Procurement Category Management
In the beginning, smaller manufacturers spend more money on their raw materials and direct labor than they do on the overhead of the company. However, as these companies grow, their overhead expenditures grow proportionately.
Today a company, with a Cost of Goods Sold (CGS) of $100 million, can have an overhead or Maintenance, Repair and Operational (MRO) spend in the range of $10 million or more. There can be thousands (000’s) of purchase requisitions and purchase orders supporting this spend. Furthermore, the speed and accuracy when handling this large volume of purchases can be critical to a company’s operational efficiency and cost structure.
Our client, located in the southwest, manufactures equipment for the oil and gas industry. The client, over the years, had seen steady growth in product lines. Sales volume now stood at more than $200 million. Overhead expenses now exceeded $12 milion annually. Product line differences required different manufacturing operations in physically segregated buildings on the campus.
The procurement category management was decentralized such that each department took care of ordering what it needed, in operating supplies, directly from suppliers. This meant that each department had to spend time seeking out suppliers, obtaining quotations, and ordering supplies (not necessarily issuing purchase orders). Quotations often went unconfirmed and purchase orders were not completed. Purchase order acknowledgements were (usually) not received from suppliers so it wasn’t clear that there was a commitment to price or delivery. These issues, along with many changes in supply requirements, were causing numerous delays on the production floor.
An analysis of the client’s operations revealed opportunities for us to help. The solution involved establishing a purchasing department as well as instituting procurement category management that would organize, control and manage the MRO process. The plan consisted of,
- Creating a standardized ‘network and web based’ MRO Purchase Requisition [‘closed loop’] process. See also Category Management / MRO
- Obtaining senior management approval and support for the new policies and organizational changes
- Establishing and training the newly organized purchasing department that has overall responsibility and authority for the procurement category management
- Orienting and training all ‘internal customers’ so they understand the new process and the reasons behind the change
- Implementation of a ‘pilot test’ for the MRO process
- Release of the program to the client
The newly created purchasing department, with its procurement category management / MRO process, organized, controlled and managed the indirect purchases. This saved the company time and money in a couple of ways.
First, materials, equipment and supplies were reaching their work stations as needed reducing manufacturing inefficiencies. Next, production and operations employees did not spend their time on administrative activities. Instead they concentrated on manufacturing products. It was found that the full-time MRO Buyer’s activities easily exceeded 2,000 man-hours per year. Finally, the ‘network and web-based’ purchase requisition process made it very convenient and fast for the client’s internal customers to process requisitions for needed materials.
Internal staff operations became more efficient too. There was also a significant reduction in the number and the dollar amount of the ‘Accounts Payable (A/P) Holds.’ The new process also allowed reporting and monitoring of all procurement category management purchases. This will be ‘key’ for the client, in the future, as they begin the next phase of MRO buying. This paves the way for the client to identify different MRO opportunities where they may be able to leverage their purchases and reduce costs.
Purchasing is typically responsible for spending ‘half of every dollar’ the firm receives as income from sales. The profit margin reflects management’s ability to control costs. Contrary to sales expenditures, reducing the cost for raw materials and overhead brings much higher returns immediately to your company’s bottom line.
We are Manufacturing and Supply Chain Services, MSCS, specializing in ‘enterprise-wide’ Purchasing, Commodity and Supply Chain Management. Our services promote control and cost reduction boosting your bottom line. Give Rob Kopp a call today at (469) 208-1110, or simply complete the ‘contact form’ on this page for a free consultation regarding the specifics of your situation.
Manufacturing and Supply Chain Services
Transforming Procurement Operations.
Today, procurement is expected to play a much larger role and bring value to the entire business enterprise. Is your procurement group supporting operations, by getting the right products at the right time, and helping the company make ‘targeted profits’ when doing so? For more on this topic, please follow this link.
The strategic sourcing process is a subset of procurement. It is procurement’s job to find and develop competent suppliers that are qualified to provide the firm with its needed materials. For more on this topic, please follow this link
Understanding Category Management.
In the last few years there’s been intermittent discussions about ‘category management’ so what exactly is Category Management? Furthermore, what is the ‘category management process’ and how can it be used to your company’s advantage? For more on this topic, please follow this link.
We are Manufacturing and Supply Chain Services, MSCS, specializing in ‘enterprise wide’ procurement and Supply Chain Management programs. Our company’s proprietary processes and services promote organization, control and cost reduction boosting your company’s bottom line. How can we help you? Learn more about MSCS’s procurement and supply chain programs.