quite important for organizations to tackle the aforementioned problems and obtain visibility into their purchasing behaviour. This, in turn, helps them in reducing costs and increasing their operational efficiency.

The first step to maintaining and curbing MRO spend lies in getting actionable insights, by gaining visibility into your purchasing behaviour through your purchase history in a particular category. A vendor-usage report is generally the best way to obtain this information, as it can give you access to all the purchases that your organisation has made in the past few months (through invoicing report). Crucial information such as product information, the annual quantity purchased and the unit price of each item via standardised measures can be garnered from the report. This can help an organisation assess the total spend, the vendors being currently engaged and the type of products that the vendors are catering to them.

Post requisite collection of information the following strategic actions need to be implemented for cost-reduction:

  • Vendor Consolidation: Consolidating purchases to as few vendors as possible is an industry best practice when it comes to the management of MRO spend. When you concentrate on buying power, you can enhance your opportunities for reduction of purchase prices. Granting a larger portion of your spend to particular suppliers will also make them willing to reduce product pricing, which will help you make substantial cost-savings. Vendor Consolidation also helps in increasing your efficiency, as fewer transaction and better engagement with a limited supplier base helps in fostering better supplier relationships as well.
  • Optimization of Orders: Gaining actionable insights into your volume usage over a period of time, will help you assess better the average number of orders that are placed for a particular product, and also if there were any peak times when the demand for the said product was high. This information can then be utilised to combine product purchases into fewer orders, that can help in reducing delivery costs and optimising profit. There is also an added benefit of overall reduction of product costs, due to discounts received with larger order quantities.
  • Negotiations of Contracts: Many a time, even though organisations have a particular supplier in place, they do not have a pricing or contract agreement drawn out that can help them manage the price of the purchase materials. Having a well-negotiated, long-term contract in place with your suppliers, can help in locking in the prices of your purchases till the stipulated time of the contracts. This in turn also incentivizes the contractors to give additional benefits as well as category discounts, knowing that the purchases are to continue for a continued period.

If left unmanaged, MRO spend can impact an organisation’s bottom line greatly, hence it is imperative for businesses to analyse their purchasing patterns, which can help them in significant cost reduction. Thus, by prioritising the strategic approaches mentioned earlier, best practices can help your organisation in generating large savings and increase your overall profitability.

Liked what you read? We would love to hear your views on the topic, and how do you think you can minimise MRO spend in your organisation? Write to us in the comments section below.