Special thanks to Source One, a Corcentric company for this guest post.
Every distribution center has materials and services used to maintain, repair, or operate their facilities, machinery, or equipment. These items are typically referred to as MRO products (Maintenance, Repair & Operations). This broad category of products includes items like repair components, lubricants, lighting fixtures, safety supplies, janitorial products and other consumables that are not directly tied to the core products distributed. The value of these individual products are relatively low, and for this reason purchases tend to seem inconsequential and are frequently below approval thresholds. However, when all the purchases are added up at the end of the year, what seemed to be a relatively inconsequential category can reveal itself to represent a huge cost with a significant impact on profitability. For this reason, it is important that organizations obtain visibility into their purchasing behavior to reduce costs and increase operational efficiency.
The first step in managing MRO is gaining visibility into your purchasing history within the category. The best way to gather this information is through a vendor usage report that outlines all purchases made by the organization in the past 12 months – or, through an invoicing report. The most critical information to obtain from this report is the product information, annual quantity, and the unit price of each item. Ensure you’ve standardized any specific units of measure to provide for an apples-to-apples comparison of products from different vendors. This information should help organizations understand their purchasing behavior by clearly outlining the current vendors being engaged for these product purchases, the type of products that are being purchased from each vendor, and the total spend. After this information has been obtained, organizations should look for opportunities to take the following strategic actions.
- Supplier Consolidation: An industry best practice when managing MRO is consolidating purchases to as few vendors as possible. Supplier consolidation is a proven strategy to concentrate buying power and reduce purchase prices. Suppliers will be more willing to reduce product pricing if they are granted a larger portion of your spend. This, in turn, could lead to substantial cost savings. Additional benefits of consolidating suppliers include the efficiency boost that comes with fewer transactions and better direct engagement with a reduced supply base.
- Contract Negotiations: In many instances, organizations purchase materials from a specific supplier, but do not have a contract or pricing agreement in place to manage the price of these materials. Implementing long-term contracts with preferred suppliers gives an organization leverage to lock in pricing for a specific period of time, and the ability to implement category discounts on current MRO category purchases. Suppliers will be willing to add additional incentives and category discounts if they know that purchases will continue for a specific period of time.
- Order Optimization: Analyzing volume usage over a specific period of time can bring insight into the average number of orders for a given product in a given year, as well as any peak times during the year. Using this information to bundle product purchases into fewer orders will help to optimize profits by reducing delivery cost and overall product costs through a larger order quantity.
MRO spend can quickly add up and impact your organization’s bottom line when left unmanaged. It is important for organizations to understand their purchasing behavior within this category to reduce overspending and utilizing best practices to effectively manage MRO.