By George E. Krauter
Now is the time of the year when procurement managers are asked for plans to reduce "costs" for the year. Most MRO procurement departments are measured on their abilities to reduce the cost of price...not total cost of ownership. Therefore, the MRO buyer will go to MRO distributors with requests for quotes (RFQ), requests for information (RFI), and/or requests for proposal (RFP).
These "Request For's" are almost always accompanied with a price quote request which is formatted into the tried and true "market basket" process. The buyer will assume that all those selected to respond are equal in the services they provide and have equal purchasing powers for the lines they represent. By picking the supplier with the lowest price, buyers can show management the best price reduction, equal supply support, and be rewarded for their apparent levels of expertise.
The Market Basket selection process for MRO is generally accepted as a valid method to acquiring the optimum MRO provider (In my experience, mainly because people cannot think of an alternate method that will be accepted by senior management).
Below are listed the facts and fallacies of the "market basket" process as they relate to MRO supplier selection.
> Duplicated parts under different SKU numbers.
> Inadequate descriptions.
> Descriptions known only to the incumbent supplier
> Inconsistent unit of measurement data.
> Outdated pricing information
> Outdated usage.
> Obsolete parts.
> Parts with one cent unit "price holders"
Alternatives to the market basket process:
As noted above, RF's for MRO parts are sent to MRO distributors for price quotes. These companies are authorized distributors for manufacturers who sell their products (with some exceptions) through distribution exclusively. Prices submitted are based upon the distributors operational costs, profit requirements, short term sales needs, and mostly, their ability to squeeze their suppliers with extended discounts and longer terms. Therefore, the MRO manufacturers constitute the supply chain function that determines optimum price levels. For the major categories of MRO consumed (small number, major buys) price negation should be a joint negotiation involving the MRO buyer, the manufacturer and the selected distributor.
Select the supplier based upon their ability to lower the total cost of product at point of consumption also known as total cost of ownership (TCO). Tell the supplier the price reduction requirements desired by management and make sure the selected provider remains profitable throughout the term of agreement (which should be open end).
Outsource the entire MRO supply chain to MRO management experts and require KPI goals and performance measurements that will satisfy management.
The example below illustrates a real life high cost situation that resulted from the use of a low-price supplier.
A large multi-plant food manufacturer with a strong corporate purchasing presence selected the low-price supplier based upon data obtained from a market basket process. The supplier's closest location was 100 miles from the plant. The plant MRO buyer was also responsible for inventory reductions and control. The buyer noticed that inventory was increasing and could not find out why. An investigation showed that the selected supplier had quoted so low that their return was under 5%. Therefore, they would compile orders and deliver only twice per month to save costs. Meanwhile, back at the plant, parts were needed so maintenance personnel with purchase cards bought what they needed in package quantities which went into stock. When the orders finally arrived from the corporate supplier, the excess went into inventory causing the unnecessary inventory increases.
This is just one of the situations that add total cost to the market basket process. Organizations looking to streamline MRO costs should consider an alternative approach.
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: email@example.com.
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George E. Krauter
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