MRO Spend Reduction PART 2: Spend Analysis
In Part 1 of our MRO Spend Reduction blog, we discussed how Inventory Optimization and Disposition can reveal quick returns and long-term cost savings. In Part 2, we dive into the next layer of MRO Spend Reduction, which can be revealed through a detailed Spend Analysis.
In the fast-paced, ever-changing world of MRO, the reality is that many companies can't tell definitively what items they bought, who they bought them from, and how much they bought them for within the last month, let alone the past year. P-cards, free text descriptions, VMI one line invoices: these are all contributors to poor data and limited spend visibility. Without access to this critical business insight, purchasing and procurement departments are essentially operating blind and unaware of inefficiencies.
Spot buys, price variances, non compliances, costly OEM items, and a multitude of vendors are just a few of the significant cost savings opportunities that can be revealed through a detailed spend analysis. In order to truly understand and leverage these valuable savings, you must first collect 12-24 months transactional purchase history. The data should include, at minimum, the following fields:
Internal part number
Part description (This may be divided into distinct fields: noun, modifier, description, notes)
Manufacturer part number
Unit of measure (Unit of Purchase vs. Issue)
Vendor part number
Purchase order number
Purchase order date
Item receipt date by purchase order number
A detailed Spend Analysis is broken into three parts: Commodity Spend Analysis, Vendor Spend Analysis, and Itemized Spend Analysis. Within the Commodity Spend Analysis, each unique item will be segmented into its respective commodity bucket (product group), where the total SKUs and dollar value by commodity will be calculated. Next, the Vendor Spend Analysis will assess and calculate the total spend per vendor, as well as, the commodity spend per vendor. Finally, the Itemized Spend Analysis will reveal lowest price paid, highest price paid, price variances through the preferred vendor, price variances across all vendors, and OEM vs. MRO price variances.
Once the Spend Analysis is complete, the work is not over. Now, you must apply the findings. Using these valuable reports, the Procurement team can begin to tender and leverage MRO spend by product group, consolidate the vendor base, establish preferred vendor programs, enforce compliance amongst purchasing staff and preferred vendors, and interchange costly OEM items for generic MRO items at a fraction of the cost.