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.