MRO Today - The present and future of MRO purchasing

The present and future of MRO purchasing
Study examines your buying initiatives and plans for the next few years. How do you stack up?

by Paul V. Arnold

Twenty-two percent of end-users who purchase MRO goods and services will buy at least some of those products via the Internet by late 2001, say the findings of a recent study on industrial distribution.

The report, "Distribution Beyond 2000," was based on feedback from 195 end-users/purchasers at U.S. manufacturing companies, as well as input from 164 industrial distributors and 182 MRO product manufacturers. It was conducted by Texas A&M University and the Thomas A. Read Center for Distribution Research and Education.

Besides a major rise in Internet buying from 1999 levels, the study says vendor reduction, integrated supply and satisfaction in distributor performance will continue to be major issues for manufacturing companies in the next five years.

Of the 195 end-users surveyed, 61 were "low volume" purchasers of MRO products (less than $100,000 per year), 66 were "medium volume" ($100,000 to $1 million) and 68 were "high volume" (more than $1 million). The majority of end-users surveyed held senior management purchasing and supply chain job titles.

Of the survey's 13 sections, five -- expectations, performance metrics, integrated supply, technologies and changing channels -- placed a main focus on end-user responses.

Technology
According to the report, 3 percent of end-users surveyed currently use the Internet to purchase at least some of their MRO products. But when asked how that will change in the next two years, 22 percent say they will purchase over the Internet by late 2001, a 633 percent increase in 24 months.

Distributors are migrating in that direction. When asked to assess the importance of seven technologies on a scale of 1 to 5 (1 being unimportant and 5 being very important), distributors rated having an Web site for order placement and processing as a 2.2 right now, but a 4.0 by late 2001. A Web site for product information garnered a 2.6 now, but a 4.0 for 2001. Online catalogs earned a 2.1 now, but a 3.8 for 2001.

A majority of purchasers say they currently use technologies such as e-mail, bar coding, online catalogs, EDI, and the Internet for product information and technical support. By the end of 2001, nearly all of those will be used by more than three-quarters of purchasers.

Integrated supply
Along with Internet buying, the study pointed to integrated supply as an emerging tool for business process re-engineering. Fifty-three percent of surveyed end-users say their company does not have an integrated supply relationship. That includes 73 percent of low-volume purchasers, 48 percent of medium-volume purchasers and 40 percent of high-volume purchasers.

For low-volume purchasers, integrated supply contracts currently comprise, on average, 7 percent of their MRO purchases. Medium- and high-volume purchasers are at 19 and 21 percent, respectively. But a major shift toward integrated supply is coming.

Within three years, low-volume purchasers say integrated supply contracts will comprise, on average, 18 percent of their MRO purchases. Medium- and high-volume purchasers put the figure at 39 and 40 percent, respectively. Within five years, the groups' figures jump to 23, 47 and 48 percent.

For integrated supply to grow in acceptance and usage, distributors must pay special attention to their performance in these arrangements.

Among end-users currently involved in an integrated supply relationship, only 7 percent say they are very satisfied with their IS relationship.

In another key rating, end-users were asked to rate the importance of 13 criteria used to select a distributor. The No. 1 criterion was on-time delivery, earning a 4.8 on a 1 to 5 scale. That was followed by product quality (4.7) and dependability (4.6). Price was the No. 5 criterion.

Vendor reduction
While Internet purchasing and integrated supply grow in acceptance, vendor reduction is well-established. Seventy-one percent of end-users report reducing their MRO supplier base over the last five years. That figure includes 58 percent of low-volume purchasers, 71 percent of medium-volume purchasers and 81 percent of high-volume purchasers.

During that span, end-users say their company's vendor base was trimmed more than 50 percent, from an average of 161 vendors to 78. But the whittling will continue. Sixty-six percent say they'll cut vendors in the next two years.

Among other initiatives end-users will target in the next three to five years, 63 percent of those surveyed will reduce on-hand inventory, 39 percent will reduce their SKUs, 36 percent will implement a supplier quality program, 28 percent will undergo process re-engineering, 26 percent will reduce the number of brands they purchase, 17 percent will outsource inventory management and 8 percent will outsource MRO procurement.

This article appeared in the February/March 2000 issue of MRO Today magazine. Copyright, 2000.