Reducing Costs in Category Management Procurement
Category management procurement has different segments, and one of the more commonly known areas is Maintenance Repair and Operational (MRO) items. This ‘spend’ tends to go unnoticed, staying ‘under the radar,’ even though larger sums of money are being spent each year on these purchases. Once identified, this activity can become a priority to control and manage. A company with a revenue stream in the millions can literally save hundreds of thousands of dollars each year by carefully reviewing and taking action on items in this area.
Client’s Challenge
Our customer, located in the south, manufactures equipment for the oil and gas industry. The customer had grown to the point where they had a raw material spend approaching $100 million. Their overhead expenses likewise were also increasing and had just reached $12 million annually.
This large spend prompted the client to learn more about their MRO costs. One of the issues encountered was that these expenditures were not being properly identified nor segregated in the production system.
Another issue was that the MRO process was decentralized, i.e., there wasn’t a specific individual or group charged with the authority and responsibility for the category management procurement (MRO). Instead, personnel in the Production and Planning departments were executing these purchases. Naturally, the Production and Planning employees concerned themselves primarily with the purchase and receipt of inventory needed for production and not many of the other accompanying and in some cases mandatory processes that it was necessary to follow.
Meanwhile, a significant number of indirect or expense purchase requisitions were being generated daily. Likewise, at the time, some of the departments took care of ordering their needed products directly from various suppliers. The normal procurement process, that includes solicitation of several suppliers, finalization of quotes and the creation of a purchase orders, was rarely accomplished. Reducing costs, and the many administrative issues that arose due to the lack of control of the MRO process, would be difficult unless changes were made.
The Solution Utilizing Category Management Procurement
An analysis of our customer’s operations revealed opportunities for us to help them. The answer involved establishing a professional purchasing group and instituting category management procurement.
The idea was to,
- Establish a separate Purchasing department, that included category management procurement, and give them full responsibility and authority for purchasing
- Create a standard MRO Purchasing and Requisition process that included a ‘network and web based’ purchasing requisition system
- Obtain executive management approval and support for the new policies and organizational changes
- Train personnel in managing the new category management procurement process
- Conduct orientation and training for all company employees, including senior management, to ensure that they understood the new process, how to use it, and why the procurement process was being changed
- Implement a test program for the MRO process
- Release the finished program to the client with work instructions and templates
The Bottom Line
In 2013, the newly installed category management procurement / MRO process began immediately paying dividends for our client. In one instance alone, the MRO Buyer reduced the amount paid for copier, printing, and equipment by 18.6%, or $83,000 a year. Likewise, consolidation of this activity to the newly created department removed the administrative buying tasks from production employees. This increased efficiency in manufacturing saved our customer another $187,000 per year in labor variance.
Equally important to the client’s ‘internal customers,’ when using the ‘network and web based’ purchase requisition process, was the ease, speed and accuracy they could request and receive their MRO items. The materials, equipment and supplies were reaching their work stations when needed.
Similarly, the new process that used the purchasing and production system properly, allowed reporting and monitoring of all procurement category management purchases. This would be ‘key’ for our customer to begin the next phase, i.e., identifying opportunities where they can begin leveraging their buys and reducing costs even more. It is important to note that our client did not experience any change in the quality of products or services yet reduced costs in these areas.
Manufacturing and Supply Chain Service
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.
Sourcing Strategy.
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.
Manufacturing and Supply Chain Services
We are Manufacturing and Supply Chain Services, MSCS, specializing in ‘enterprise wide’ production and operations 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. CONTACT US
