At a time of unprecedented upheaval, and almost existential crisis for global supply chains, procurement professionals are under more pressure than ever to reduce MRO spending.
Global supply chains have been upended by the pandemic. In the wake of the disruption, businesses need to inject them with more resilience. That means the diversification of supply chains is becoming a priority, with an increase in the demand for new, more local sources of goods and products.
However, as our fourth annual survey of the state of maintenance, repair and operations (MRO) procurement, conducted in partnership with the Chartered Institute of Procurement & Supply (CIPS) shows, this is not a zero-sum undertaking. Adding more suppliers into your network might seem like a smart way to reduce the risk of disrupted supply chains. But it’s also a move that can increase risks in other areas of the business. Not least when it comes to controlling spend and ensuring budgets are allocated in the most efficient way.
Just-in-time manufacturing and distribution have become the dominant global models in recent years for a simple reason: they are incredibly efficient. With countries including China and Vietnam transforming themselves into centres of production excellence, a whole transport sector developed to support the increasing geographical spread of value chains.
From just-in-time to just-in-case
Kate Davies, Head of Global Commercial Services at RS Components, has seen a shift away from that outlook: “Previously, the prevailing attitude was, ‘Global solutions and supply chains with operations that can proactively manage risk and use economies of scale for mutual advantage’. However we now need to evolve and challenge the status quo to consider, ‘What adds true value to our business? Does a local supply chain offer greater opportunity and benefit over consolidation?’
“Beyond the core supply chain, options to source locally versus a global solution are increasingly more difficult to defend. This is a welcome challenge and requires a shift and agility for procurement.”
This shift to finding new sources of supply is, however, a little at odds with one of the trends our annual surveys have detected. We began these research projects with the Chartered Institute of Procurement & Supply in 2017. Since then, supplier rationalisation has always been high on the list of priorities for procurement professionals – not only here in the UK but across the world.
In the UK, where there is an average of 158 suppliers for direct and 177 for indirect supplies, rationalisation is seen as vitally important. Rationalising suppliers while adding new ones to your roster is almost a complete contradiction, at least on the surface. But it underscores the importance of adding the right suppliers and doing so in the right way.
“Beyond the core supply chain, options to source locally versus a global solution are increasingly more difficult to defend. This is a welcome challenge and requires a shift and agility for procurement.”Kate Davies, Head of Global Commercial Services, RS Components
Control and visibility
More than two-thirds of UK businesses have a formal approvals process for new suppliers. Yet only 12% have pricing agreements in place for all their suppliers. That’s a lot lower than elsewhere in EMEA, where the proportion is nearly one-quarter. But more than that, it indicates that price controls are not a sufficiently rigorous part of the selection and approval criteria. And that can sow the seeds of future troubles.
Asserting proper control over spending on maintenance, repair and operations (MRO) is crucial for any organisation. Yet our 2020 survey findings show that 43% of businesses say they don’t have the spend visibility they need. The problem is likely to be particularly acute for large businesses (more than 1,000 employees), where a fifth say they have more than 250 indirect suppliers.
Alex Davies, Head of Value-Added Services at RS Components, understands the pressures businesses are under. “We know that we operate in a fragmented marketplace,” he says. “That makes it challenging in the best of times for customers to have visibility of where products come from. I think to a certain degree, COVID-19 has probably exposed how fragile some of those supply chains are.”
It is hardly surprising, then, that according to our research, more than 30% of UK businesses see eProcurement tools as a way to improve that situation. Around one-quarter are using online marketplaces for tendering and orders. The appetite for digital tools is there and growing. But almost two-thirds told us they need more qualified procurement people. The same proportion in the survey said a lack of investment in technology to manage MRO spend is a problem.
“It’s challenging in the best of times for customers to have visibility of where products come from. To a certain degree, COVID-19 has probably exposed how fragile some of those supply chains are.”Alex Davies, Head of Value-Added Services Delivery for EMEA, RS Components
Complex problems and clear solutions
With almost one-fifth of businesses telling us their MRO supplies budget exceeds £5 million per year, there is a clear incentive for getting spending in hand. And among larger companies – those with more than 1,000 employees – one in three is spending more than £5 million on MRO.
Combining these factors presents an interesting cocktail of needs and challenges: new suppliers, better visibility, controlled spending, reduced risk, increased resilience.
Understanding that diversification doesn’t have to be at odds with rationalisation is key to making progress. Having fewer, more strategically aligned suppliers may be the answer for some businesses. Similarly, finding global partners that also have a local presence can help de-risk the MRO supply chain. Pools of stock, held by supplier partners in multiple locations, can overcome shortages and outages elsewhere in the global supply chain.
But investing in digital technology should make its way to the top of every organisation’s list of priorities, too. The right digital tools and platforms can simplify the process of on-boarding new suppliers and can enforce standard procedures and compliance – such as the all-important approvals process. But more than that, they can deliver greater spend visibility and assist in ongoing assessments of provenance, weeding out counterfeit goods, while helping ensure purchasing process compliance, too.
For in-depth data and analysis on how COVID-19 has impacted indirect procurement, download the 2020 Indirect Procurement Report here.