Trends in MRO procurement

Report predicts steep rise in distributor cost-savings documentation, integrated supply

by Paul V. Arnold

Thirty-four percent of end-users say their company utilizes cost- savings documentation as a way to evaluate the performance of their MRO distributors, but 60 percent say they will use the metric by 2003. These were among the findings of a recent report sponsored by the Industrial Distribution Association and the Industrial Supply Manufacturers Association.

The report, “2001 Trends in Distribution: An Update,” was based on feedback from 173 end-users at U.S. manufacturing companies, as well as input from 121 industrial distributors and 73 MRO product manufacturers. It was conducted by Texas A&M University and the Thomas A. Read Center for Distribution Research and Education and presented at an ISMA/I.D.A. convention in late 2001. The report is the sequel to “Distribution Beyond 2000,” released in late 1999.

Besides the trend toward cost savings as a performance metric, the report says that over the past two years manufacturing companies have increased their use of integrated supply, Internet purchasing, supply base reduction and technology, and will continue to expand their use of these tools in the next two or more years.

Of the 173 end-users surveyed, 47 were “low volume” purchasers of MRO products (less than $100,000 per year), 66 were “medium volume” ($100,000 to $1 million) and 60 were “high volume” (more than $1 million). The majority of end-users surveyed held senior management purchasing and supply chain job titles, but other job titles included plant manager, production manager, operations manager, plant engineer and maintenance manager. Documenting savings, value

Texas A&M researchers see 2001 as a launching pad for cost-savings documentation. While 66 percent of end-users say their company does not currently use the metric, 39 percent of that group stated their organization was heading in that direction in the next 24 months.

In addition to implementation, 74 percent of end-users stated that distributors showing the ability to document cost savings had the potential to earn more of their company’s MRO business. That figure included 65 percent of low-volume purchasers, 73 percent of medium-volume purchasers and 81 percent of high-volume purchasers.

A surge in integrated supply
While distributor documentation was a new piece to the study, integrated supply proved to be an established trend that keeps on growing.

End-users report that 31 percent of their annual MRO purchases are done within the framework of an integrated supply contract. This is nearly double the results found in the 1999 study. And, end-users said integrated supply will handle 55 percent of their MRO purchases in 2004 and 62 percent in 2006.

Integrated supply is a component of a larger trend toward supplier reduction. Sixty-five percent said they reduced their supply base in the past five years, and 46 percent said they plan to keep on cutting. End-users in the study reduced their supply base, on average, from 211 suppliers to 88 since 1996.

Internet’s influence grows
Utilization of the Internet for purchasing MRO products hasn’t rocketed at the rate end-users predicted in the 1999 study, but it still marks an area of growth and opportunity.

The 1999 study said end-users conducted 5 percent of their MRO purchases over the Internet; they expected to hit 22 percent by 2001. The new report shows they buy 10 percent of their MRO products on the Net and eye 34 percent by 2003.

In a broader look at technology, end-users currently use and plan to use the following procurement tools: online catalogs (67 percent now, 79 percent in the near future), bar coding (43, 65), e-mail (89, 91), Web sites to check order status (52, 76), Web sites for order placement (54, 78) and Web sites for technical support (82, 88).

This article appeared in the April/May 2002 issue of MRO Today magazine. Copyright, 2002.

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