Uncovering Obvious Procurement Cost Savings

By George E. Krauter

June 22, 2018 at 8:42 AM

MRO costs.jpg

Procurement is continually under pressure to find areas of cost that can be recovered or eliminated. Although the MRO spend dollars are low when compared to the total amount applied to capital projects and production materials, there is substantial cost saving opportunities that exist. These savings can be realized from both financial and non-financial activities.

First let’s look at the financial side:

  1. Price is the most obvious area; “let’s reduce the unit price of parts…it’s relatively easy to do and easy to report”. There is another factor that must be obvious, i.e., a cheaper part and/or poor availability can cause a much higher total cost situation in the plant.  The lower cost supplier must deliver what is ordered [no cheap substitutions] and do so when needed. Brands delivered must match brands described. Unfortunately, they often do not.
  2. Inventory recovery will produce direct financial benefits as long as the requisition request fill rate is close to 98-99% with 100% for designated critical spares. Your CFO needs to recognize and approve the financial benefits of inventory recovery of both controlled and uncontrolled sub stocks.  Consolidation of inventory, elimination of duplications along with increases in fill rates will prove to be a substantial contribution to the plant’s bottom line.
  3. Freight charges can be excessive from MRO suppliers. Situations include: 
    • A markup applied to the supplier’s cost of freight.
    • Unnecessary multiple shipments resulting in added freight costs.

I have seen a two-page purchase order with 20 line items result in nine receipts where the freight charges are near the value of the parts shipped.

Once you have negotiated a favorable freight rate with your carriers; allow your supplier to participate and require that orders be complete and on time.

Non-financial opportunities for savings

Now let’s look at the non-financial opportunities:

  1. The cost of processing transactions is substantial and can be recovered. Beware of companies offering electronic processing solutions where the cost of implementation could exceed the actual return. Make sure the function [cost] is not shifted for other departments to endure causing little net benefit. A statement of work required of major suppliers [or one supplier] that consolidates transactions, receipts, and invoicing will effect substantial savings. Personnel who were previously involved with processing these [now eliminated] transactions must be reassigned or given new responsibilities in order for the savings to be realized.
  2. Downtime recovery can be the largest area of cost recovery. If plant management measures Mean Time to Repair [MTTR] and Mean Time Between Repairs {MTBR], the cost of downtime can be calculated. That cost would include losses of production, missed shipment schedules and, idle worker expense. By defining the Bill of Material [BOM] per asset and assuring availability of MRO inventory for those parts that caused the downtime, saving can be measured by comparing previous MTTR to the reduced MTTR resulting from proper parts supply.
  3. An MRO storeroom that is managed to support the specific needs of maintenance can generate substantial savings in “wrench” time for maintenance personnel. Stores management should be connected to the plant’s maintenance goals and should be a part of maintenance planning sessions. The benefits of close cooperation programs can be difficult to measure, but benefits will be evident when a change in MRO procedures is installed. Plant managers should be willing and able to report the savings to you when the benefits occur.

Is it worth spending time on MRO savings? Are opportunity costs too high? Can savings be measured and reported? When MRO management is left to function without a change for the better, opportunities are lost and profits suffer. Time spent on changing the MRO storeroom into a profit center from a profit eater will bring a substantial return on your MRO change investment. 

Tags: inventory recovery MRO Spend MRO Supplier MRO procedure
Category: Blog Post

George E. Krauter


George Krauter, former founder and president of Industrial Systems Assoc. [I.S.A.] has retired as vice president of Synovos.

Currently, he has initiated, "George Krauter Consulting [GKC]"  for effective reliability and cost recovery for consumers  of MRO materials. George is a recognized authority on the management of the MRO supply chain and support for maintenance reliability programs. His book, "OUTSOURCING MRO...FINDING A BETTER WAY" is available from Amazon and from Reliability Web.com.

He is published in Uptime, Modern Distribution Management, and Supply and Demand Chain Executive. George has conducted seminars across North America, in Europe, and in the U.A.R. as well as a guest speaker at Temple U., Howard U., Duke, and MIT.

George is a graduate of Temple University; he lives with his wife, Joyce, in Bucks County, PA. All grand kids live within eating distance. He can be reached anytime:   georgekrauter@comcast.net.

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