Many businesses have a cost source that they have not yet considered controlling effectively – and that is where smart procurement can really repay their efforts, said Brian Andrew, South African GM of RS Components.
Speaking at the Smart Procurement World Conference taking place in Cape Town from 1 to 3 March, he says: “Most businesses have at some time experienced a financial squeeze and struggle with finding costs to cut without impacting business operations.
“But there’s an overlooked item hidden in our financials – the process costs of procuring maintenance, repair and operations goods. Companies usually focus on the value of goods procured and don’t take into account the total cost of their procurement processes.”
These MRO process costs are driven by two key, interlinked factors, says Andrew. Highly skilled staff are needed to ensure compliance with procurement protocol but their valuable time is spent in an extended and fragmented procurement process.
US MRO procurement expert Joel Roth has pointed out that procurement consumes man-hours in many different ways: purchasing, receiving, store-keeping and intra-company materials movement; purchase orders issued; invoices processed; accounts payable checks; cost and material accounting; data entry; database maintenance; bidding, sourcing and negotiating; inventory obsolescence and overstock; expediting and tracing of open orders; missed or late deliveries; errors and quality deviations (Roth, 2008, The 20% solution).
Research by the University of Manchester Business School in conjunction with RS Components indicates that for every R1 spent on product costs to keep your machines, equipment and offices running effectively, a company will spend around R2 in processing costs making the total cost of purchase almost three times the original value of the item.
“A price-led procurement strategy overlooks other key drivers of costs in the procurement process,” says Andrew. There are four main areas where cost saving can occur, namely purchasing, inventory, sourcing and product. When companies implement multi-stakeholder strategies across departments such as product substitution and standardisation, supplier consolidation, inventory reduction and simplifying processes there is likely to be a greater more sustainable impact on MRO procurement costs.