Getting Total Cost of Ownership on the agenda for MRO procurement

Procurement teams and engineers involved in MRO face a series of complex daily challenges

From minimising downtime through to ensuring contract compliance, every aspect of maintenance, repair and operations (MRO) purchasing has the potential for complexity, which can mean added cost. So how can this cost be reduced?

Lawyers have a saying: hard cases make bad law. The same goes for MRO procurement. All too often, emergency purchases can turn out to be expensive mistakes. Avoiding costly downtime in the event of a component failure is, of course, paramount. But if you want to avoid expensive admin and processing time, it is necessary to focus on total cost of ownership (TCO) and not the item price.

The time-sensitive nature of MRO is partly to blame for the way hidden costs can mount up. Time spent by an engineer ringing round different potential suppliers hoping to strike lucky is just the tip of the TCO iceberg. The pressure to get the job done is understandable. But while ad hoc purchasing can feel like the fastest way to solve a problem, in reality, wasted time is not being saved – it is just being passed along to someone else.

When an invoice appears in the purchase ledger accountant’s inbox with no accompanying details, a long process of trying to establish its validity begins. It may need to be allocated to a particular job, or even charged back to a customer. It almost certainly needs a PO and if it’s come from an unheard-of business, that supplier will need setting up on the payments system.

There may be forms that need to be completed, credit checks to be undertaken, compliance with modern slavery laws to be ensured and more besides. All of which takes time and takes people away from other tasks they could be working on. At every step, the costs are adding up.

Order in haste, repent at leisure
Financial pressures are never far from a procurement professional’s mind, of course. Annual research by RS and the Chartered Institute of Procurement and Supply (CIPS) has shown that reduced operational budgets are consistently one of the biggest pressures they face.

It is known indirect procurement process costs can be twice as much as the products themselves. This is a significant additional expense that isn’t always obvious to everyone who gets involved in placing orders for urgently needed items. It’s also an illustration of why price and cost are not always synonymous.

There are yet more hidden costs waiting to reveal themselves. Imagine a scenario where a part purchased in haste to fix a customer problem fails unexpectedly in the future. The customer will demand a replacement, there may be additional damages caused which they may expect to have reimbursed, there may be costs from downtime that they want to be compensated for.

Yet, a survey by management consultancy McKinsey found that 75% of procurement contracts have no TCO clauses. The consequences for one manufacturer in the survey were that they had to undertake significant rework due to poor-quality materials, resulting in additional costs equal to 30-50% of revenues.

McKinsey also warns that just focusing on upfront costs can lead to suppliers delivering late, which leads to either overtime costs on the factory floor or customer credits when deliveries of finished goods are delayed, or both.

Patrick Dunne, Chief Property and Procurement Officer at the retail group J. Sainsbury, says that supply chain failures are sometimes an indication that TCO was not properly considered when entering a procurement agreement. A case of too many eggs in one basket, perhaps, which becomes exposed if a business suddenly has to ‘near-shore’ or source from closer to home. It can be a symptom of a lack of TCO thinking, Dunne says.

“The need to near-shore could suggest there may have been supply chain troubles all along,” he says. “Perhaps it was never very stable in the first place. Or maybe you made past decisions for the wrong reasons – commercial reasons – rather than total cost of ownership or total lifecycle reasons.”

Advocating TCO with a carrot, not a stick
The disruption created by COVID-19 left many businesses in a bind, unable to rely on the supply chains that had been the foundation of many of their customer relationships.

Although TCO is not a new concept for a lot of companies, Simon Fletcher, UK Sales Director at RS, says the pandemic led to some companies cutting corners. “When faced with demands to source supplies quickly, there can be enormous pressure to make off-contract purchases,” he says.

To get things back on track, it is vital that procurement professionals communicate the benefits of a TCO-based outlook to the highest levels in the organisation. Pressure to make operational expenditure savings in a short period of time only adds to the problems. That’s when procurement people find engineers saying they’ve Googled the product or looked on eBay and they can get it cheaper.

Enforcement measures like refusing to reimburse engineers for items bought on expenses is one way to make a TCO approach stick. But Fletcher says taking customers through a supplier consolidation journey is a better way to open their eyes to the benefits of TCO.

TCO may be a hard sell to some parts of the business. It’s not just about saving money, although it will do just that over the long-term. It will help avoid unnecessary costs further down the line, whether from breakdowns and production outages, or simply from creating additional paperwork. Plus, it can claw back valuable time, meaning that employees can focus on what matters most.

“Total cost of ownership ultimately outweighs cost price,” Fletcher says. “But every level of an organisation from top to bottom has to buy into this as a procurement strategy.”

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