When companies begin to assess their MRO spend, they often refer to it as a “greenfield” with significant potential for identifying savings opportunities. While this is generally the case, there’s usually a reason they’ve waited so long to take a look.
Companies have a lot of preconceived notions about MRO. They often see it as too complicated, too labor intensive, too specialized – the list goes on. Time-bankrupt companies don’t have the internal resources or expertise to tackle the category correctly, while others are gun shy from their previous negative experiences in the space.
Make no mistake, decentralized MRO spend can be challenging to wrap your head around – but that doesn’t mean it’s impossible. Let’s look at some of the category’s challenges and recommended tactics to employ in order to avoid the common mistakes many organizations make.
Communicate to Better Leverage Spend
The reality is, decentralized MRO spend causes a significant amount of purchasing complexity. If all decisions are made at the site level on a day-to-day basis, each location establishes its own supply base.
A site manager makes purchases based on that specific location’s needs while operating within a budget. This means that things like on-time delivery, proximity, and inventory management take priority over price. That’s not necessarily a flawed mentality, but it’s often an inefficient one that leads businesses to miss out on savings opportunities.
First, since sites aren’t working together, they aren’t properly leveraging spend. Even when two sites are working with the same supplier, they often set up separate accounts for each location. This fragmentation causes data integrity issues that make it significantly more challenging to consolidate the necessary information and effectively drive purchasing power.
Additionally, these silos also generate issues when it comes to knowledge sharing and standardization. For example, if a company’s various locations all use different brands of gloves, what happens when one location discovers a glove that reduces hand injuries by 25% but fails to inform other locations about this discovery?
On the surface, it may appear a relatively inconsequential oversight; the other sites would continue to operate as usual and would still generate revenue. But in reality, the other sites relying on the old gloves are setting themselves up for significant opportunity losses.
Reconsider “Catch-all” or Discount-driven Suppliers
When corporate leadership acknowledges a problem, they generally attempt to fix it utilizing minimal effort and resources.
As an example, let’s say your leadership team conducts a high-level spend review and determines that there are both too many suppliers and too much unmanaged spend. The easy fix would be to consolidate this spend to a single “catch-all” supplier. After all, there are MRO distributors that provide pretty much anything.
It’s probably easiest (and most advantageous) to contract with one of them, right? Wrong.
While businesses often take these measures in search of discount programs and other cost-related incentives, such tactics are among the most common pitfalls in MRO spend management. The truth is there is no one-size-fits-all solution in the MRO world; One of the biggest mistakes that a company can make is assuming that there is. Making this tactical error keeps many businesses from properly understanding their spend and end-user needs.
Challenges of Centralized MRO
So what really happens when corporate tries to consolidate spend to one national MRO distributor?
First, corporate reaches out to the distributor; Commonly, it’s an incumbent supplier or someone they met at an industry conference. Next, the supplier develops a contract using one of their standard templates with predefined category level discounts and incentive programs.
Corporate then releases a mandate explaining that all MRO-related spend should be consolidated to said supplier. Implementation efforts are led by the supplier and driven through the contract itself based on volume commitments, rebate incentives, and the corporate mandate.
This tends to cause a plethora of issues, namely that the distributor typically doesn’t cover specialty or customized products as stock items. In these cases, the distributor purchases the products from the manufacturer at the same price that the buyer is accustomed to. Then, they add a markup that leaves the buyer paying significantly more than they did in the past. Further complicating matters, this process results in significantly inflated lead times.
Site managers are quick to point out issues like this, and they’ll begin to distrust the preferred distributor as well as upper management. This will increase friction and decrease compliance across the supply chain.
Also, from a savings perspective, while a discount model might drive savings, it won’t necessarily maximize the organization’s savings potential. Achieving this potential would require careful data analysis to identify recurring items, categories, and manufacturers followed by intense negotiations.
Taking the Proper Approach
The reality is it’s a serious challenge for overworked companies to approach MRO properly. Quick fix solutions, however well-meaning, simply don’t work.
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