RS's Jarn Gill explains why understanding the hidden costs involved in indirect procurement is crucial to making significant savings

A tough economic landscape, allied with a competitive business environment over the past decade, has prompted many organisations to source cheaper products and drive down costs by employing aggressive negotiating tactics. But there is another element that is the source of a major drain on company finances: the real cost of MRO product procurement.
"MRO procurement is often overlooked as many firms underestimate the true scale of these costs"Jarn Gill, Head of Corporate Sales, RS
MRO procurement is often overlooked as many firms underestimate the true scale of these costs. This can be due to the complex nature of MRO procurement – multiple suppliers, a variety of product categories, diversity of stakeholders, operating sites and procurement systems all contribute to the complexity. This makes it difficult to understand MRO costs, and therefore, potential savings.
 
To understand how MRO savings can be made, it is essential to understand the nature of these costs, which are often overlooked because they form only around 20% of the total procurement spend of an organisation. In addition, they are not attributable to the manufactured product but are instead the products needed for the organisation itself – the maintenance, repair and overhaul of the business operations. Therefore, these costs are often invisible and are rarely the focus of attention when it comes to generating cost savings. Even if they are scrutinised, it is the product cost that is in the spotlight, not the procurement process itself.
 
Using data to spot inefficiency
At RS, our data capability enables us to analyse consumption and identify inefficiencies that are contributing to high MRO procurement costs. Indeed, many businesses would be surprised to learn from our findings – which have been independently verified by the Manchester Business School – that the ratio of MRO procurement cost versus product costs is 2:1. This means that if the MRO budget is £1 million, more than £3 million is actually spent on MRO procurement.
Some organisations are aware of the cost of the process but feel unable to tackle the problem, believing it to either be too much hassle or too complex. For those procurement professionals who are aware of this issue, many have never been able to put a true figure on the cost to their business, and therefore it is an issue that can often be buried or postponed. Then, the focus reverts back to savings on product costs, feeding the cycle of inefficiency.
 
So what can be done to counteract this? RS has devised an end-to-end process that can be applied to all customers to help them achieve significant savings on MRO procurement. This process focuses on five key areas including optimisation of product, inventory, supplier and process, and pricing solutions.

For example, concentrating on fewer products, perhaps that are of better quality or more energy efficient to reduce energy consumption and maintenance costs, could be one simple step that would facilitate the reduction stock that would improve cash flow, as well as avoiding instances of obsolescence. It would also invariably reduce downtime in supplier management, ordering and invoices.
 
Customers will be able to make significant savings using our process and the beauty of it is that the process is wholly taken care of by RS. The perceived hassle factor is negated and, with proper evaluation, stakeholder engagement and joined-up thinking, ongoing monitoring and benchmarking, organisations will start to see dramatic savings very quickly.