Connected Thinking’s recent roundtable discussion focused on the challenges and opportunities arising from indirect procurement and MRO supplies as organisations in all industries seek to drive improvement
Recent research conducted by RS and the Chartered Institute of Procurement and Supply (CIPS) provided a snapshot of the major issues and trends that procurement professionals have noticed regarding indirect procurement.
Having identified some of the challenges faced by organisations, Connected Thinking gathered senior procurement professionals from a raft of industries to discuss the results and their own experiences. In addition to the procurement experts, RS’s Mike England, President EMEA, and Richard Jeffers, Technical Director for Northern Europe, offered a supplier perspective and Helen Alder, Head of Knowledge at CIPS, represented the procurement industry as a whole.
Perhaps unsurprisingly, the single biggest pressure cited by procurement professionals in the RS/CIPS research was the need to reduce operational budgets. Asked whether this answer resonated with them, the panel broadly agreed.
“We’ve placed about a quarter of a million MRO orders in the last year, so there's been a huge focus to say how we can efficiently do this,” says Paul Duncombe, UK Category Manager for Factory Supplies at Siemens. “We need to look at the purchase-to-pay process to make that a lot more efficient.”
Rob Woolley, Directs Category Manager at Cadent, agrees. “Over the past 12 months we’ve seen a targeted lens on our operational expenditure (opex) savings,” he says. “Having moved from a large, plc-owned, multi-group company to a business that’s now owned by private investors, there is a need to see a return on that investment. We’ve a commitment to the board to save £15 million on opex within this fiscal year`.
“I suppose that is slightly incongruent with the previous message in our sector, which was very much around total expenditure (totex) savings, which means we were looking at the total cost of ownership,” he adds. “Now, opex savings are a key driver. As such we are targeting a 55% reduction on overall suppliers to leave us with a smaller list of preferred suppliers.”
Dean Moult, Head of Direct Category Management at Arqiva, a telecommunications and infrastructure firm responsible for television, radio and mobile phone masts and towers around the UK, explained that his company faced similar cost pressures.
"We want to work with key vendors to give us greater visibility of our MRO spend"Dean Moult, Head of Direct Category Management, Arqiva
“As with many businesses there’s a huge programme running to take cost out and this is one of the strands,” says Moult. “There are a couple of key areas we want to focus on to achieve that. First, we want to reduce our number of MRO vendors and, second, we want to work with key vendors to give us greater visibility of our MRO spend.”
Most of the group agreed that vendor consolidation is an essential part of their ongoing indirect procurement strategy as they look to make the ordering process simpler for stakeholders, agree set costs with preferred suppliers and reduce the process costs around MRO purchases.
For Schneider Electric, an additional consideration is introducing better stock control for MRO products across its 90 production sites. “One of our biggest challenges is stock management,” says Hugo Barbier, Schneider’s Procurement Manager. “We’ve been stocking too many products and since products that aren’t used regularly have a cost, we’re trying to optimise our stock. We try to work with our recommended vendors so that they can offer solutions to reduce our stock and give us better availability of the products that we use regularly.”
Mike England believes that making vendor consolidation a success comes down to getting front-line stakeholders – the engineers – on board. “It’s a balance between driving vendor consolidation to remove costs and improve efficiency, versus the practical requirement to just get stuff done, either through production or through maintenance,” he says. “I think the relationship between procurement and the engineers is crucial. You need to find ways to show stakeholders that the procurement strategy of vendor consolidation is aligned to the long-term engineering and maintenance strategy.”
Where organisations struggle to get their MRO strategy across there is a problem with off-contract or ‘maverick’ spend from the frontline stakeholders. This was a recurring theme for the panel. Hugo Barbier explains: “It’s been a real challenge because when you come to a site the engineers prefer to work with the local vendor who’s got the reactivity, got the stock ¬– and they can just walk across the road and buy whatever they need from them.
“But when that happens we don’t have the spend visibility or know what we are buying,” he adds. “By consolidating our business it’s possible to have a better spend visibility – and when you have a better spend visibility you can actually drive your procurement strategy.”
Cadent is also trying to reduce off-contract spend in its organisation. “We have a well-defined contract and contractor model, but what we do find with MRO is a need to have items at short notice in case equipment has broken down,” says Woolley. “We have had issues with maverick spend historically, not intentionally but because necessity tends to mean that rather than using our contracted channels they have called into a local tool stockist, bought something and then expensed it or raised a retrospective purchase order. This area has and continues to improve with our guidance.
