Sourcing savings in services
By Narendra Mulani -- Logistics Management, 8/1/2008
Sourcing and procurement are only one part of the supply chain equation. But in some respects—including the potential for cost reduction—they’re among the most important. Take maintenance, repair, and operations (MRO) activity, where leading-edge acquisition practices can reduce costs by up to 30 percent.
This is not late-breaking news. Thousands of organizations have already captured sourcing and procurement savings associated with MRO goods. Yet, for all their triumphs, many organizations overlook the potential associated with acquiring MRO services. The opportunity can be illuminated by reviewing spend analysis data.
A review often reveals that information is of low quality, with large expenditures categorized simply as “repair” or “scheduled maintenance.” MRO services are also trickier to define. While a typical MRO item (for example a light bulb, filter, or bolt) can be precisely parameterized according to size, performance, and material specification, the buyer of an MRO service must frequently work with a specification as vague as “drive to our plant and fix our pump.” Issues with language and local regulations also complicate matters. The bottom line is that MRO services comprise about 25 percent of a typical company’s total indirect spend. However, high performance in this area is seldom realized or even sought.
Clearly, sourcing and procuring MRO services presents its own unique challenges. Yet there are two guiding principles upon which high performance in sourcing and procuring MRO services is founded. The first of these is “clustering”—identifying groups of company sites in close geographic proximity. Clustering can help maximize opportunities for combining expenditures without compromising operational considerations.
It is wholly reasonable, for example, to contract with a cost-efficient and competent supplier that can serve multiple plants within a few hours drive of each other. This contrasts sharply with the more traditional, centralized approach that companies usually follow in their sourcing of MRO services. As shown in the graphic, companies often look to deploy service suppliers from a central point. This frequently works well with physical distribution and warehousing, but it’s almost never cost-effective with MRO services.
The second principle speaks to the need for a more holistic approach: improving key processes and rationalizing suppliers without imposing unworkable, centrally imposed sourcing rules. Good examples include combining the purchase of goods and services where possible (for example, avoiding separate purchases of a filter and the filter’s installation); increasing the specificity of key service definitions, and seeking to combine categories of spend across sites.
In effect, it may not be viable to source categories centrally, but it’s very possible to dramatically increase savings by pooling spend and creating category “bundles” of services upon which suppliers are more likely to bid. Few suppliers may be interested in a contract that requires them to serve plants scattered over thousands of miles. But if an organization can condense the contract to plants within a single country or region, then supplier interest (and hence competition) will be greater.
Here’s a brief look at how a global chemicals company put the aforementioned principles to work. Its first step was to develop a detailed business case, which confirmed that tighter service definitions, thoughtful process improvements, supplier rationalization and the creation of clusters of plants could significantly reduce spend on MRO services. Several high-impact categories—HVAC maintenance, scaffolding and insulation, industrial cleaning, mechanical and electrical services, engineering, and rotating equipment maintenance—were identified as primary focal points.
Subsequent implementation of a “site-by-site” services-sourcing program produced benefits that surpassed the company’s targeted levels of improvement:
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Heating, ventilation and air conditioning maintenance: savings of 20 percent to 30 percent.
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Scaffolding and insulation: savings of 10 percent to 30 percent.
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Industrial cleaning: savings of 5 percent to 20 percent.
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Mechanical and electrical services: savings of 5 percent to 25 percent.
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Engineering: savings of 10 percent to 20 percent.
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Rotating equipment maintenance: savings of 25 percent to 35 percent.
Moreover, the initiative’s value went further than cost savings. For example, the company found that implementation of new MRO service contracts became more straightforward, since many of the necessary specifications and site requirements were now available in a codified format. Moreover, as the relationship between individual sites and the headquarters operation strengthened over time, it became easier to manage centrally sourced, non-MRO service categories.
Not surprisingly, the company is now expanding its MRO services-sourcing program to other countries and continents. But even though its successes have been impressive, they are nothing that couldn’t be duplicated, or even surpassed, by companies with similar levels of insight, diligence and commitment to high performance.
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