Spending up to 15%More on MRO? The Fragmented Supply Chain is the Reason

Does your procurement team rely on a fragmented MRO supply chain? If the answer is yes, your manufacturing enterprise may be unknowingly losing out on opportunities of 6-15% cost savings. MRO spending for manufacturing enterprises typically ranges from 0.5 to 4.5% of their revenues. Of the different verticals in manufacturing, industries like engineering, procurement & construction (EPC), mining, and infrastructure development have the highest MRO spending as a share of total revenue. 

How Does a Fragmented MRO Supply Chain Affect Manufacturers’ Bottomline?

A fragmented supply chain is an outcome of a fragmented supplier base for MRO procurement. Research reveals that manufacturers in many industries have as many as 1300 MRO vendors per plant. The high number of MRO suppliers results in a higher number of MRO procurement transactions.

A high number of MRO suppliers means that each of these suppliers gets a lower share of the enterprise’s wallet. Suppliers bargain aggressively with manufacturers on spares and parts’ costs and cutting down on customer service in the SLA. The result is that manufacturers get little leverage with bargaining for MRO price discounting and cost inefficiencies.

The necessity to track each MRO procurement transaction calls for a deployment of a higher number of resources in the procurement team. Else, if enterprises deploy a limited number of resources, the high number of MRO purchase orders squeezes worker productivity. 

Furthermore, the manual procurement process for supplier collaboration does not let you know about your MRO category spend. 

Why Do Procurement Managers Persist with a Fragmented MRO Supplier Base?

Despite the demerits listed above, your plant managers and procurement teams may persevere with a fragmented MRO supplier base. What are the reasons for this?

• Fear of Downtime: Your plant managers consider production downtime to be the biggest risk. What if you do not receive MRO supplies on-time and in-full (OTIF)? What if your machines and workers on the production line come to a grinding halt? How do we assess the capabilities of new suppliers?

• Long-Term MRO Supplier Contracts: Fit it and forget it. Many plant managers find it safer to ink long term contracts with MRO suppliers. Some contracts may extend to as long as 20 years. Such long-term contracts put the MRO supply chain management processes in an auto-pilot mode; unless there’s a fire-alarm, a wake-up call, or a problem. 

• Lack of MRO Category Management: Only 25-50% of MRO spend is consistent across product categories. The remaining 50-75% of MRO spend categories witness highly uneven patterns in enterprises’ buying behavior. Such variance makes demand planning difficult and unpredictable.

• Fixating with PPP or PPV Models of MRO Costing: For years now, enterprises have fixated with price per part (PPP) and price per volume (PPV) models to bargain with MRO suppliers. These models look like significant cost-cutting measures, but suppliers eventually look for creative ways to get an edge by cutting down on other vital elements of their supply chain solutions.

What Should Procurement Managers Do to Optimize their Supply Chain?

If you are a manufacturing enterprise, ask your procurement team to consider the following measures to optimize your MRO supply chain management processes.

• Clean Your Procurement Data: Your procurement data management holds the key to consolidating your supply chain. Pivot towards clean master data management with an e-procurement solution. 

• Improve MRO Demand Planning: Use your procurement data to identify consumption patterns, inventory holding and warehousing costs, product costs, and process costs. Identify MRO re-stocking timelines across your multiple manufacturing plants.

• Consolidate MRO Categories: Sort MRO products into categories. You may use product similarity, compatibility, or source-of-origin, as sorting keys for MRO category management. Now, track indirect expense trends, lead times, logistics and warehousing costs, and reverse logistics for each category.

• Optimize MRO Inventory Management: Conduct periodic inventory audits at your manufacturing plants and warehouses. Doing so will allow you to assess inventory-holding costs and opportunities to reduce working capital blockage.

• Consolidate Your Vendor Base: Revisit your MRO spend analysis and identify MRO suppliers that can cater to multiple MRO product categories. Share your annual requirements, delivery timelines, and locations with your suppliers. 

Ask your MRO supplier to share quotes for not just the spares and parts but for taking ownership of the MRO supply chain. Choose the one that offers you an integrated supply chain solution and consolidate your vendor base.

• Integrate the Procure to Pay Process: Replace the existing manual workflow with an e-procurement application.  Enroll all relevant business stakeholders into a single digital supply chain ecosystem. To drive technology adoption, opt for a P2P software application that offers a simple user interface that your people are already familiar with.

Have You Explored the Benefits of MRO Procurement Outsourcing Yet

If you are a manufacturing enterprise and persist with a fragmented MRO supply chain, it is time to move on. Research suggests that you can achieve cost savings in the range of 6-15% if you switch from a fragmented supplier base to a consolidated one. Engage with supply chain consulting experts from Moglix Business to explore how you can benefit from our MRO procurement outsourcing solutions.

The pandemic brings the focus back on the classic debate: vendor consolidation or vendor diversification? Which of the two is the right supply chain management strategy. If your sourcing managers are searching for an answer to the question, we have got you covered. The truth is that your supply chain’s digital readiness can make all the difference to the answer.

What is Vendor Consolidation and What are its Benefits?

Vendor consolidation is a strategy to rightsize the existing supplier base and make it more cost-efficient, quality-centric, and stable. A vendor consolidation strategy will require you to map the value and category of procurement against each supplier and procure more industrial supplies from a chosen few suppliers. You can now reduce the number of vendors and reap the following benefits:

• Reduced Purchase Costs: When you purchase higher volumes of industrial supplies from handpicked suppliers, you will have higher bargaining power and ask for discounted prices. You can also explore the option of annual rate contracts to seek effective insulation against price increases. 
• Reduced Process Costs: Once you reduce the number of suppliers, you will reduce the number of purchase orders and invoices.  You will reduce the turnaround time for placing orders by integrating more line items in each order. You will reduce your process costs.
• Reduced Mismatches in Supplies: One of the hurdles of a large supplier base is many supplier codes, material codes, and supplier catalogs. Vendor consolidation allows your sourcing managers to work with fewer supplier codes, material codes, and catalogs. You will reduce the scope of mismatches between items that you order and those that you receive. 
• Improved Supplier Relationships: When you increase your purchase orders’ value, suppliers will undoubtedly accord greater attention to your requirements. You can look forward to stable and reliable supplier relationships over the long term. 

What is Vendor Diversification and What are its Benefits?

A vendor diversification strategy will require you to spread out your supplier base and work with many suppliers. Following are the benefits of vendor diversification:

• Opens Multiple Channels of Sourcing: Vendor diversification opens up multiple sourcing channels for your enterprise. It spreads out the procurement risks across a large number of suppliers and reduces your dependence on each supplier. 
• Promotes Innovation and New Product Development: Vendor diversification augments innovation and new product development. You can engage with multiple suppliers, browse through their offerings, and select the one that fulfills your requirements. 
• Promotes Competition among Suppliers: One of the benefits of diversifying your vendor base is that you have greater flexibility to choose your suppliers for each purchase order. It allows you to create an environment for competitive bidding and opt for the lowest price to get a competitive advantage. 

What is the Best Supply Chain Strategy?

The best strategy depends on product category, procurement processes, and technology maturity. In the long run, for large and growing businesses, vendor consolidation provides the scale with reduced costs. The pandemic experience has shown that effective supply chain risk management calls for visibility into procurement.

Digital procurement solutions allow you to leverage analytics, map supplier performance, and make purchasing decisions. You can lean on an integrated platform with an inclusive supplier ecosystem and a single catalog managed by a single point of contact. This way, you can consolidate your supplier base, re-engineer your procurement process, and de-risk your supply chain.