5 Ways to Optimize MRO Supply Chain & MRO Purchasing
6 MIN. READ
Optimizing your maintenance, repair, and operations (MRO) supply chain purchasing will boost your property values. Many building owners believe the value of an optimized procurement program centers on reducing costs according to certain measurements—and, while that’s very true, it’s only part of a bigger picture. Realized savings on every purchase can actually help you increase the value of your property.
And the value is not just the explicit savings. By the miracle of cap rates, it’s a multiple of cost savings. Every dollar saved results in an increased property value calculated as the cap rate * costs saved. So, if your cap rate is 6, and you cut MRO costs by $200,000, the value of your property increases by $1.2 million.
Significantly, the total value of MRO sold through North American distributors is around $151 billion as of 2021, with an anticipated compound annual growth rate of 2.5% through 2030. So, the spending numbers can be big.
And, with millions of part numbers and a large supplier base, MRO is a large, potentially difficult category to manage, with significant, invisible internal costs.
That’s why we wanted to share five ways that you can maximize your savings in your MRO supply chain and MRO purchasing and increase your property value.
1. Consider Total Cost of Ownership
This metric seems obvious but is often neglected in a rush to find suppliers. The total cost of ownership (TCO) includes all the costs to acquire and maintain a product during the entire period of ownership.
Put simply, the total cost of buying a home is not just the price you pay to get the title. It also includes factors like closing costs, commissions, repairs, renovations, PMI, insurance, and possibly HOA fees. A new home with a higher purchase price may end up having a lower total cost of ownership than an old home at a lower purchase price that needs extensive renovations.
Likewise, a product’s total cost of ownership should include things such as acquisition and storage costs. For example, if your company isn’t managing inventory well, you may end up using costly warehouse space to store items that would be better managed through an auto-replenishment system that triggers at a certain level of inventory depletion. Also, consider shipping costs—an existing supplier may have a slightly higher cost for an item, but you might be able to save on consolidated shipping. Plus, don’t forget that selecting a new supplier involves additional costs, like site visits for vetting and auditing, as well as employee time spent on RFPs and setting up and processing payments.
Importantly, quality counts. Be sure that the supplies you order meet your quality specifications. Check with your operations management team on what you need. Cheap parts that fail end up costing you money and downtime. On the other hand, avoid over-specifying, which needlessly inflates cost.
In addition, supplier performance management and effective supply chain management are crucial to effective MRO cost management. If a supplier does not deliver on time, the parts are useless, whatever the savings. You need to be able to track delivery performance management metrics like delivery performance (DP), which is defined as: (# of deliveries on time/total number of deliveries) * 100.
Some other metrics are:
- Order accuracy rate – (# of accurate orders received/total number of orders) * 100
- Average time per delivery – measures how long parts take to arrive; allows comparison to contract requirements.
- On-time and in-full deliveries – measures the number of deliveries containing the entire order arriving on time
It is crucial to embed these and other performance standards clearly in your supplier contracts. But, if you don’t have a way to track actual performance against contract requirements, you have no leverage to manage supplier performance.
And once they are established, you need enabling technology to provide a central place to track and manage actual performance in real-time. Otherwise, you will walk into a fight with no ammunition, while suppliers will be armed to the hilt.
More on enabling technology later.
2. Rein in Tail Spend
Tail Spend is defined as everything outside the purview of the large, managed purchases that most companies monitor quite stringently. In other words, these purchases are small and often overlooked.
In many cases, tail-end spending can involve 80% of a company’s suppliers but comprise only 20% of its total spending. Thus, it eats up a disproportionate amount of internal costs in purchasing (POs) and in accounts payable (A/P) for invoice processing. Essentially, if you have 1,000 extra suppliers, the result can be 1,000 extra POs and 1,000 more invoices to process every month.
What’s more, the small transaction amounts coupled with a large number of transactions make tail-end spending opaque and thus difficult to track.
However, many companies are waking up to the fact that tail-spend chaos often hides waste and even fraud, so it is a prime savings opportunity.
