Published March 23, 2011
RE-ENGINEERING THE 3PMRO SELECTION PROCESS
About $150 billion in MRO materials is purchased annually in the US. There are thousands of MRO distributors competing for these dollars.
The selection process MRO consumers utilize to procure those materials varies from simplistic to the sublime… from attempts at structure to “Go Get It Yourself”… from corporate dictates and audit trails to utilization of “P” cards.
Most companies pay little attention to MRO. A major reason is that knowledge on “How to Improve” or “Why Change” is minimal. A familiar refrain: “Let’s go out on quote and show price saving comparisons that satisfy management. Besides, MRO is only 6% of our spend; let’s concentrate on the other 94%.”
RFPs, RFQs, etc. often state that “Price” is not the major determinant in supplier selection; “Services” et.al. are the most important factors.
The RFQ/RFP (RF) process is extremely costly regardless of the side you sit on, supplier or requestor. Committees are formed, meetings and webinars are scheduled to establish what data should be included; the various disciplines develop and share opinions based upon how it relates to their internal functions. This affects a long, costly and arduous set of requests and responses.
As mentioned above, these meetings exist and are costly and redundant for both requestor and responder. The time required to complete the process often drags out over six months to a year in some cases. The data submitted gets old and stale leading to adjustment requests by the winning supplier after the contract is awarded. These adjustments are permitted because there is no alternative. You cannot go out and request a re-quote that only elongates the time where savings are not realized. The result is that the selected provider may or may not be the best source for your company. The truth is that the existing RF process is flawed and does not necessarily produce the “best deal.”
Why is the process the way it is? “Because,” managers will say, “this is the way we have always done it. There is no other way to satisfy management that we have the best deal and have them accept the results of the process as optimum…We have done our best.”
What is an alternative that will achieve the best sustainable benefits and satisfy all disciplines?
Step One: Develop a scope of work and key performance indicators around a third-party MRO program (3PMRO) that will optimize your MRO storeroom operations to meet your needs and goals. The scope reflects the wish list of those involved in indirect materials – Finance, Engineering, Facilities, Purchasing, and Plant Management. Include your implementation time line schedule and implementation costs. Scope of work needs to have an accurate accounting of annual material spend to be included and for existing inventory dollars.
Step Two: Select your supplier. Typically, only a few have the capability of managing your scope of work. Pick the one best for your program and tell them what you want. Visit the supplier’s CEO [no less] and obtain commitment to provide:
- Total focus on your program
- Adequate financing to sustain the process
- Experience in on-site operations
- Established implementation process
- Compatible systems capabilities
- Open book cost sharing
- Purchasing power leverage
- Willingness to perform to KPI’s and productivity programs.
Step Three: Establish a price level reflecting your saving goal for the program. There should be an 8-10% price savings available to you and still have enough margin for the supplier. If not, you have the wrong supplier. The chosen supplier must be able and willing to obtain site specific pricing from their manufacturers who set the pricing structures and be willing to share all pricing data in an open book policy. Tell your supplier the price you will pay; no need to quote. The price savings would be a part of your ROI goals.
In review, many companies assign personnel to control the MRO spend and even try to control/optimize MRO inventory. The quest to find the “best” provider takes the form of the RFQ, the RFP or other RFs. The larger industrial MRO consumer utilizes these processes to its advantage, asking MRO distributors what services would be provided to achieve corporate goals in coming years.
It begs the question – if price is not a major factor, why does the market basket dominate the RFP? Why are the vagaries of the market baskets not recognized as leading to little value and wrong decisions? To this point, the approach has been to use GAP, General and Accepted Principles.
Time is long past when a process is justified by, “This is the way we have always done it.”
Now is the time to recognize that you need to “Tell… Don’t Ask.”
Contact George Krauter with your MRO questions at firstname.lastname@example.org.