MRO Strategic Sourcing: Assess Current Spending
In a recent blog post titled "MRO Strategic Sourcing: The Expensive Table Scraps", I explained that too many organizations leave money on the table due to poor procurement practices. I outlined 7 fundamental steps to optimize strategic sourcing. This post is the first in a 7-part series in which I will go into more detail for each of the 7-steps and discuss how it applies to MRO Storeroom operations.
7-Steps to Optimize Strategic Sourcing:
- Assess current spending: where and with whom
- Research the sourcing providers in the market
- Review the total cost of ownership (total acquisition costs)
- Identify & select qualified suppliers
- Negotiate contract and supplier agreements
- Implement strategic sourcing strategy
- Assess, audit, and measure
We’ll look at the first step – Assess current spending: where and with whom
This first step is critical for establishing validated data to use in making sourcing decisions. This is captured through our Computer Maintenance Management System (CMMS). The conduit used to capture this data is the work order system. ALL TIME AND MATERIALS ARE CAPTURED ON WORK ORDERS! In every CMMS that I’ve worked with there is an item master. In the item master are two key data entry points that need to be completed; “Where Used” and Catalog Group. All MRO Stocked items are linked to equipment and categorized. When we issue parts to an asset we capture the history of costs and usage. This is extremely important for so many reasons such as rate of consumption, Mean Time Between Failures (MTBF), Total Cost of Ownership calculations, etc.
Once we’ve established a history we can then begin to analyze our spending patterns. This includes the catalog groups where a large portion of our spending is going (i.e. motors, pumps, gear boxes, PLC’s, etc.) or which equipment are we spending an unusual amount of both time and money on. If we can place our dollars spent in nice little buckets we can pareto the groups and begin to better understand our spending.
You will find some very interesting results from this activity. Examples include:
- Purchasing the same items from several different suppliers (thus losing a supply chain strategy of leverage buying)
- Excessive spending on equipment just to keep it running (throwing good dollars at bad equipment)
- Spreading our purchases across many suppliers when we could in fact combine and reducie the number of suppliers which again, leverages our buying power.
Don’t forget that outsourcing and outside services can be included in this analysis. Another interesting byproduct of this is the ability to identify duplicate parts which account for a typical storeroom 7% -12% of total dollars or sku’s.
As described above, the first step in Strategic Sourcing is getting our arms wrapped around what we are spending and where. Once we’ve established this we can generate spending patterns, excessive equipment spending, and a base-line to analyze. The next blog will discuss the second step of the 7-step process, researching the players in the market that offer the products and services you require.