MRO implications

How the unique features of 

MRO procurement influence 

cost savings and financial 

performance

White paper 

MRO Implications 

Unlike direct costs, the ‘hidden’ and often 

uncontrolled nature of MRO procurement 

costs can make it difficult to apply cost saving 

strategies. By its very nature, MRO is diverse, 

fragmented and unplanned; consequently many 

organisations choose not to pursue cost savings 

in this area, or simply don’t know how to go about 

it. Yet the potential for financial savings and 

efficiency gains is substantial. 

This white paper, one of a series covering best 

practice in MRO Procurement, discusses the 

true nature of MRO procurement and explores 

what it means for an organisation in terms of 

cost savings, financial performance and profit 

improvement. 

rs-connectedthinking.com 

connectedthinking@rs-components.com

White paper 


Introduction 

According to a GEP study in 2011, some of the 

main reasons that MRO typically affects an 

organisation’s profitability adversely are: 

• Large spend spread out over many different 

sites and categories. 

• A large number of SKUs. A Fortune 100 

manufacturing operation may require 25,000 

to 50,000 unique MRO SKUs, which are only 

used in certain equipment. 

• Unpredictable demand for MRO items. Some 

MRO items may turnover less than once every 2 

years. 

• ‘Just in case’ mentality – ‘I can’t afford to wait 

for this part so I’ll buy some now just in case’. 

• A large number of suppliers. 

• Decentralised MRO processes: sourcing, 

request/order, inventory management with 

inconsistent practices and processes. 

• Maverick spend, due to lack of process control. 

• Spot buys – unplanned purchases for items not 

set up in inventory – can account for as much 

as 50% of annual spend. 

• Data management across sites is a challenge. 

• Part level information is typically inconsistent 

and incomplete. 

• No common part numbering scheme, so the 

same item is identified in many different ways. 

Reducing costs disproportionately improves financial performance 

All of these factors can be addressed individually 

through various cost saving tactics, but sustained 

cost saving success becomes extremely difficult to 

achieve without three key components: involvement 

of key decision makers, proper tracking of savings 

and utilisation of data analytics. 

A 1% decrease in total costs can have the same 

effect as a 10 times or more increase in a company’s 

total revenues. To put this revenue increase into 

perspective, a company would have to achieve close 

to 60% compound annual revenue growth over five 

years to achieve the 10 times revenue increase. 

Once the key personnel are engaged and the 

correct processes are being utilised, an organisation 

can start to achieve sustained cost savings in MRO 

which can lead to huge increases in a company’s 

earnings before interest and taxes, and can free 

cash flow. 



White paper 


Cost saving areas and the potential for savings 

There are 4 main areas of costs to focus on: 

product costs, inventory costs, purchasing costs, 

sourcing costs. Here we outline the potential for 

savings within each area. 

1. Product costs 

The cost saving that companies can achieve by 

focusing exclusively on product discounting is 

limited. The buyer can usually only save 3-4% 

of product costs, or potentially 10% at best, by 

negotiating with vendors or through competitive 

bidding. This is because there is limited scope for 

discounting by MRO suppliers, who typically have 

very thin margins. 

‘On average, product costs only make up 20% 

of total MRO costs, while the rest are all the 

processing costs that would not be shown on the 

invoice.’ 1 

So MRO product cost saving has to be sought 

from alternative methods such as changes in 

purchasing criteria – brand selection, product 

standardisation and consolidation and better 

strategic procurement planning. 

Brand substitution – Although some MRO 

products are purchased for advanced purposes, 

sometimes less expensive products could be 

substituted with comparable or equivalent results. 

Brand substitution could be considered for 

original equipment manufacturer’s parts (OEM) 

which are typically much more expensive than 

their generic counterparts. 

Consumption analysis – For companies with 

multiple sites in particular, MRO product costs 

could be reduced by tracking consumption at 

a MRO unit level at each of the locations and 

comparing their usage. Data could then be 

shared across the locations, and volumes of 

products cut where necessary. This practice could 

also optimise the usage of MRO items. 

