The key to achieving total cost savings in indirect procurement is making your purchasing process more efficient – here’s how to do that…
In our article ‘What is MRO procurement?’, we explained the importance of indirect procurement costs and how, with this type of purchase, the average organisation spends £2 on process costs to every £1 spent on the actual product. While the product cost is still worth considering, organisations that focus solely on cost are missing the big picture and they may actually end up spending much more money on their process than they save by finding or negotiating a cheaper product.
Here, we look at how you can effectively cut your process costs to make the MRO procurement process more efficient for your organisation.
When it comes to indirect material purchases, the product costs will often only amount to 25% per cent of an organisation’s product costs. However, the buying process for these materials can account for up to 80% of your total process costs.
Firstly, it’s important to know what these process costs are and why they are so expensive. The three key process costs associated with indirect purchases are:
1 Sourcing costs
The costs involved in searching for, finding and ordering products from suppliers. These are often higher because organisations will have hundreds of suppliers for MRO products.
2 Purchasing costs
The costs involved in creating purchase orders and handling invoices, which is made worse due to the high volume of low value purchases made for MRO.
3 Inventory costs
The costs involved with stocking and managing inventory, which is made worse through large numbers of unplanned purchases and ordering from suppliers without good service levels.
“Organisations that focus solely on cost are missing the big picture, and they may spend more on their process than they save with a cheaper product”
There are a number of areas that organisations – usually led by their procurement team but with support from key stakeholders across the business – can look at.
Reducing the number of suppliers will help reduce sourcing costs, and also help with inventory costs if those suppliers have good service levels. Working with fewer suppliers and making use of eProcurement will also help to save time around purchases while also giving greater spend visibility.
In addition, it’s important to look at planned versus unplanned maintenance and to work with engineers to try to reduce the amount of unplanned purchases – and direct those purchases that are made towards trusted suppliers.
Overall, it’s important to address all of these issues as part of a joined up strategy. Simply targeting one area is unlikely to have a significant impact on process costs, so it’s important to identify improvements across your indirect purchasing process and bring key stakeholders on board so that changes can be implemented consistently across the business.
By working with suppliers such as RS, it is possible to use our excellent service levels, experience and digital solutions to make significant improvements in every area of the MRO purchasing process. Our mix of asset management, eProcurement and inventory solutions, combined with our huge range of more than 500,000 products, our delivery service and data analysis, can help to identify potential savings and then achieve those savings quickly and efficiently.