RS Components, distributor of electronic, electrical and industrial components, shares insight on the real cost of maintenance, repair and operations (MRO) product procurement.
Increasingly competition and financial pressures have caused many businesses to focus on cost savings by sourcing cheaper products and driving down product costs through aggressive negotiation.
The focus has been solely on product price to generate cost savings – but there is a hidden element that is a major finance drain; and that is the real cost of MRO product procurement.
MRO procurement costs are often overlooked when organisations underestimate the scale of these costs.
This can be due to the complex nature of MRO procurement – multiple suppliers, a variety of product categories, diversity of stakeholders, operating sites and procurement systems all contribute to the complexity, and make it difficult to achieve a proper understanding of MRO costs and potential savings.
Currently, MRO complexity is cheating organisations out of significant cost savings, and they need to recognise the reasons for that complexity to unravel it.
They are overlooked usually because they form only around 20% of the total procurement spend of the organisation.
In addition, they are not attributable to the manufactured product, but are instead the products needed for the organisation itself – the maintenance, repair and overhaul of the business operations.
These costs are often invisible and rarely the focus of attention when it comes to generating cost savings.
Even if they are scrutinised, it’s the product cost that is in the spotlight, not the procurement process.
Jarn Gill, head of Corporate Sales at RS Components, explains; “Our focus on this area of research to help organisations realise MRO costs and address the process to make savings stemmed from an understanding of data capability, to analyse consumption and unveil the inefficiencies that are contributing to high MRO procurement costs.
“MRO procurement cost versus product costs is 2:1. This means that if the MRO budget is £1m, more than £3m is spent on MRO procurement.
“Additionally, some organisations are aware of the cost of the process, but feel unable to tackle the problem, perceiving it to be too complex.
“Many have never been able to put a true figure on the amount and therefore it’s an issue that can often be buried or postponed, reverting the focus back to savings on product costs, which feeds the cycle of inefficiency.”
RS has devised the Value Process, an end-to-end formalised process that can be applied to all customers to achieve significant savings on MRO procurement.
The Value Process focuses on five key areas including: optimisation of product; inventory; supplier and process; and pricing solutions.
Concentrating on fewer products, perhaps of better quality or more energy efficient to reduce energy consumption and maintenance costs, could be one simple step to facilitate the reduction stock to improve cashflow – as well as avoiding instances of obsolescence.
It would also invariably reduce downtime in supplier management, ordering and invoices. This process alone has shown that savings of up to 35% on MRO can be reaped.
With proper evaluation, stakeholder engagement and joined-up thinking, ongoing monitoring and benchmarking, organisations will start to see dramatic savings very quickly.