Product standardisation – If companies 

compare their products across different 

departments and / or sites, MRO product costs 

could be reduced by standardising products and 

equipment. Product family consolidation could 

also be utilised to rationalise materials purchased 

across sites and departments - particularly when 

materials within the same product family come 

from several different suppliers. This also helps 

to minimise the learning curve and speed up 

production 2 . 

Procurement planning – Cost savings could 

also come from better planning in procurement 

management. Unplanned MRO procurement 

purchases typically represent a large percentage 

of ‘spot buys’ – unplanned purchases are 

typically more than 40% 3 . The majority of these 

unplanned purchases are sourced through a large 

number of suppliers and across many different 

products. The implication of this is that these spot 

buys increase the costs of managing the ordering 

process and add risk to maverick spending. A 

reduced supplier base leaves the buyer more 

time to develop better relationships with trusted 

suppliers and maximise purchasing power as well 

as reducing sourcing and processing time. 



White paper 


2. Inventory costs 

‘The vast majority of organisations pay little or 

no attention to MRO inventories, other than to 

replenish stocks that have run low. The reason 

for this inattention is that almost all enterprises 

expense their MRO purchases through the profit 

and loss statement, rather than capitalising MRO 

inventories – as they do for raw materials, work-inprocess, 

finished goods or capital equipment – on 

their balance sheets.’ 1 

Research by the Aberdeen Group argues that 

inventory is one of the most valuable assets, yet 

companies fail to manage it effectively.4 

There are many factors to consider when 

discussing inventory and associated costs: 

20% to 50% or more of MRO stocks (in dollar 

value) are typically surplus or dead inventory. 1 

Annual cost of carrying unneeded inventory 

typically averages about 18% of purchasing 

costs. Purchase costs include interest (cost 

of money), space, record keeping, loss and 

obsolescence, insurance, property taxes, 

handling, disposal etc. 1 

Companies that try to reduce inventory across 

the supply chain are twice as likely to have belowaverage 

inventory carrying costs. 4 

Supply chain inventory initiatives drive more than 

20% reduction in on-hand inventory and more 

than 20% improvements in time-to-market in a 

case of best-in-class companies (Aberdeen Group 

2004). However, a 2005 UPS study argues that 

successful initiatives identify excess inventory 

of 4% to 10% excluding inventory allocated to 

provide increased service levels. 

Most companies do not believe that there is 

an MRO inventory problem, and those that do 

assume that nothing can be done about it. 1 

Consigned Inventory – Companies could 

eliminate most or all of their inventory by 

implementing consigned inventory with their 

supplier, since under these conditions the supplier 

owns the inventory until they use it. 

Vendor-managed inventories – By implementing 

a vendor-managed inventory, a company could 

save money in process costs because the supplier 

would determine the inventory and process the 

procurement transactions. This solution could 

work if the supplier can provide greater inventory 

control and management than the customers 

currently do themselves. 

Inventories transfer and disposal – Research 

by the Aberdeen Group in 2004 suggests that 

companies have an inventory misconception 

that it is fine for each location or tier in the 

supply chain to set its own level targets and 

replenishment frequencies. This might be as a 

result of lack of synchronised inventory policies 

across the supply chain, By implementing 

inventories transfer and disposal, one company 

could reduce the amount of non-working MRO 

inventories by utilising a different company site 

which does use them, thereby saving money and 

making all sites more efficient. 

Brand substitution – Companies could also 

reduce the value of stock by stocking products 

that are worth less. However, lower price products 

could mean lower quality – the company 

should think carefully before replacing the 

product, especially if it is specific or critical to 

maintaining the company’s operation. 

UPS in 2005 suggest that the right mixes of 

current inventory, elimination of old and obsolete 

inventory, tight integration with demand planning 

and identification of appropriate safety stock 

targets can lead to even higher levels of service. 

There are several possible ways to save money by 

managing inventory efficiently. 



