Driving New Efficiencies in the Indirect Supply Chain

In difficult economic times, companies look for new ways to increase efficiency and cut costs. Most companies focus their efforts on direct materials and capital expenditures. In the 1980s, companies tried outsourcing purchasing, inventory and other functions as a cost cutting measure. However these bundled services did not provide the transparency needed to eliminate waster and inefficiencies. Now Supply Chain Managers can implement lean processes that provide better visibility and promote continuous improvement in every aspect of the supply chain. Best-in-class companies have reduced MRO costs by 19 percent, according to an Aberdeen Group Study, however there were significantly lower savings realized by average and laggard companies at 7% and 3% respectively.

Historically, MRO supply functions have operated separately from the primary strategic purchasing operations, but have been managed on-site, and so they have not benefitted from the attention of centralized purchasing professionals. This traditional approach to MRO creates five key problems:

1. End users lack a complete understanding of MRO costs, despite the fact that they represent almost two thirds of a company's requisitions. In most cases, companies lack a comprehensive tracking system that provide visibility into the total cost of ordering, warehousing, transporting, receiving, payment, and other supply chain costs.
 
2. Supply chains are fragmented and inefficient due to the wide variety of materials needed. This adds to total costs due to the labor and systems required to do things such as audit, pay invoices, and transport.
 
3. Companies lack visibility into the supply chain because of the large number of MRO items involved. This may result in overstocking of items which leads to unnecessary inventory carrying costs, or stock-outs which can lead to a loss in productivity.
 
4. Skilled maintenance/engineering staff spend too much time ordering, finding, and picking up parts, and this loss of efficiency can increase down-time.
 
5. Multiple suppliers entering the manufacturing site create safety and security issues.

The first step is to perform a detailed analysis of the MRO spend, which will allow for the development of a strategic sourcing plan that identifies the optimal supplier base. The goal is to ensure supply of the needed products while minimizing transactional costs. The next step is to examine the tactical procurement process and look for ways of improving efficiencies and eliminating costs. The third step is to look at logistics processes from supplier receiving through delivery to point of storage or use.

Once the total costs of MRO materials are understood, it will be possible to create a strategy to drive inefficiencies out of the system. An end-to-end approach to the MRO supply chain offers the opportunity to seize an important competitive advantage in today's challenging economic climate.

Adapted from: http://bit.ly/bpLAzV