Spending up to 15% More on MRO? Fragmented Supply Chain is the Reason
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.
Vendor Consolidation Vs. Diversification: What is the Best Supply Chain Strategy?
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.
5 Priorities for CXOs to Unlock the Manufacturing Supply Chain
Is a turnaround just around the corner for the manufacturing supply chain in India? Insights from various manufacturing indices suggest that while aggregate performance continues to be sub-optimal, the upward plateauing of some verticals suggest that distant signs of recovery may not be too far away after all despite the weak sentiments prevailing now. The dip in the Nomura Business Resumption Index from 70 to 66 over the first fortnight of July, suggests the manufacturing engine cooling down. Despite the Markit PMI rising from 31 in May to 47 in June 2020, industry verticals have continued to grapple with challenges of constrained capacity, weak demand, contraction of the workforce and lack of alternate supplier sites for import substitution. Moglix Business is partnering with manufacturing enterprises to make sense of these emerging patterns and identify the priorities that CXOs need to address to unlock the manufacturing supply chain. Explore these top 5 priorities here.
Map Supplier Clusters, Demand Centers and Labor CorridorsThrough the Pandemic
In India, manufacturing supply chains are highly intertwined and consist of a complex matrix of supplier clusters, demand centers, and highly concentrated labor corridors. CXOs in manufacturing enterprises need to map the exposure of their respective supplier clusters, demand corridors, and labor corridors to the contagion to identify their supplier downtime, time to recovery (TTR), and the spikes in logistics and supply chain management costs. One hundred thirty districts in the country account for 38% of manufacturing output, 50% of final private consumption, and 40% non-farm employment. Many of these districts are still in the red zones. These insights explain the contraction of output and the sub-optimal capacity utilization in the range of 28-63%. Moreover, 50% of truckers in the logistics and construction sectors come from just 15 of these districts. It explains why workforce deployment has continued to be 33-57% and why consumer demand is yet to pick up.
Track and Trace Opex Regularly Amidst Shrinking Revenue and Output
Keeping track of the OPEX and managing indirect and direct expenses is imperative to create new avenues of efficiency. The rise in direct and indirect costs facing manufacturing enterprises is due to higher overhead costs of safety protocols, loss of economies of scale due to a drastic reduction in volumes, high freight charges, and other logistic expenses, increased costs of raw materials, power cost and high costs of debt financing. CXOs in Indian manufacturing enterprises need to pivot their management of indirect costs on line items like MRO inventory, packaging materials, packaging design, maintenance, and interest payments on suppliers spend analytics through digital procurement platforms. Digital platforms that run on artificial intelligence and machine learning can enable CXOs to stay informed on evolving developments in the supply chain, exercise higher control on strategic sourcing, and regularly track and trace OPEX from anywhere and at any time.
Realign Supplier Networks to Facilitate Import Substitution
Manufacturing enterprises have continued to witness a decline in exports for four consecutive months during the pandemic. Trade wars and geopolitics have already weakened the global trading environment. The pandemic has caused further supply chain disruptions for several verticals like automotive, textiles machinery, leather goods, footwear, electronics, and electrical equipment. Consequently, these verticals have continued to register abysmal manufacturing output thus far. The erosion of trust in supplier networks with high exposure to one country calls for CXOs to explore import substitution opportunities for their strategic sourcing. While import substitution and realignment of global supply chains are strategic actions, Indian manufacturing enterprises need to avoid further procurement risks. CXOs need to explore strategic partnerships with local industrial suppliers through digital supplier collaboration models to achieve agility at scale in their import substitution efforts and hit the ground running.
Digitize Procurement Processes to Reduce Fixed Costs and De-Leverage
One of the significant challenges facing CXOs in Indian manufacturing enterprises is the resilience of their balance sheets and cost structures. Research suggests that fixed costs account for 20-35% of the total costs for Indian manufacturers due to a high CAPEX on investments in land, plant, equipment, and machinery.CXOs of Indian manufacturing enterprises need to rationalize costs in the short term while creating opportunities to move towards leaner fixed cost models in the long run. Leveraging digital models for the automation of cost centers like procurement organization, supplier collaboration, and quality control can enable supply chain leaders in manufacturing to transform fixed costs incurred on these functions into variable costs and achieve the targeted balance sheet impacts. At Moglix Business, we have seen enterprises that have migrated towards e-procurement models save up to 5% on direct and indirect costs.
Digitize Sales and Distribution Processes to Open New Revenue Streams
The unlocking of the economy has shifted from a cold turkey and holistic approach to a more decentralized and localized one. The uneven spread of the contagion across regions in the country makes it difficult for Indian manufacturers to operate their sales and distribution functions. Technology penetration in Indian manufacturing enterprises is below 5%. One of the significant opportunities for CXOs in Indian manufacturing is to leverage digital B2B commerce models to restart the engines of revenue enablement while ensuring that sales and distribution people, distributors, and customers continue to collaborate from the protected environments of their homes. Research shows that OEMs and authorized distributors of industrial supplies that have leveraged digital B2B commerce models are likely to stay ahead of their contemporaries as the economy continues to move towards recovery gradually.