White paper 


3. Purchasing costs 

Purchasing costs cover the core purchasing 

processes, such as: identifying the need, the 

raising of requisitions, route approval, creation of 

purchase orders, receiving goods and matching 

invoices. 

Direct purchases account for 20% of total 

numbers of purchase orders, yet indirect 

purchases account for 80% of total numbers of 

purchase orders.5 (Figure 01). 

Although companies may have standardised their 

direct materials, MRO procurement systems tend 

not to be standardised. This is because in general 

when companies purchase direct materials, a 

procurement division controls the orders. When it 

comes to indirect or MRO materials, procurement 

divisions cannot manage them efficiently because 

those processes are outside standardised 

procurement and financial management systems. 

Supplier reduction – Consolidation of spend 

to larger, more flexible suppliers can eliminate 

managing multiple negotiations and suppliers. 

E-procurement solutions – Offer a reduction in 

purchasing costs - automated purchase orders, or 

blanket purchase orders can be set up, ordering 

directly from supplier websites, automated invoice 

matching. 

4. Sourcing costs 

Sourcing costs are similar to purchasing costs, 

but also include spend analysis, demand 

management, contract negotiation and contract 

management. 

All of these areas are difficult to manage for MRO 

because of the large proportion of unplanned 

and non-standard items and the large volume of 

suppliers. 

Direct and indirect spend 

Implication 

FIGURE 01 

Indirect 

purchase 

spend (20%) 

Direct 

purchase 

spend (80%) 

By misunderstanding the true nature of MRO 

procurement, and by overly focusing on achieving 

product discounts, organisations actually 

limit their scope to gain savings in MRO. Such 

savings have an impact on the organisation’s 

financial performance and contribute positively 

to its profitability, so they are important for the 

organisation to realise. 


connectedthinking@rs-components.com 

References: 

1. Roth, 2008; 2. Bragg, 2010; 3. 

Campbell, 2006; 4. Aberdeen Group, 

2004; 5. Hawking, 2004;

White paper 


Conclusion 

As it is such a major component of an 

organisation’s procurement costs (47%), and as 

it has unique characteristics, MRO procurement 

needs a deeper understanding and a refocus. 

With process costs representing as much 

as double the average product costs, MRO 

process costs can present a great opportunity 

to realise significant cost savings, through 

various acknowledged procurement improvement 

strategies. This, along with the understanding that 

MRO, through its unplanned nature, is different 

from direct procurement, leads to a conclusion 

that MRO procurement strategy needs to have 

a different and an equal focus in cost saving 

strategies. The various cost saving strategies will 

be covered in our forthcoming white papers. 

Methodology 

Manchester Business School (MBS) is the UK’s 

largest campus-based business and management 

school. The school is ranked first in the UK for 

business research and their original thinking 

is applied across business and management, 

government and communities worldwide. 

In a broad-ranging project, RS Components has 

worked with MBS to identify and evaluate industry 

best practices in realising generic cost savings 

strategies. The project also had an objective 

of determining the cost-drivers associated with 

MRO procurement in companies, with the goal of 

identifying the percentage of processing costs to 

product costs within total product procurement 

costs. 

The project methodology included primary and 

secondary research. Interviews with Academics 

from the University of Manchester and industry 

Subject Matter Experts (SMEs) related to MRO 

procurement and also a web survey formed part 

of the primary research. The secondary research 

phase involved studying materials related to the 

project in the form of white papers, published 

papers, articles, other professional publications, 

the MBS library databases, internet sources and 

information shared by RS during client meetings. 

RS Components are committed to developing 

procurement strategies to help businesses save costs, 

improve efficiency and effectiveness. Our experience and 

global scale position us as an industry leading provider. 

For more information contact your RS Account Manager 

or email connectedthinking@rs-components.com. 

No part of this publication can be reproduced wholly or in 

part without the express written permission of 

RS Components Ltd. 

RS Components Ltd. Birchington Road, 

Corby, Northants NN17 9RS, UK

MRO implications

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