Procurement teams don’t just ensure that the raw materials, components, and parts arrive on time, on budget, and on spec. In many organizations, the procurement team is also responsible for MRO sourcing. That’s maintenance, repair, and operations.
In other words, procurement has the added responsibility of keeping the company and production running. It makes sense, given the procurement team’s expertise. After all, MRO is a critical part of any organization’s success. In addition, there are many hidden costs with MRO and many opportunities for significant cost savings.
However, sourcing teams quickly discover that MRO is very different from direct procurement.
The Five Biggest Challenges of MRO
Naturally, MRO is not easy. It’s complex, it can be labor-intensive, and achieving cost savings can be elusive. A procurement team that takes on this aspect of company operations will quickly run into a series of challenges. These five are the classics:
MRO Sourcing Challenge 1
The quality of historical data is typically lacking. Different staff members and different departments will have varying methods for entering data, and terminology doesn’t always match. Different suppliers might use different part numbers as well. And then there are the everyday typos. Over time, the errors and differences compound, and data quality gets worse.
MRO Sourcing Challenge 2
An MRO often involves a market basket with many SKUs, each of which may have a low transaction value. Suppliers aren’t necessarily interested in spending the time to supply pricing on every single line item.
MRO Sourcing Challenge 3
An MRO may have variable lead time requirements for different line items. Some of the products or parts may be needed immediately, while others can wait for several weeks.
MRO Sourcing Challenge 4
The sheer number of requirements can make managing an MRO a challenge. There are often many line items, each of which might have different minimum order quantities, different lead times, and other requirements. Some might be conditional on others, requiring the sourcing team to filter out what might otherwise be a winning bid based on the lowest price because the supplier is unable to meet a deal-break condition on one of the other line items.
MRO Sourcing Challenge 5
Coverage by suppliers is also a big challenge with MROs. Because there are so many line items, it’s common to run into a situation where one supplier is only able to bid on the first 100 line items, while a second supplier’s coverage extends to only the final 50 items. Variable coverage significantly complicates the MRO bidding process.
Fortunately, there are ways you can manage the challenges involved in an MRO RFP. We’ve put together a list of three best practices for MRO sourcing. With these in place, you can transform MROs from being a headache to being a big win for your company.
MRO Best Practice Number One—Automate
The nature of MROs—with multiple line items, conditional logic, numerous requirements, and variable pricing—means they can quickly devolve into a pivot table nightmare.
To avoid this scenario, the first MRO best practice is to automate the process as much as possible. In particular, focus on an automated methodology for collecting your conditional logic and your pricing through the same workstream. Doing so means that instead of spending hours, days, or even weeks working with various pivot tables and making manual comparisons, you can access an award tabulation within seconds of receiving your quotes.
MRO Best Practice Number Two—Use Target Pricing
During an MRO RFP, a lot of time can be wasted in going back and forth with suppliers with questions about pricing. That’s why the second MRO best practice is to use target pricing. Doing so means suppliers have an expectation of the price you’re looking for, so they can either bid or not bid, saving everyone time.
Studies on target pricing have shown that this procurement strategy influences supplier behavior. In fact, it encourages suppliers to offer better pricing.
The ultimate method for target pricing is to employ an intelligence engine that automatically produces your optimal target pricing. This advancement has only been made possible by the adoption of machine learning and artificial intelligence by leading predictive sourcing software like Arkestro.
MRO Best Practice Number 3—Clear Communication
Some of the most difficult challenges in an MRO RFP are essentially self-inflicted. They arise because of poor communication with suppliers.
Too often, procurement teams fail to communicate their coverage expectations to suppliers. This can lead to many problematic scenarios during the bidding process. For example, suppliers may only bid on a few line items of a large market basket. A supplier might offer good pricing, but if you award the business for just a few line items, you miss out on potential volume discounts. You can easily end up with the so-called “Singleton” problem. That’s where you have many suppliers bidding on your MRO, but there’s no real competition because each is bidding on different line items.
Employ the final MRO best practice—clear communication. You’ll find MROs are faster, far less labor-intensive, and your company will reap the benefit of better results.
MRO Sourcing Best Practices Summary
- Automate your sourcing process wherever possible
- Use target pricing with suppliers
- Practice clear communication with coverage expectations
Take the Next Step
Arkestro is offering a free template for your next MRO RFP. Simply visit this link to experience the advantages of Arkestro, the AI-powered, predictive sourcing software. Our team will be happy to set you up with an MRO RFP template at no cost, so you can see the three best practices of MRO sourcing in action.