Reducing Coronavirus Led Supply Chain Disruptions Now and Building Resilience for the Future
Credit ratings agency Fitch that had earlier pegged India’s real GDP growth rate for FY 2020-21 at 5.6% has now projected that the disruption caused by the contagion of the Novel Coronavirus throughout an integrated global economy could slow India’s real GDP growth rate by 0.5-1%. This projection notwithstanding, visibility into the impact on the global economy has been hard to come by. Josef Oehmen, associate professor at the Technical University of Denmark (DTU), Engineering Systems Design Group asserts that the Covid19 pandemic has no precedence that businesses can point to, no personal experience that corporate leaders can count on, no historical data for consultants to call on and therefore: there is no risk-adjusted value for businesses to act upon.
In fact, not since the end of the Second World War have countries and corporations experienced a supply chain disruption of such global scale and magnitude coupled with loss of lives of such tragic proportions.Prof. Patrick Hanohan from Trinity College Dublin asserts that even if the death rate is as low as in the case of flu deaths due to effective containment, there shall be repercussions: supply chain challenges in the short term and weakening of demand and spending cuts in the intermediate-term.
Wading Through Troubled Waters Now: Mitigating the Supply Chain Disruptions Due to Covid19
Given the spread of the pandemic across the globe, several industry verticals in the manufacturing sector are faced with immediate supply chain challenges.
First, is the dependence of some of the world’s largest companies or their suppliers that either has supply chain and procurement exposure to quarantined areas across three major economies: China, Italy, and South Korea. A study published in the Harvard Business Review asserts that 1000 such companies or their suppliers own more than 12000 facilities in such quarantined areas. Industry verticals with the highest supply chain and procurement exposure to quarantined areas in China, Italy, and South Korea include automotive, industrial engineering and heavy machinery (2,730), high tech and consumer electronics (3,238), healthcare (1,562) and consumer goods(1,139).
Second, in the context of the lockdowns announced by several regimes across the globe to suppress the spread of the contagion, enterprises in industry verticals like life sciences, healthcare, pharmaceuticals, and medical devices that need to produce “essential goods” urgently have been affected adversely. Major categories of supplies of these enterprises procured from quarantined areas include packaging, personal protection, medical dispensers, sterilized dressing pads, cables, and active ingredients.
What Needs to Be Done Immediately to Minimize Supply Chain Risks?
Given the supply chain disruptions facing enterprises in the manufacturing sector, the following contingency measures may be deployed on a war footing to save the lives of people and ensure the availability of goods:
First, enterprises need to create a contingency organizational structure to respond to the situation with a central leadership team at the corporate level showing the way. The central leadership team may be supported by a customer response team and most importantly a supply chain planning and operations team.
Second, the central leadership team shall have to ensure visibility into layered supply chains. They can do so by creating a database of components that are “critical to the mission”, trace the origin and flow of procurement and explore substitute suppliers.
Third, the customer response team may be entrusted to objectively assess the available inventory, calculate quantities of spare parts and after-sales-stock to keep manufacturing up and running and ensure downstream supply chain mobility and distribution to customers.
Fourth, the supply chain planning and operations team may be tasked with ensuring the first ring of personal safety for people by providing personal protective equipment (PPE) and collaborating with people on the production floor shop, warehouses, and nodal points in the supply chain to regularly monitor infection-risk levels. Further, the supply chain planning and operations team can do well to engage in logistics planning, identify points of risk, ensure the safety of goods during transit through effective sanitization and packaging and push for faster delivery of goods.
Recovering from the Economic Impacts on Covid 19 in the Intermediate-Term
Coming out of the Coronavirus crisis, business engagements will likely to be transformed forever.
First, enterprises that sail through the crisis shall like to adopt some of the major elements of their contingency measures to create a supply-chain risk function team. Such supply chain risk teams may be entrusted with the responsibility to map supply chain risks continuously and provide objective assessments to aid decision making in the domain of supply chain management and oversee risk governance.
Second, moving forward it shall be imperative for enterprises to strengthen supplier collaboration and work with entire supplier ecosystems that can provide a de-risked, geographically spread out and diverse model for global procurement.
Third, in the aftermath of the Coronavirus crisis, as enterprises shall stagger back to a new normal, they should ideally invest in the digitization of their supply chains to augment efforts of the supply chain risk team to anticipate the road ahead. Given the impact that the pandemic has had on supplier collaborations and contract compliance and obligation management of the manufacturing sector, it shall make enormous good sense for enterprises to invest in early warning systems, forecasting tools and comprehensive contract automation software suites that leverage artificial intelligence and machine learning capabilities. Returns from such investments in supply chain digitization assets shall manifest in the form of predictability of supplier capacity, turnaround times and rational expectations of risk factors and thus enable them to adjust their position in the market with time at hand.
Parting Comments and Epilogue: A Window into Supply Chains Post Coronavirus
Even as enterprises across the global economy continue to grapple with the challenges of the Coronavirus pandemic it is still unclear what the supply chain of the future would look like. However, amidst all uncertainties, one thing is clear: business won’t be business as usual and those that survive shall have to look at the supply chain function through a completely different lens that shall resemble the challenges and solutions of the future.
As Prof. Hua Lee, from the Department of Information and Technology at Stanford Graduate School of Business has observed, it shall not be enough to know what’s happening in your supply chain. Enterprises would need visibility outside their supply chain, know the capacity of other suppliers and modes to deploy them immediately when needed. Operational hedging shall be a necessity in the supply chains of the future with global suppliers being managed by inclusive procurement ecosystems driven by vendor consolidation. Parallely there shall be a greater need to increase logistical flexibility, design alternate transit routes and expand the geographical spread of warehousing facilities.