“We’re also now hearing references to Google and eBay – I had a recent example where the engineer said, ‘I looked on the internet and I can find it for a pound cheaper,’” adds Woolley. “It’s that lack of understanding that it’s a pound cheaper on the purchase price, but if you go ahead and buy it, you won’t have the correct terms in place, we don’t know about the warranty and the part might be counterfeit and fail.”
Richard Jeffers recalls his own industry experience and points out that there needs to be a mix of communication and enforcement to stop maverick spend. “The only way I managed to block off-contract spend was by formally leaving suppliers and then going to find the engineers and saying to them, ‘Use the contract. If you put those purchases through on expenses I can’t guarantee they’ll get reimbursed,’” he says. “Using top-down enforcement was the most effective way to do it.”
Kevin Cheetham, Category Manager at brick manufacturer Ibstock, has had strong support from his senior leadership team, which has helped deliver impressive results. “We have a very good compliance figure, which is currently around 95% for MRO spend,” he says. “But that doesn’t mean it isn’t a constant battle. We analyse the data every quarter and then have to engage with any sites where there is leakage.
“We also use rebates a lot,” he adds. “We go to great pains with our finance people to try to ensure that the rebates we receive are funnelled back to the sites, which rewards good practice.”
Paul Duncombe explained that Siemens is looking to put a clear process in place for its MRO purchases to try to avoid maverick spend. “We want to put a system in place for any order under £1,000” he says. “The idea is that engineers follow a defined set of steps to make an MRO purchase – first, they go to a preferred supplier, such as RS, then to an integrated or marketplace seller and then if it’s still not available they can make a one-off purchase with a smaller vendor.
“The idea is that that’s all done within a day,” he adds. “It’s all low-value items that don’t need approval and we should end up with a simple, seamless process.”
"You need to find ways to show stakeholders that vendor consolidation is aligned to the long-term maintenance strategy"Mike England, President EMEA, RS
An issue connected to the battle against off-contract spend is the wider aim of achieving stakeholder alignment – getting engineers, senior management, finance and operational managers to understand and support a cohesive indirect procurement strategy.
Helen Alder at CIPS believes procurement professionals need to improve their soft skills to connect with other parts of their organisation. “Twenty years ago it might have been fine to have a procurement person who was really good at finance and analytics and would sit in a dark room and not talk to anyone all day, but that has totally changed,” she says. “At CIPS, our members who flourish are the ones who are on the board, who are good at marketing themselves and communicating, and are adding value.
“These people have got their teams out in the business working with the different departments and are putting much more emphasis on soft skills and marketing procurement.”
"Our members who flourish are the ones who are on the board, who are good at marketing themselves and communicating, and are adding value"Helen Alder, Head of Knowledge, CIPS
Nick Hickman, Head of UK Operations of consultant engineering firm NIRAS Process Industry Ltd, shares an example of how these soft skills can be put to good use. “We had an experience recently where a procurement person actually sat with a project all the way through to completion,” he recalls. “I think the more dynamic organisations are realising that to get credibility there needs to be joined-up thinking all the way through to get the benefit at the end.
“When a procurement person has interacted as part of the initial engagement and maintains that involvement throughout the project and sees it through to its end, it brings more success.”
Abrar Ahmed, MRO Category Buyer at Cadent, explains that his firm has also seen success with greater integration between procurement and engineering. “Originally when we conducted MRO tenders, it was procurement that gathered the key information, whether it was internal or from suppliers and third parties, and we presented that back to the engineers and budget team and simply stated what they had been purchasing,” he explains. “But now it is the stakeholders who are coming forward to capture this information and that has really supported us.”
According to the RS/CIPS research, 46% of procurement and supply professionals expect their indirect procurement strategy to change “a great deal” over the next five years. Our panel was unanimous when asked what this meant: digitisation.
Paul Duncombe points out that rapid advancements in technology, which are improving the purchasing process for consumers, are starting to impact the business world. “In their personal lives, everyone goes online to order things quickly and to find information easily, and that’s what people now expect in business,” he says. “Our suppliers offer me innovation, new services and new ideas, they’re pushing us into areas where we might not feel comfortable but that’s the future, so that’s where we need to be.”
