Consolidation is key in the supply chain world

The world of supply chain is filled with acronyms. MRO stands for Maintenance, Repair, and Operations, or as I like to call it – Miscellaneous is Rarely Optimized.

The world of MRO is a daily challenge of finding the right balance between fiscal prudence and operational efficiency. It’s important to identify the underlying gaps and pain points specific to your company before you can easily implement the solutions I’m offering.

Challenges

• Spend amounts are tracked by budget code.
• Purchases are delegated to the end user departments.
• Negotiated contracts don’t cover everything that the departments need as the list of items needs a refresh to account for actual usage patterns.
• Items that are ordered from different suppliers will have a different part number and description.
• Category codes are not in use, or they are not widely used and poor accuracy and standardization.
• Staff often lack the technical skills that are needed to do a proper analysis, and the MRO spend amount doesn’t seem to justify time spent on reporting.

You know you have a problem when you hear, “I can’t wait, I need it right now.” Instead of determining what is needed ahead, it is easier to simply go to the local store and pick up what you need. The comments I have heard is that it is “cheaper” or “more convenient.” We often overlook the time spent going from the job location and back, and the costs associated with the transaction.

Not all the issues outlined above apply to every review. My observations might be enough so that you might think and start to wonder how many are applicable to your organization.

Spend Analysis

The analysis and business case for change is difficult, as organizations struggle to use category management effectively across their various departments. The first step is to determine if the exercise is worth doing. It will depend on what is bought, how often, the quantity, and your stocking methodology. I would suggest that you consider do a review if the annual spend or the inventory is greater than $100,000.

Inventory Review

When looking at inventory, you will go from either having too much (dead stock or slow moving) or not enough (just in time) or just ran out (JRO). To stabilize your inventory on hand you will need to review the usage over an extended period and consider getting rid of some excess stock.

The reality is that one person’s junk is often another person’s treasure. Reach out to an online auction house to determine if what you have is a candidate for disposal. This is much easier than trying to do a live auction and you might be surprised by how much money you can get for something you consider scrap.

You could approach your existing suppliers to determine if they are willing to buy back or provide you with a credit for items that you will not use and where the supplier can still sell the product to their other customers at a discount. A win/win scenario for both sides.

Consider that if you have $200,000 in inventory then it is likely that $40,000 of this amount could be obsolete. Getting rid of these items would allow the organization to use the money for other purchases. Even if it takes 10 hours to complete the task from start to finish, the return on investment would be almost 1,000 per cent.

Supplier Consolidation

There is an age-old adage that you can only improve what you can measure. Over the last two years, I have had completed a number of in-depth reviews of MRO spending. MRO is often miscellaneous, which means there are more items in this category than any other.

In some cases, an organization may have more than 20,000 stock keeping units (SKU). Normally, I see about 7-10 different suppliers that could be subject to consolidation. Keep in mind that if one supplier has 90 per cent of the business then it isn’t likely that your organization needs to consolidate. If there are seven suppliers and no one has more than 25 per cent of the business, then your organization should consider consolidation.

I recommend that you start with an export of your data and at a high level to determine which of the many suppliers sell MRO items. Savings are possible as MRO purchases are often not fully scrutinized.

In fact, when I did my analysis, savings were possible with the right supplier. Remember that MRO items often have a low purchase price and are not consumed in large quantities. When I look back on all the reviews that I have done, I have noticed a specific trend – daily deliveries across many suppliers. If this happens in your operation, there is a good chance that supplier consolidation is possible.

Supplier consolidation allows your company to reduce the number of suppliers used for MRO items. This reduces associated costs such as product sourcing and selecting, purchase orders prepared and issued, and receiving transactions. In addition, by leveraging additional usage volume, additional price reductions could be achieved.

Marty Luciw, who works for Grainger, shared that companies should be able to average a 12-15 per cent cost savings when they consolidate. This target is realistic if you have never done this type of exercise. Additionally, with the right service levels established you can ensure that that you get next-day service. The feedback that I got from Luciw is that online ordering is the way to go, and its use ensures that about 97 per cent of the customers have the stock the next day.

Efficiencies Lead to Savings

MRO review and Supplier Consolidation isn’t just a cost-cutting measure; it creates efficiencies that lead to other types of savings. The biggest impacts when you embrace consolidation are that your company is spared the headache, and your MRO operations hit all the right targets.  MW

Gerald R. Ford is Data Analytics and Strategic Advisor for Kinetic GPO. Ford has spent many years helping municipalities manage the often-complicated world of public sector purchasing. He has dedicated more than four decades to the procurement community.