There are many paths to reducing “hard-dollar”invoice expenditures for MRO materials. Here are examples of some of those provided in The 20% Solution:
Special Negotiated Discounts -To negotiate the best deal, it is essential to understand the needs, problems and objectives of each party. Example: An earth products processor required special cartridge filters for its calcining and grinding equipment.
These filters were ordered 20 at a time, at a cost of $450 each, plus freight and emergency premiums due to long lead times and lateness in reordering. And the customer tied up about $10,000 in inventories. Upon inquiring, the distributor learned these patented filters were custom-made to order in small lots by hand and were a costly nuisance. The distributor agreed to buy in economical lot sizes of 65, stock the filters and deliver next day at no charge.
The manufacturer gave the distributor an added discount and dated terms to defray his additional costs. The customer’s price dropped to $398 with freight and emergency charges eliminated, inventory virtually eliminated, and lead-time cut from 8-10 weeks to next day.
Avoiding Unnecessary Purchases -Many buyers have never considered the cost of unnecessary purchases, possibly because they have no practicable way to identify them. Example: A multi-plant manufacturer of automotive anti-friction bearings was ready to close down a plant suffering heavy foreign competition. A long-time MRO supplier was asked to identify savings potentials estimated at $2 million annually for indirect materials, of which $605,000 (30 percent) was ascribed to unnecessary purchases and better utilization of surplus inventories.
The plant stocked many components for equipment such as screw machines and grinding machines, using min/max criteria based upon an ancient machine census. As a result, the storeroom was buying expensive replacement parts for many more machines than were in use.
Standardization/Consolidation of Items and Suppliers -This is one of the most significant cost reduction areas in MRO procurement, dwarfing savings available from reduced pricing. Example: A containerboard manufacturer -with 15 mills and more than 100 converting plants -maintaining a raw database of more than 12,500 MRO items. A sample analysis of three randomly-selected product types was initiated to identify the potentials for standardizing or consolidating the number of SKUs, as well as possible dollar savings. Here are a couple examples –
Measuring tapes: 73 different SKUs from seven different sources were cut to 10 SKUs from one high-quality supplier (who also made three of the other brands being bought from current sources on a private-label basis). Weighted average savings were 30 percent.
Mops, brooms, heads and handles: 138 different items from 30 sources were consolidated into 13 heads and one universal handle from one top-quality manufacturer. Weighted average cost reduction totaled 35 percent. Additionally, the product was shipped knocked down (heads and handles unassembled) which reduced freight cost, handling, storage space, inventory investment and stock-out.
Specifications -Many MRO material specifications are based upon tradition, historical usage or standards that are no longer relevant. Yet, because the product has always worked, it is assumed that any change in specifications will lead to disaster. However, a simple change in specifications, properly tested before adoption, may completely change the cost paradigm.
Example: A manufacturer of piston rings for the automotive industry used aluminum oxide slurry to achieve final tolerance and finish requirements. The supplier recommended a different concentration and formulation from a different manufacturer.
The required testing was performed and the new product accepted. Usage declined by 66 percent and total annual cost, including freight, went from $147,000 to $39,000 -a 75 percent reduction in a single plant.
Joel Roth’s book, The 20% Solution, is available to MDM readers for free download (in pdf) at www.the20percentsolution.com. This book has been used as a professional sales promotion and educational tool for end-user customers and prospects, with a dramatic response from the purchasing community to whom it is directed.