MRO Procurement Risks and How to Avoid Them
MRO procurement has evolved beyond the traditional process of simply obtaining goods and services that are essential for the smooth running of production assets.
Today, procurement and operations teams have to closely work across multiple tiers from spend management to contract management to supplier relationship management to risk mitigation to ensure that everything works efficiently.
However, no matter how well-oiled the system, every manufacturer faces MRO procurement risks that can set off a cascade of issues and affect other business divisions. Below are a few key MRO procurement risks and effective strategies that you can implement to avoid them.
MRO procurement risks to identify
Oversights in needs analysis
The purpose of a needs analysis is to benchmark current performance in your MRO procurement. It allows you to look at the spending across categories and understand what capacities you need the supply base to deliver to support your organization’s strategy.
However, businesses tend to overlook this step and miss out on opportunities to optimize their MRO procurement. Without it, businesses can have a hard time identifying operational inefficiencies and fail to see areas where they could cut down on costs of excess parts or eliminate risks where shortages may exist. If organizations can’t see the big picture, they cannot pinpoint overlaps or redundancies across categories that could be either eliminated altogether or leveraged elsewhere in their enterprise.
Unreliable suppliers
Many businesses overlook the importance of supplier relationships. MRO procurement isn’t just about sourcing items from a supplier, but it’s also about identifying them as partners in building shared success. Therefore, it’s vital to foster good relationships with them to help your business grow.
If your suppliers don’t comply with the terms and conditions of your agreement, deliver products of sub-par quality, fail to communicate changes in a timely manner, or make late deliveries, this can ripple across your entire MRO procurement strategy, and you run the risk of serious production line disruptions.
Disruptions in the supply chain
Production downtime whether planned for routing maintenance, or worse unplanned emergency repairs, can have huge impacts on your ability to fulfill orders on time.
Whichever the case, disruptions can wreak havoc across the entire MRO procurement process and can result in both tangible and intangible costs to a business.
A tangible cost would be a loss of production. With most equipment offline, the manufacturing facility will not be able to operate at maximum capacity and therefore wouldn’t be able to produce as much product as they can under normal operating conditions. Since production directly correlates with profit, reduced profits and increased costs can cripple a business in the long run.
An intangible cost would be the depletion of inventory levels. Since the plant will not be able to manufacture products as it normally would, suppliers will not be able to meet expectations in terms of quality and quantity. This can lead to out-of-stock situations, returned items, and frustrated customers which can negatively affect a business’s brand and reputation.
Strategies to mitigate MRO risks
Careful needs assessment
An effective needs assessment identifies how a business is creating value and provides a detailed overview of areas of improvement. By shedding light on what’s working and what isn’t, business owners can implement the necessary steps to make the system more efficient.
A purpose-built cloud solution gives businesses the luxury of aggregating data across multiple departments in the organization into a single platform. With access to real-time, accurate data, the platform commands greater visibility because it gives a 360-degree view of the entire manufacturing enterprise.
With this solution, businesses can gain valuable information regarding the following among a few other things: costs/value of assets, spend categories, inventory management systems, growth projections, and logistics.
ESG Supplier Analysis
Environment, Social, and Governance (ESG) criteria serve as a guideline for environmentally friendly, socially acceptable, and ethically sourced supply chain goods and services with a special focus on procurement, sourcing, and supplier relationship management-related actions.
By using the constructs provided by ESG criteria, businesses can include supplier-compliance actions and conduct reviews of compliance performance to assess whether suppliers are performing in line with ESG expectations.
According to Gartner, if a supply chain activity violates an environmental, product safety, labor, or human rights regulation, they’ll likely pay:
- a fine for noncompliance
- a steep drop in sales and funding for breaching the trust of consumers and investors
This can help you not only hold unreliable suppliers accountable for their actions but also choose reliable suppliers instead. As countries across the globe continue to mandate ESG best practices, having suppliers that meet these standards will be critical moving forward for global manufacturers.
MRO Optimization
Digitizing your MRO procurement process is an excellent way to maneuver MRO procurement risks. These digital solutions are equipped with Industry 4.0 tools such as artificial intelligence and machine learning that can scan large datasets to yield valuable information without the need to conduct a traditional data cleanse prior to implementation.
For instance, powerful algorithms can be used to analyze historical data of previous downtime occurrences to identify patterns and the root causes of issues. This data can be utilized to construct accurate models for potential future disruptions so that the necessary steps can be taken well ahead of time before the disruption occurs.
This helps to make business decisions future-proof by keeping you ahead of unnecessary risk so that you can streamline your materials, reduce storage costs, and expand your profit margins.
Mitigate Risks with MRO Optimization
There is no doubt that MRO procurement comes with a lot of challenges. As a business owner, it can be hard to navigate through these risks on your own. However, defeating even the toughest procurement challenges is a lot easier when your team has the tools and technology required to succeed.
To learn more about how you can use cloud-based software to overcome MRO procurement risks, download the Ebook on why companies still struggle with MRO optimization.