Attention to tail spend often makes a significant difference in terms of profit. So, why is it so often overlooked? The answer is usually quite simple—companies are traditionally focused on larger purchases.
If your company seems to have maxed out its savings opportunities, managing tail spend can help you find new ways to save. If you don’t have resources to devote to this yourself, a managed service could be a good solution.
Additionally, you can consider a Software as a Solution (SaaS) procurement tool to automate all your MRO purchases through one central point. By doing so, you can consolidate transactions and achieve transparency in all your spending, not just tail spending.
Raiven Marketplace is such a tool. It provides a simple, user-friendly interface for all your buyers to use. In addition, it features a readily accessible central place to store data in real-time and in a consistent format to enable better spend management.
3. Enforce Employee Compliance
So, you’ve found excellent suppliers, and you’ve spent the time negotiating contracts. What’s next? The short answer: compliance. You need to ensure that your employees actually purchase from your contracted suppliers instead of running to the local office supply store for toner cartridges or buying from an uncontracted supplier just because their sales rep brings donuts to the office once a month.
The issue is the lack of reliable data to track your purchases to get the transparency you need to track and manage compliance. Without reliable data, you are in the dark. Raiven Marketplace collects and centrally stores all your purchasing data in one easy-to-access place.
And it provides real-time reporting capabilities, so you can easily track purchasing compliance.
Gone are the days of paper records, supplier reports, and Excel spreadsheets. Accurate, timely, and complete data is power.
With Raiven Marketplace illuminating non-compliance, you can take effective steps to reduce compliance costs.
There is now technology available that makes compliance easy by notifying buyers of lower prices from your contracted suppliers while they are on uncontracted supplier websites. The savings can be significant; you can lose from 10–25% in savings from non-compliance alone! It’s called Raiven Digital Assistant. Check it out here.
Finally, if you want to forego the cost of resources and time to source MRO effectively, with Raiven Marketplace, we offer easy access to deep discounts between 7% and 25% from pre-vetted, pre-contracted, world-class suppliers and distributors like Carrier, Grainger, and Ferguson.
You can take advantage of this offering to hit the ground running and quickly realize savings with minimal incremental cost.
All in all, Raiven Marketplace offers an effective, scalable, easily deployed foundation for procurement optimization.
4. Institute Price Auditing
If you’re optimizing your procurement plan, this is a crucial step. Price auditing ensures that your company actually receives the price you’ve negotiated under the supplier contracts. After all, mistakes happen—but you want to be sure to nip any issues in the bud. Another reason to audit is the prevalence of dynamic pricing. Suppliers can change the cost of items at any time, and regular auditing ensures the price reflects your negotiated one.
But, without high-quality data, auditing prices is almost impossible. Using paper records, invoices, Excel spreadsheets, and supplier records will plunge you into a swamp in short order.
Once again, Raiven has the solution. Marketplace monitors pricing in real-time and provides reporting for price anomalies. It detects issues before you lose money. And it provides accurate data on your purchase history to correct supplier errors. Without this ability, you can miss price changes and incur a significant excess cost. And you will be ill-equipped to recover overcharges from suppliers.
5. Look Outside Your Industry
It’s easy to be laser-focused on developments within your own industry—which is great, but don’t forget that you can also learn from other types of businesses. For example, grocery store chains excel at creating efficient, sustainable, and replicable procurement processes across all their stores. Another example is the hospitality industry, where procurement was really refined and perfected using group-purchasing organizations (GPO), an arrangement that leverages collective purchasing power to get the best prices on items.
That is how Raiven can offer deep discounts on pre-vetted, pre-contracted deals. Our unique alliance with Avendra opens the door to savings for you.
If your company could use some help thinking strategically about your procurement program, Raiven offers a managed service that strategically aggregates mid-tail, tail, and rogue spending for MRO in buildings. We offer ongoing supplier negotiations, account management, compliance, adoption, and a consumer-like eProcurement platform for no-cost price comparisons. We let you outsource the trouble of instituting money-saving relationships at no cost to you. If you’re interested in learning more about how we can help your company cut costs, please send us an email or give us a call.