Management by commodity

By Dr. Robert A. Kemp

Most U.S. manufacturers spend 57 percent of total revenue to buy goods, services or capital equipment. It’s widely believed that indirect materials, or MRO, average about 20 percent of the total buy. We have come to know and understand three major concepts that apply here: 
1) MRO operations typically generate low-dollar, unplanned buys.
2) We hold lots of slow-moving MRO inventory.
3) Commodity management concepts and processes generate significant operational advantages and cost reductions.

Commodities are groups of goods or services on some logical basis for supply management. Commodity classifications are usually quite wide — for instance, cutting tools, work gloves, spare parts, lubricants, office supplies, janitorial supplies and facilities maintenance supplies. Many other groupings also exist.

Very large commodities can be divided into subcategories. For example, lubricants can be divided into a hierarchy of categories for supplier selection and management. Similarly, you can group items by the breadth and depth of use across your company. For example, office supplies are used across the company and suggest national management. Items used across part of the company or just one region merit regional management. And, items specific to one plant or facility warrant local management. Often times, local interests or biases obscure our ability to look at the big picture and identify the benefits of leveraging the supply base.

The figure found on this Web page presents an organization-wide perspective. It shows that a combination of centralization and decentralization makes sense. A corporate commodity team and strategy controls corporate-wide MRO. Regional strategy and processes control regional MRO. It satisfies the corporate strategy but is operated by a regional commodity team. Similarly, plant-specific MRO must meet corporate and regional strategies, but it’s operated by the plant. At each level, we need clear strategies, policies and procedures.

Select commodity teams to best represent the organization in terms of managed breadth and materials classes along with the requisite strategic supply management skills needed to manage the commodity. The team at each level develops and implements the strategies, develops and selects the suppliers, negotiates contracts, monitors supplier performance, and meets goals related to cost reduction, supply base rationalization and service.

After getting organized, your teams need a detailed spend analysis for the various commodity groups. These analyses will identify:
1) items by group and subgroups;
2) suppliers ranked by percent of the spend;
3) buying practices or patterns;
4) inventory location and age;
5) supplier problems/complaints;
6) consumption/use trends;
7) inventory value.

Armed with a spend analysis, your commodity teams will be able to answer these questions:
1) What and where are the high-value inventories?
2) Who and where are our major suppliers?
3) How much do we spend with each major supplier?
4) Do multiple purchases occur from different elements or buyers to the same supplier?
5) Which goods/services might be better supplied by integrators or other inventory management forms?
6) Do consolidation or rationalization opportunities exist?
7) Do quick cost-reduction opportunities exist?
8) Are there ways to improve buying practices with strategic supplier management processes?
9) Can we create a strategic supply management plan to implement new management processes in sequence, beginning with the high-value commodities and suppliers and working down the list?

The goal of all of this is better on-time MRO supply management at the lowest possible costs. For many organizations, commodity management for MRO goods and services can supply substantial benefits.

Robert Kemp is a consultant, speaker and the former president of the Institute for Supply Management. He can be reached at . 

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