Do Maintenance Repair and Operations (MRO) procurement teams know how to get the best from their suppliers?
Remember the days when you could just issue a request for proposal (RFP) and wait for responses to flood in? You can still do that of course, but you would be missing out on a world of innovation and resilience.
With supply and market dynamics in flux, and increased risk across supply chains, MRO procurement professionals need to find new ways of working with suppliers – and the most effective among them are constantly seeking partnerships with supplier that harness their capabilities and creativity. In the process they are transforming the nature of supplier management for good, driving productivity, innovation and improved risk management.
Of course, building strong supplier relationships can be quite a task if your organisation has multiple suppliers. The 2022 Indirect Procurement Report by RS and the Chartered Institute of Procurement and Supply (CIPS) found that UK businesses have an average of 80 MRO indirect suppliers. Average total indirect spend is £2.5m.
The report also revealed a subtle change of emphasis among the 83% of organisations that use key performance indicators (KPIs) to measure indirect MRO supplier performance. Quality, a leading KPI for 77% of companies in 2021, is now favoured by 73%, while on-time delivery remains the most popular KPI in the UK – used by 80%. Availability has risen in importance, used by 63% of firms in 2022, up from 53% in 2021.
Managing direct and indirect suppliers
Procurement strategies vary between direct and indirect procurement, with the importance of the latter often hidden. A dairy producer, for instance, needs milk – that is easy for everyone to understand. However, the same business also needs chemicals to clean the machinery with after the raw milk has been processed. The indirect products (chemicals) are just as fundamental to its ability to supply the product as the direct (milk).
As this example indicates, indirect procurement plays a critical role in keeping production running. It is also vital that those responsible for indirect procurement ensure continuity of supply – and in these challenging times, this means more strategic management of supplier relationships.
Rising prices offer an opportunity to talk to suppliers in a different way. You need to work with them to understand the fundamentals of the market, what drives it and how you can stock to protect yourselves. Working together, for example, can you find alternatives?
It is also crucial to understand where each category sits within the organisation and its relative importance to the business. Only then can you feel confident asking questions such as do we really need these things? Could we do without them? Could we do something differently?
Know your suppliers
When it comes to building closer relationships with suppliers, it’s important to know where you stand. The 2022 Indirect Procurement Report found that only 9% of organisations actively contract-manage at least 75% of their spend on MRO supplies.
The same is true of wider supply chains, according to Deloitte's 2020 Chief Purchasing Officer survey, which found that only half had high visibility over their tier 1 suppliers, while 90% rated their visibility over their wider supply network as moderate to very low.
Helen Alder, Head of Knowledge & Learning Development at CIPS, says that clarity is vital to improving supplier relationships. “Collaboration is a really good idea in so many ways. But you need to find a really good vendor that understands your business and can add value,” she says.
Closer relationships between buyers and suppliers could create significant value and help supply chains become more resilient, according to McKinsey. But they need to be built on openness, regular communication and trust, the consulting firm says.
Procurement professionals also need to recognise that they are not necessarily the expert when it comes to new innovations and technologies, so telling suppliers what you want may not be as effective as describing your problem and asking them to help you solve it.
Sharing knowledge and understanding each other’s business drives further opportunities for innovation. And good relationships with suppliers are critical to business success, especially when times get tough. Trust and transparency are fundamental pillars for growing those relationships and building resilience in your supply chain.
Let’s leave the last word to McKinsey: “We are no longer in a world where assuming ‘an annual RFP will yield 3% price savings’ is a viable operating model. After a year of continual and intensive action to adapt, many procurement organizations have deepened their understanding of their supply chains and deployed new levers. But more can be done.”
For more MRO insight, click here
