Author: MROP Cost Savings Opportunities Often Overlooked by Purchasing Community - Modern Distribution Management

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Author: MROP Cost Savings Opportunities Often Overlooked by Purchasing Community

Industry veteran Joel Roth looks at how organizations buy supplies for MROP in a recently published book, The 20% Solution: A Practical Guide to Dramatic Cost Reduction in MROP Procurement. Roth says that in most organizations, raw materials, purchased components, capital goods and packaging materials represent 75%-85% of total dollars spent on physical goods. And MROP represents about 15%-25%.
 
The characteristics of MRO buying are different from other types of goods, he says -requiring entirely different methods of analysis, sourcing, negotiating, stocking and tracking and an entirely different cost structure.
 
Why did he write a book on the subject? The procurement of maintenance, repair, operating and production supplies accounts for 20% of total ...
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Industry veteran Joel Roth looks at how organizations buy supplies for MROP in a recently published book, The 20% Solution: A Practical Guide to Dramatic Cost Reduction in MROP Procurement. Roth says that in most organizations, raw materials, purchased components, capital goods and packaging materials represent 75%-85% of total dollars spent on physical goods. And MROP represents about 15%-25%.
 
The characteristics of MRO buying are different from other types of goods, he says -requiring entirely different methods of analysis, sourcing, negotiating, stocking and tracking and an entirely different cost structure.
 
Why did he write a book on the subject? The procurement of maintenance, repair, operating and production supplies accounts for 20% of total spending but consumes about 80% of the time, effort and expense in purchasing.
 
Roth says that the subject of MROP supplies purchasing is substantially neglected,” even by the professional purchasing community. For example, he says the index for the Seventh Edition (2000) Study Guide published by the Institute for Supply Management to prepare purchasing staffers to qualify for the Certified Purchasing Manager Program lists just four entries -totaling less than one page of text -for MRO supplies procurement out of 500+ pages in the guide.
 
A distributor can help his customers identify and implement significant cost savings in this equation.
 
Roth illustrates the opportunity here:
Imagine an appliance manufacturer that buys $50 million annually in a few grades and sizes. The buyer can readily check market prices and trends in market reports. He can deal directly with available mills and easily identify the vendors who can supply his requirements. He can negotiate a competitive price because he is able to offer an attractive volume of business. And he can verify the deal by contacting a few colleagues. This company can complete an effective buy on $50 million in raw material with minimal time, money or effort.
 
Now imagine the same manufacturer addressing its MRO purchase requirements. It may be purchasing 15,000 different SKUs across nine different plants. One of these SKUs is a six-inch Philips screwdriver. Each plant buys a different brand, from a different vendor, with a different specification, at a different price and calls it by a different name, description or identifier. This pattern will apply to most of the 15,000 SKUs. Moreover, the MRO buying is probably being done by a multitude of people in various plants.
 
So how can you change the outlook of customers who fit this description? Go to this link and download the electronic version -for free. The 20% Solution is aimed at educating corporate purchasing management so they might achieve a better outcome than is likely here. It is well-written and offers a lot of value to you and your customers. In the book, Roth provides pages and pages of case studies on how customers and their suppliers have created significant cost savings in MROP purchasing.

An excerpt from this book was published in the latest issue of MDM. Click here. Learn about our twice-monthly subscription newsletter here.

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