The task of keeping the enterprise supplied with the myriad parts, materials, and services needed to keep the machinery humming, sometimes seems to resist all the usual procurement best practices and disciplines. Here is a core blueprint for reducing your costs and satisfying your user communities at the same time.

1. WHITE PAPER
Taming Your MRO Spend:
Five steps to less complexity, lower costs
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Here's a way to gain control: a core blueprint for reducing
your costs and satisfying your user communities at the same time.
© 2011 GEP. All Rights Reserved.

2. Taming Your MRO Spend
Does MRO procurement seem hopelessly complex and specialized?
Here's a way gain control: a core blueprint for reducing your costs and
satisfying your user communities at the same time.
If you've ever been challenged The task of keeping the
by the procurement issues enterprise supplied with the
surrounding MRO - Maintenance, myriad parts, materials, and
Repair and Operations - you are services needed to keep the
not alone. Even the most machinery humming sometimes
seasoned procurement pros find seems to resist all the usual
this arena daunting and highly procurement best practices and
frustrating, especially in disciplines. It's a high-spend
enterprises with substantial beast that is difficult to tame.
production, manufacturing and
processing activities.
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3. Taming Your MRO Spend
-Pump Kits
-Strainers
Figure (1) shows a typical MRO category tree for a manufacturing company:
Why MRO procurement is so What’s more, by its very nature,
complicated MRO encompasses a complex
When it comes to MRO, the user mix of highly technical products
community typically has strong and specialized services that can
and emotional attachments to be difficult to understand and to
their parts and suppliers; they have manage.
a much greater stake in avoiding
downtime and outages than in
saving on inventory and adhering
to procurement processes. It’s not
about the 9% savings, it’s about
keeping the line running.
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4. Taming Your MRO Spend
For example, in a typical industrial operation, MRO can involve:
Ÿ A large spend spread over many sites and categories
Ÿ A Large number of SKUs. A Fortune 100 manufacturing operation may require 25,000 to 50,000 unique
MRO SKUs, many of which are used only on certain equipment.
Ÿ Unpredictable demand. With MRO items, it’s difficult to accurately predict usage requirements. Some 70%
of the MRO items in inventory may turn less than once every two years.
Ÿ “Just in Case” mentality – “I can't afford to wait for this part so I'll by some just in case.”
Ÿ A Large number of suppliers, including local vendors at each site
Ÿ Decentralized MRO processes (sourcing, request/order, inventory management) with inconsistent
practices and processes
Ÿ Maverick spend, due to lack of process control
Ÿ Spot buys. Unplanned purchases for items not set up in inventory can account for as much as 50% of the
annual spend.
Ÿ Data management across plants is a challenge
Ÿ Part level information typically is inconsistent/incomplete
Ÿ No common part numbering schema/taxonomy
Ÿ Same item identified many ways in different systems
How to reduce costs and consolidate the supply base
For most enterprises, the ultimate goal in MRO is to find a way to reduce the spend, without compromising or
hampering the users responsible for maintenance and repair throughout the organization.
In a way, the approach is classic, best-practices procurement, with a few critical twists and strategies required
for this uniquely troublesome area.
Here is a blueprint and approach we have found particularly effective in working with scores of companies with
demanding and sometimes intractable MRO procurement issues.
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5. Taming Your MRO Spend
How to reduce costs and consolidate the supply base
1) Locate the biggest savings opportunities
The first step is to determine precisely what the organization is spending on the various MRO sub-
categories and supply solutions – captured and categorized according accordance to the
organization's category tree, and by site
This segmentation allows you to identify, at a high level, which MRO categories offer the greatest
savings opportunities. In most cases, those opportunities will lie in the categories with the highest
spend, and those where large numbers of suppliers can be consolidated and leveraged for more
attractive pricing.
The spend analysis typically involves extracting invoice data from the organization's accounts
payable system(s) to identify MRO suppliers and map them by site and category – a process that can
often be more complex than expected.
