RS Industry Sector Manager Chris Cruise explains why procurement teams should put service levels before cost cutting

Finding the right suppliers is crucial in any organisation, and procurement teams know there are significant risks and cost implications if they choose the wrong one. It could result in being tied to a five-year contract, facing both financial and reputational penalties if a poor supplier means your organisation fails to meet the expectations of either regulators or your customers, or both.

Too many people believe that because MRO (maintenance, repair and operations) consumption has similar characteristics to planned maintenance, it should be treated in the same way, with a focus on price. In practice, less than 20% of products are purchased more than once, with a small number of items purchased annually in volumes of no more than 10. So, how do you effectively tender for MRO consumption?
 
Contract leakage

Traditionally, procurement teams have used the ‘basket of products’ methodology for testing a supplier’s price and service. However, once a supplier has been chosen, the same issues tend to arise – products are unavailable; there is a difficulty in auditing pricing against the contract due to range and visibility; alternative products are substituted; and then there is contract leakage. This leads to an overall increase in the cost of products, production and maintenance downtime and, ultimately, a non-performing contract.

"Less than 20% of products are purchased more than once for MRO"Chris Cruise, Industry Sector Manager, RS
The real costs in an MRO contract are the one-off, ad hoc purchases; those products which are used only once and which add up to a large total spend, attracting the attention of a buyer or ops manager. These are then typically used as data points for a tender basket. This is the right thing to do for planned consumption, but successful MRO contracts are driven by service and not price.
 
Focus on service
Since service is such a key part of any MRO tender, why not test the service element on the basket of products before signing a contract? A good approach would be to select a basket made up of parts purchased in volume (30%) and those purchased only once (70%) as a random data set.
"Price should only be one of many factors you consider"Chris Cruise, Industry Sector Manager, RS
The price should only be one of many factors you test, alongside things such as the sourcing and purchase method, product availability, average stockholding in the past 12 months, any distributors supplier changes in the past two years, and price fluctuations. This wide-ranging approach provides a much more accurate test of the real requirements and demands of your operational/maintenance engineers.
 
If you are happy that the supplier meets these requirements and complies with your contracts, you have a better chance of being able to deliver the right product, in the right place, at the right time and at the right price to your frontline team.