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TAPPing into Indirect Procurement

Jan. 6, 2011
MSC Industrial Supply executive Erik Gershwind advises shops to take advantage of suppliers expertise and capabilities in Technology, Assets, People, and Processes.
“After achieving buy-in, a shop must begin collecting and analyzing data on all of its procurement purchases. If costs are not highly visible, any effort to measure and reduce them will be ineffective.”

As a rule, “indirect procurement” refers to any of the procurement efforts that a company makes to maintain its operations, and may involve anything from general office supplies to consumables like lubricants and cutting fluids, as well as more expensive consumable products like cutting tools, and high-value capital equipment. MSC Industrial Supply is a direct marketer and distributor of metalworking and MRO (Maintenance, Repair and Operations) products for industrial operations nationwide. It estimates it distributes approximately 600,000 products from approximately 3,000 suppliers to approximately 320,000 customers.

We invited MSC’s executive vice president and chief operating officer Erik Gershwind to address some of the changing dynamics in industrial procurement methods that should be recognized by machine shops or any manufacturers seeking to optimize their product-sourcing practices.

Many of today’s shops are reevaluating their methods of indirect procurement. What actions can they take to cut costs effectively and successfully?
“Overall, companies have a difficult time establishing and implementing initiatives related to indirect procurement. When looking at MRO supplies, it is nearly impossible to accurately forecast demand. The sheer volume of items purchased through the indirect channel makes it difficult to identify, track and analyze costs. Additionally, a company often works with many suppliers for its indirect procurement. Integrating an overall strategy for indirect procurement can seem overwhelming when first considered.

”Fortunately, enough companies have successfully accomplished this goal that some basic guidelines have emerged as being vital to succeeding in this area.”

What are some of those basic guidelines that have emerged?
“For starters, companies that have been most successful at integrating an indirect procurement strategy have gone to great lengths to select suppliers that act as partners. When establishing a relationship with a vendor, certain key areas should be evaluated.

“Shops need to think ‘TAPP’ (Technology, Assets, People, and Processes) to tap into MRO/Indirect Spend savings by leveraging their suppliers’ expertise and capabilities in these top four areas.”

Explain how that works in each of those four areas.
“For technology, shops that lack a budget for technical tools and solutions can use their suppliers’ technologies. These technologies may include crib management, automations and e-commerce, auto replenishment, and electronic catalogs.

“For assets, those shops that are still stocking non-critical inventory should leverage their suppliers’ inventories to reduce excess and obsolete inventory, slow-turning inventory, and specials, along with capital equipment expenditures.

“For people, shops that are under staffed and need more help can use their suppliers’ people to outsource functions such as procurement and expediting, while taking advantage of in-source services such as inventory stocking and spot buys.

“For processes, shops that need advice about ‘going Lean,’ for example, can get help from suppliers for such things as business-needs analysis, supplier reductions/SKU rationalization/standardization, and volume purchasing agreements.”

Are there any other strategies that will help to streamline the implementation of indirect procurement?
“Yes, and probably one of the more critical ones is to achieve buy-in throughout the shop. Every employee that makes purchasing decisions needs to understand that the new approach will benefit the company’s profitability. Additionally, a well-planned strategy will make the procurement process more efficient and reliable.

“After achieving buy-in, a shop must begin collecting and analyzing data on all of its procurement purchases. If costs are not highly visible, any effort to measure and reduce them will be ineffective. As this data is gathered, it can be organized by product category, making it more useful and easier to track in the future. This categorization will also help to maintain a real-time inventory, reducing or eliminating the costs associated with time-consuming annual or quarterly inventory counts. Companies may also look to this refined data to identify categories with the greatest amount of costs, as these will likely provide the greatest opportunity for savings.”

After these categories have been identified, then what?
“Once the most substantial indirect cost areas have been identified, many companies have found success by establishing a semi-planned spend category. Typically, expenditures are broken down into ‘planned’ and ‘unplanned.’ Although the demand for MRO supplies is exceedingly difficult to forecast accurately, it can often be forecast in a general manner. That is, a shop might not know exactly when it will require a certain supply, but it will likely know if the need will arise in the next six months. Once a semi-planned category is created, those individuals responsible for procurement can anticipate potential needs and plan accordingly.

“Shops must keep in mind, though, that as these processes begin to take form, it is vital to ensure that they are implemented in such a way that the necessary parties embrace them on their merits. A top-down order with little in the way of demonstrated benefit will be hard to enforce. “Along those same lines, a balance must be struck between centralized and decentralized functions. Overall strategic decisions should reside within the top management. But, at the same time, successful implementation of the strategy will rely upon the actions of those directly responsible for procurement spending.”

Any closing advice or comments?
“Any potential means of reducing costs and improving efficiency must be taken into consideration if shops wish to maintain their profitability and competitive edge. Taking a fresh look at indirect procurement could prove a valuable means to boosting a company’s financial position.”

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