THE IMPORTANCE OF SUPPLIER CONSOLIDATION

Consolidating your MRO supplier base reduces both costs and risks

Maintenance, repair and operations, or MRO, includes items such as light bulbs, safety switches, tools and other materials needed to support business operations and according to the latest Indirect Procurement Report from RS and the Chartered Institute of Procurement and Supply (CIPS), businesses spend an average of £2 million per year on this highly complex category of procurement. The same report also discovered that businesses now have an average of 92 MRO suppliers, a rise of 18% since the previous study, and the number using more than 250 suppliers has risen from 6% to 15%.

This figure, however, looks set to decline. Why? Because when asked how they are increasing procurement efficiency, half of respondents to the Indirect Procurement Report said they are consolidating the number of suppliers. This article will explore how supplier consolidation drives greater efficiency in MRO procurement as well as its other benefits before sharing expert advice on introducing this strategy effectively within your own organisation.

Reduced processing costs
Consolidating the number of MRO suppliers you use helps to improve efficiency by reducing the number of supplier relationships you have to manage. Placing more orders with a small number of suppliers also reduces the volume of transactional processing, from sourcing and checking availability to raising purchase orders to reconciling invoices, for what are typically low-value purchases.

This can have a significant monetary impact when you’re handling hundreds or even thousands orders per year. While almost 60% of Indirect Procurement Report participants didn’t know the cost associated with processing an order, among those who did, 37% said it was more than £100.

Reducing the cost of transactional processing through a strategy of supplier consolidation is particularly important in a climate where those responsible for MRO procurement face a range of financial pressures.

Likewise, the number listing reduced operational budgets as their top business pressure doubled to 60% and 40% described delivering annualised cost savings as their biggest day-to-day challenge.

Stronger supply chains
There are other financial advantages associated with supplier consolidation. “When you have fewer suppliers, you buy relatively more from each of them and can leverage this bigger spend to become a preferred customer and get better prices,” explains Helen Alder, Head of Knowledge and Learning Development at CIPS.

Becoming a preferred customer has other benefits too, adds Alder. “When COVID hit, for example, lots of buyers said it was suppliers they had tight relationships with who maintained the security of supply. It almost became about that relationship more than anything else.”

While that particular threat may have passed, concerns around risks have not. Almost half of Indirect Procurement Report participants listed managing risk in the supply chain as a key procurement challenge in the next 12 months – meaning these strong relationships with key suppliers remain extremely valuable.

Building trusted partnerships
By consolidating suppliers, you can also ensure that the remaining relationships meet your biggest needs. What do you want a supplier to provide? And what measures can you put in place to ensure these requirements are fulfilled? Popular key performance indicators, or KPIs, used by Indirect Procurement Report respondents include delivery on time (68%), quality (65%), price (59%) and availability (48%).

Pursuing quality over quantity in terms of suppliers ultimately allows you to form trusted partnerships which can support broader business objectives. “Examine who can really add value and what they can help you with,” recommends Alder. “Can you share a problem and see what solution they can offer? Can you work together to explore say how to remove X amount of carbon out of your supply chain? You can’t do that in a purely transactional relationship. You need a longer-term strategic relationship and common goals that you’re aiming for.”

Ask trusted suppliers how they can help you to move your MRO procurement process away from individual invoices for products, adds Alder. “For example, can they guarantee to hold X amount of stock for you or provide a vendor-managed inventory service?”

As well as providing a single consolidated invoice in place of numerous individual ones, another major advantage of vendor-managed inventory solutions such as RS ScanStock is that such services impede off-contract spend. This is a big issue, with 35% of participants in the Indirect Procurement Report stating that ensuring contract compliance with preferred suppliers is a day-to-day challenge. By limiting opportunities for maverick spend, vendor-managed inventory solutions also reduce the likelihood of counterfeit goods, which as Alder points out “often have strong links to child labour”, entering your supply chain.

Developing your strategy
Given all the benefits of supplier consolidation, what advice does Alder offer to businesses looking to pursue this as a strategy?