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The Trend is Your Friend: Reducing MRO Purchasing Costs through Demand Analysis

MRO Purchasing Costs through Demand Analysis
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All MRO inventory is not created equal. Job-critical spare parts should not be treated the same as routine maintenance supplies. Cheap, bulk-order items do not deserve the same attention as materials with long lead-times. Likewise, frequently purchased parts should be categorized as stock items and bought on contract in order to take advantage of lower prices, rebates, and other supplier concessions.

Unfortunately, most manufacturers operate in an environment of imperfect information, which makes predicting internal demand difficult. In fact, an SDI study found that companies order only 27% of just their stock MRO items for three consecutive years. When taking into account all MRO items (stock and nonstock), that number shrinks to 12%, indicating a great opportunity for potential savings. With only a quarter of their MRO supplies remaining in consistent use for more than two years, firms may be tying up valuable resources in inventory carrying costs and obsolete parts.

Reasons for MRO Demand Unpredictability

The SDI study found that companies repurchased about half the items in their MRO warehouse from year to year. The dramatic decline in repurchases in year three is due to several factors, both on the supply side and the demand side. Storeroom management can learn valuable lessons if they can pinpoint the reasons behind their particular repurchase rates, such as

  • Upgraded technology that makes the part obsolete
  • Supplier attrition through consolidation or market forces
  • Poor taxonomy or other deficiencies that make the part’s source untraceable
  • Off-contract part purchases made by diverse employees and departments
  • Life of the part — wherein some parts may last longer than two years, so they won’t be purchased every year

Consequences of SKU Churn

Inconsistencies in the SKU lineup – whatever the cause – limits the effectiveness of purchasing, procurement, and storeroom management.  First, by not establishing a relationship with suppliers and then not being able to guarantee ongoing buyer relationships with suppliers, the firm sacrifices any leverage in price negotiations.

In addition, line item turnover indicates a lack of control over part usage, usually due to the unpredictability of demand. This inconsistency can induce companies to over-order and spend valuable warehouse space on safety stock that may never move, leading to excessive carrying costs.

On the other hand, underestimating usage can bring production to a halt for days while awaiting costly expedited delivery of out-of-stock replacement parts when the installed pieces fail.

Invest a Little to Save a Lot

Getting a handle on MRO material demand can deliver significant cost savings, streamlined warehouse management, and optimized production. And partnering with an experienced supply chain provider allows manufacturers to outsource logistics and concentrate on their core operations. While working with SDI to bring actionable transparency to the supply chain requires little infrastructure investment, in most cases it pays for itself and more, through:

  • Supply discounts
  • Usage insights
  • Business intelligence
  • Integrated operations
  • Predictive rather than reactionary maintenance operations

SDI’s proprietary analytics software and industry experts combine to bring unprecedented transparency to demand, pricing, and supplier data. The information uses trend analysis to pinpoint which MRO items will be purchased regularly over the coming years. This allows SDI to help our customers save money in two ways. First, for irregularly purchased items, we can establish optimal MRO inventory levels, replenishment triggers, and other streamlining techniques to limit inventory carrying costs. The bigger savings comes on items purchased and used regularly over longer periods. SDI can ensure these are all categorized as stock items in order to capture value from suppliers. Keeping these items in stock eliminates production down times when parts fail or wear out. Once it is determined that clients will make regular purchases of these items, SDI engages our vast supplier network to negotiate bulk and preferred-customer discounts based on projected quantities.

SDI’s MRO inventory management teams can determine the proper categories for all your MRO parts. Critical, high-demand materials then can be monitored closely and competitively bid on. With actionable data at your fingertips, strategic decisions can be made more quickly to take advantage of market conditions and prices. SDI continues to make advances in predictive intelligence and machine learning to guide customers’ decisions and reduce their MRO supply chain costs.

Contact SDI to learn more about how our demand forecasting and purchase-leveraging services can minimize your costs and maximize operations.

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