UNDERSTANDING MRO COSTS

The complexities of MRO procurement can obscure its true cost

Although maintenance, repair and operations, or MRO, products are often low value, the complexities intrinsic to this category of procurement mean managing spend can be difficult and the costs can easily escalate. This article will explore why understanding MRO costs is so important and how to better manage MRO in order to improve control and reduce expense.

Direct, indirect and processing costs
All companies have direct costs: the amount they spend buying the materials needed to operate their business. For a carmaker, these might be engine parts or upholstery for interiors. For an industrial bakery, direct costs include packaging materials as well as ingredients such as flour and yeast.

Companies incur indirect costs too. Both the carmaker and bakery, for example, need electricity and other utilities that don’t contribute directly to their products but are essential to operations. MRO spending falls under this umbrella of indirect costs and covers a wide range of products such as light bulb, safety switches and tools.

There also are additional costs associated with both direct and indirect spend that can be harder to quantify. For example, it is easy to overlook the time and resources involved in handling all the stages of the procure-to-pay process but this impacts every organisation’s bottom line.

According to the latest Indirect Procurement Report produced by RS and the Chartered Institute of Procurement and Reply (CIPS), MRO spend averages around £2 million per year. However, because it is such a highly complex category of procurement, we find that the so-called soft costs related to sourcing, ordering and inventory can often account for 60-70% of total cost of ownership in MRO and 30-40% relates to the cost of the product itself.

Greater complexity, greater cost
What makes MRO purchasing so complex? For a start, a buyer may be sourcing hundreds or even thousands of items, both planned and unplanned purchases, from multiple product categories at different frequencies of usage. Get it wrong and an entire operation might ground to a halt while waiting for a delivery – an expensive prospect when the average hourly cost of downtime stands at £5,471.95. In these circumstances, it may be tempting to hoard products in on-site storerooms but this clashes with capital investment priorities about what to hold in stock, which brings its own costs, and what to buy on an as-required basis.

A need to maintain ageing assets can also make MRO procurement more difficult. “This is where it gets increasingly complex,” says Helen Alder, Head of Knowledge and Learning Development at CIPS. “If a machine becomes obsolete, spare parts become harder to source. How do you maintain an old machine if nobody stocks the parts anymore? What solutions are there to either make the machine work or buy a new piece of equipment and go down the capital procurement route?”

Another challenge facing those responsible for MRO procurement is the fragmented supply base.

Lack of visibility
The complexities of MRO procurement are exacerbated by wider business pressures that directly impact purchasing decisions. More than sixty percent of participants in the Indirect Procurement Report, for example, said that inflation and higher costs pose a major challenge to procurement in the 12 months. A similar number listed reduced operational budgets as a business pressure affecting how they procure and 40% said delivering annualised cost savings is the biggest day-to-day issue.

These inter-related pressures mean that managing MRO spend becomes even more vital. There are, however, considerable obstacles in the way. Lack of spend visibility, for instance, is a growing issue. More than 30% of respondents to the latest Indirect Procurement Report cited this as a problem, compared to less than 20% in 2023.

Measuring soft costs in this highly complex category of procurement is even harder, with just 41% of Indirect Procurement Report participants knowing the business cost of processing an order. Among this group, the average was £89 although for more than a third it came in at over £100. The cost also varied according to company size: an average of £71 for small firms, £106 for medium-size enterprises and £95 for large.

Reduce costs, reduce risks
What are the options for businesses looking to both better manage MRO spend and reduce their process costs? One option is to make procurement more efficient by introducing a vendor-managed inventory service such as RS ScanStock that will automate as much transactional activity as possible.

It also streamlines the labyrinthine purchase-to-pay cycle associated with MRO procurement. Doing so greatly reduces process costs yet at the same time improves visibility of spend.

By generating accurate purchasing data, vendor-managed inventory solutions can drive further efficiencies within MRO procurement by improving decision making, notes Alder. “You understand how much you’re buying, of what and where so you can standardise,” she says. “You can cut down on off-contract purchases and maverick spend too, so it reduces costs and risks.”

Respondents to the Indirect Procurement Report who have experience using vendor-managed inventory services agree, listing a range of benefits that either lower costs or lower the risk of incurring cost. More than a third mention higher availability and more than two-thirds mention a reduction in the time spent raising individual orders and better visibility of stock and spend.

Other digital procurement solutions can drive greater efficiency by streamlining processes and systems too. Web-based tools such as RS PurchasingManager reduce the time, and therefore money, spent on everything from product searches and availability checks to approval processes and invoice reconciliation while improving contract compliance and end-to-end visibility. Would your business welcome these improvements?

Find out more about RS inventory and procurement solutions