While technology around eCommerce and eProcurement, Artificial Intelligence and new stock management solutions is driving change, many organisations struggle to know where they should invest to future-proof their business.
“I use the word ‘appropriate’ quite a lot,” says Nick Hickman. “Sometimes I think inappropriate solutions are offered to businesses so they don’t go ahead with an investment because they think, ‘What, £3 million? There’s no way we can afford that!’
“But, actually, there’s a solution for them that would cost £1 million and which would deliver the benefit they want, move them on and enable them to make further investments at a later date. It’s about what is appropriate – you need a balanced view.”
Richard Jeffers points out that as technology becomes mainstream prices become more affordable. “The price of technology has moved from where it was three years ago,” he says. “The cost of data is coming down, but actually there is the analytic capability that Microsoft or IBM or Google are able to plot and are actively marketing out there which has now reached a maturity that means we can derive real value.
"We talked to our customers about technology and predictive analytics, and what comes across is that they want a trusted adviser to come and talk to them"Richard Jeffers, Technical Director for Northern Europe, RS
“We talked to 50 or 60 different customers about technology and predictive analytics and the message from all of them is that they want a trusted adviser to go and talk to them,” he adds. “The subject is complicated, it’s new and they don’t understand the ins and outs of it and they may not have the capability to deliver it in-house.”
Dean Moult identifies with this. “In our personal lives, the ‘Amazon-ification’ way of buying dominates,” he says. “That has led to an expectation that it should be just as easy to purchase items in the business environment. So why are we persevering with the antiquated process of raising purchase orders that are sent in the post or by email?”
Moult believes that suppliers play a key role in helping organisations choose which technology to invest in and how to apply it correctly.
Another issue around technology and digitisation is raised by Mike England, who asks whether UK organisations need to improve the skill set of their workers if they are to adopt new systems.
“I certainly think there will need to be some degree of upskilling,” says Rob Woolley. “My team support the innovation department within Cadent and we are now working more closely with the investment team around digital and IT, but we certainly need to build capability internally.”
Ibstock Brick is also looking at this issue, according to Kevin Cheetham. “We have an active apprenticeship scheme and spend a lot of money on training our engineers to keep them up to date with technology,” he says. “I see procurement in many ways as a catalyst to bring in experts to go and talk to the guys at the coalface.
“You say, ‘Look, you talk technical language because that’s not our language, but you can advise on a particular course of action that we could follow.’ It’s then up to procurement to put the commercials for that in place to make sure that the relationship works for all sides.”
Relating to the potential for technology to improve the MRO process, the conversation turned to another major procurement challenge that teams (and the engineers they work with) have to manage. According to the RS/CIPS research, the biggest day-to-day challenge the respondents faced is maintaining ageing assets.
“Some of the assets we work with are 50, 60 years old,” says Dean Moult. “You might think, ‘why don’t we chuck it all away and buy new equipment?’ But it’s massive capex investment.
“The lifetime of that investment cost is not available, so you’ve just got to keep these things going.”
Kevin Cheetham is having similar discussions with colleagues at Ibstock Brick. “In a lot of our manufacturing units the equipment is up to 30 years old, because the attitude has been to keep on fixing it,’” he explains. “There’s now a realisation that we need to increase machine uptime, so we’re in the process of investing heavily in getting the majority of our major manufacturing equipment inspected and reported on, then to look at what’s needed to bring it all up to the required standard.
“We’re starting to look at predictive maintenance, where a sensor will tell us that something’s going to fail – rather than relying on Fred, who’s been on the shop floor for 20 years, saying, ‘I can hear something but I’m not sure what it is.’”
Mike England points out that RS firmly believes in smart maintenance as the future but acknowledges the change won’t be overnight. “We believe that predictive maintenance is the destination all organisations are heading towards and it is just a matter of time,” he explains. “I think now that the technology has improved and the data analytics are accelerating that artificial intelligence is only going to make that better and better, and ultimately the cost coming down is the trigger point for it to start.
“But at the same time, the reality is that you can’t take the elephant of a factory in one big bite – it is not possible,” he adds. “So, let’s look at some key applications within facilities where this technology would really help us. Whether that’s just the critical assets, whether it’s areas of difference that have a higher cost implication if something did actually fail, and let’s start there to test and prove the technology’s value.”