Site Category Power Transmission Electrical Supplies Pipes Valve & Fittings
& Bearings (PVF)
Motion – ($1MM) Graybar ($.5MM)
Mfg. Site A Ferguson ($5MM)
All Phase ($1MM)
Applied Ind. Technologies- ($2MM)
Mfg. Site B Kaman ($5MM) Wesco ($5MM) McJunkin ($2MM)
CBT ($2MM)
Motion – ($2MM) Supply Force ($2MM)
Mfg. Site C SKF – ($5MM) Wilson Supply ($5MM)
Timken($5MM) HD Supply ($1MM)
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6. Taming Your MRO Spend
First, the different Account Payable systems may have varying degrees of data integrity. The same
supplier, for example, may be variously identified as Grainger, WW Grainger, and W.W. Grainger.
Second, MRO spend can involve thousands of local suppliers that may each be used by a single site;
making it difficult to identify what products and services they provide.
2) Develop a sourcing strategy
Here, the idea is to determine which go-to-market solutions might offer the best potential for
savings, without compromising operations in any way.
The most common decisions and questions:
Do you go through distributors, or directly to the manufacturers?
In most cases, a mixed approach will be best, depending on the categories. Commonly used MRO
items such as bearings, belts, fasteners, electrical and plumbing components, cleaning supplies, and
hand tools are typically sourced through distributors. While more complex items used in
maintaining and repairing specific equipment are typically purchased from the manufacturer.
Your distribution options:
Category Killers. These are large distributors that focus on a specific category such as; Pipes,
Valves&Fittings, Safety Supplies, Electrical Supplies, Power Transmission and Bearings. They
carry a broad range of manufacturer products in their specialty and also have product and
technical specialists who help with technical issues.
Consortiums. These are groups of smaller distributors have formed to support industrial
customers that are looking for a single national or regional solution. These consortiums, such as
Supply Force, negotiate directly with customers to establish standard pricing and service
agreements for all of the company sites. Once an agreement is signed, the local distributors then
service the individual locations.
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7. Taming Your MRO Spend
General Distributors. These are the Wal-Mart’s of the MRO world, stocking a broad range of
different products that they can deliver quickly. However, they charge a premium for this “one
stop” convenience, and typically don’t offer the level of technical support of local distributors.
Integrated Supply. With an Integrated Supply solution you essentially “outsource” the
management of your MRO to a third-party integrator. Depending on the scope of the
agreement, the integrator can provide the full range of material management services, from
sourcing of the material to day-to-day transaction processing to invoice processing and
payment of suppliers. In some cases, they also take over in-plant functions such as managing the
storerooms.
In practice, you will probably need a number of these solutions, based on cost issues, on the
operational and technical needs of the sites, and even the politics of the organization.
To make better decisions and to gain stakeholder support, it is always helpful to communicate early
and often with the plant managers, maintenance supervisors and engineers who use the MRO
products.
Failure to engage the users throughout the process will undermine the success of the strategy. The
the best-negotiated pricing agreement in the world is useless if no one uses it.
3) Going to Market
After the strategy decision, collect and organize all of the data necessary to “go to market.” And ask
the users to identify all of the technical service and customer requirements that must be included in
the RFP.
Devise a representative Market Basket
Since it would be impossible to include all MRO items when evaluating the pricing of various
suppliers, it’s helpful to have suppliers offer quotes on a representative sample of MRO items in a
given category.
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8. Taming Your MRO Spend
To create this you can work from data from an ERP or MRP system that has good item-level
descriptive information and purchase information including either USPSC coding or an internal
category coding schema. If not, a “data mining” exercise is required to cobble together the data
from other sources.
Typically, this entails identifying key suppliers for the category or categories we are sourcing and
requesting they provide the relevant information on past purchases.
In either situation, to go to market you will need to have, at a minimum: manufacturer, manufacturer
part number, item description, quantity purchased, unit of measure and the last price paid.
After identifying the range of items to be included in the market basket, the next step is to determine
how to request supplier pricing.
You can ask for prices in any of three ways:
Ÿ Manufacturers cost plus a mark up
Ÿ Sell price at a specific gross margin
Ÿ A list price minus a discount.
The idea is to have all suppliers quote in the same way, so you get a consistent sell price (either
delivered or without delivery charge) that you can compare across suppliers.
You also want the supplier to provide the pricing framework they will use to price all other items that
are not included in the market basket.
Understanding and negotiating this pricing formula is critical because you do not want the supplier
to treat the market basket items as a “loss leader” to win the business and then charge significantly
more for the non-market basket items later.
