7 Key insights
every CPO should know
about MRO

Got MRO?
These 7 MRO Insights cover fundamental strategies to help your company navigate the complexities of this category. The MRO market is estimated at $1.7 trillion annually - $200 billion of which is in the industrial segment – make sure you’re optimizing MRO for your company now and for years to come.

Insight 6: The 4th Dimension of TCO

MRO is one of the most misunderstood and highly emotional spend areas for any business. MRO Strategic procurement often takes a back seat to the company’s internal users / stakeholders who are passionate about obtaining their materials / services from “local” friends, and historical relationships. They “shop daily” focusing almost exclusively on the lowest unit cost. Procurement is often told, “If you mess with my suppliers, you will be responsible for shutting the plant down!”

There is, however, simply too much at stake in both reduced operations costs and organizational performance. MRO spend can and should be strategically sourced as all other direct and indirect spend is addressed.

Supply Chain’s procurement team should identify and engage appropriate internal stakeholders then walk them through identifying and quantifying the value-added services and technical support stakeholders need or currently being received through outside suppliers.

Building those criteria into an MRO strategic sourcing initiative encourages a needed stakeholder collaboration while proactively bridging gaps between procurement and internal stakeholders.

Total Cost of Ownership – (TCO):

TCO is a modern procurement metric that focuses on an item’s holistic, lifetime cost (or lifecycle costs), not just its unit price. Cost elements may include but limited to: unit price, freight, inventory carry costs, insurance, risk management, life cycle performance, disposal costs, etc.

Purchase Price Variance – (PPV):

PPV Is a procurement metric that measures a procurement organization, or individual’s effectiveness to achieve cost savings targets. It measures the unit price difference from present price to future price. The better (lower) the future price, the better the PPV metric becomes. Other total cost components are typically not measured or are ignored as they are considered sunk costs within an organization’s finance and management hierarchy.

Keeping Costs Where You Can See Them

Those organizations that do attempt to strategically source MRO typically do so by attempting to address the usual three (3) TCO (Total Cost of Ownership) dimensions.

  1. Leveraging Spend to lower Unit Cost
  2. Lifecycle Cost – freight, storage, disposal
  3. Materials Standardization / Rationalization

What has quickly emerged as a prominent savings TCO opportunity in the past few years is what we call the 4th Dimension. The 4th Dimension is what actually drives a significant percentage of a total overall on-going MRO program savings.

A hand holding a silver ball with a building reflection

What is the 4th dimension?

4: Guaranteed Continuous Improvement Savings

A comprehensive program that holistically manages MRO’s total life-cycle costs (unit price, freight, inventory/stores assets, standardization, reliability, efficiencies, repairs, and disposal). Instead of a one-time event during the sourcing activities, continuous emphasis of all aspects drives optimal organizational performance. Continuous improvement savings are derived from improvements to processes, better inventory management, new training programs, and many others.

Continuous improvement requirements that proactively engage internal stakeholders and strategic suppliers throughout the life of a supplier agreement is absolutely crucial for an organization to obtain and maintain its competitive advantage. Do not confuse continuous improvement requirements for year-after-year supplier price reductions. Continuous improvement targets engage suppliers in a mutually beneficial partnership while dictated price reductions encourage suppliers to use short-cuts to cut costs to meet arbitrary targets.

The days of price shopping every day are becoming ancient history.

Most new MRO strategic partnership agreements contain 8% – 12% guaranteed year-over-year cost savings throughout the life of the agreement including well-defined, innovative rigorous criteria and documentation processes installed. In many cases, these guaranteed cost savings represent 50% of the total overall MRO budget impact savings.

Strategic, flexible, MRO supplier partnerships address the mutual commitment and investment that both the internal stakeholder and supplier partners seek in the new era.

Let the MRO experts at Tenzing develop a sustainable path towards MRO excellence for your organization.

Next Insight

Insight 7: Codifying Tribal Knowledge