MRO implications

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White paper MRO Implications 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. rs-connectedthinking.com connectedthinking@rs-components.com
White paper MRO Implications 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. rs-connectedthinking.com connectedthinking@rs-components.com
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