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9. Taming Your MRO Spend
Requirements other than price
In the selection of a MRO supplier, non-price service requirements and the supplier's ability to satisfy
these requirements are just as critical as their pricing.
At this point, it’s critical to engage all stakeholders to determine precisely what requirements must
be included in the RFP, such as:
Ÿ Delivery. Can the supplier deliver to all of the sites covered by the agreement? Can they meet
the required standard and emergency delivery times?
Ÿ Product coverage. Does the supplier carry all of the product lines that the users require? If not
how do they propose to satisfy these requirements?
Ÿ Technical Support. Can the supplier provide the sites with the technical support that the
complex MRO categories require? Product training, troubleshooting, calibration services,
warranty management, inventory services ?
Ÿ Customer Service. How does the supplier propose to support each of the user sites? What is their
program management structure? What reporting capabilities do they have? How often do they
have formal program reviews? What are their implementation capabilities?
Once these requirements are known, you need to develop a formal evaluation process that weights
each supplier's response, to determine their ability to provide the support required by the users.
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10. Taming Your MRO Spend
4) Evaluate and Select Suppliers
The first step is to evaluate each supplier's product coverage and pricing competitiveness, by
creating a scorecard for each pricing proposal and then comparing the results.
Table 1 shows an example of a product coverage and pricing scorecard for a Power Transmission and
Bearing supplier.
From there, the next step is to evaluate the supplier's non-price capabilities. It is imperative to
involve representatives from the user community since they are the ultimate customer and need to
be part of the decision process.
Using a structured supplier scorecard will allow the participants to consistently evaluate the
supplier's response to non-price requirements criteria.
% Item Covered $ Savings % Savings
Total Sale
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11. Taming Your MRO Spend
At this stage you can often eliminate a number of suppliers, since it will be apparent which suppliers
(1) do not have the breadth of product or geographic coverage, (2) are not price competitive, or (3)
cannot meet the technical requirements.
You should be left with a handful of “finalists” suppliers who meet the requirements set out by your
stakeholders. Your final selections will require a series of face-to-face meeting with the finalists to if
verify they have the capabilities documented in their proposals.
Involve your user community in these negotiation sessions, to ensure that their technical and
customer support requirements are addressed and that they are part of the decision process.
At this stage, you also need to be finalizing the pricing agreements. This may entail another round of
market basket bidding or a reverse auction to get the best possible pricing. Additionally, the pricing
framework for non-market basket items needs to be finalized.
In the end, the final selection of the MRO category suppliers will come down to:
Ÿ Pricing competitiveness. Does the supplier provide a competitive pricing arrangement? Not
necessarily the lowest but competitive when considering all of the other factors.
Ÿ Product and geographic coverage. Can they provide the products needed by the user and
deliver them in a timely manner to meet their requirements?
Ÿ Technical support. Does the supplier have the capabilities to provide the user community with
the technical services they require?
5) Tell the organization
Once the supplier selection process is completed, it is necessary to communicate -and preferably
over-communicate -the decision across the organization, carefully explaine the rationale, and what
benefits the company can expect.
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12. Taming Your MRO Spend
In our experience, it’s wise to expect some pushback; it is nearly impossible to please every single
user across the organization. As user issues arise during the early implementation, it will help to work
very closely with the supplier to proactively address any user concerns.
Naturally, it is also necessary to manage the supplier relationship throughout the process to ensure
that the commitments, pricing and service are being met.
In the end, a successful MRO sourcing process can deliver big dividends for the organization.
Good MRO supplier partners drive more than price savings, they can help reduce demand, reduce
inventories and bring improvements to the manufacturing and maintenance processes that can
deliver significant value across the company.
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13. ®
GEP (Global eProcure) is a leading procurement services firm dedicated to helping enterprises add value
and reduce costs through procurement and supply chain transformation. With a comprehensive portfolio
of services and solutions, GEP helps many of the world's largest organizations uncover savings
opportunities, and deliver these savings to the bottom line. We have managed over $50 billion of spend
on behalf of these clients, across industry sectors and geographies.
Our blended model combines management consulting, strategic sourcing support, implementation and
outsourcing services with a full suite of best-in-class procurement tools and technology solutions. Our
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