Be a Better Buyer with Closed Loop MRO Purchasing
Be a Better Buyer with Closed Loop MRO Purchasing
by Scott Keough
You can tell a lot about a maintenance organization by observing how it purchases and consumes repair parts. Reactive organizations only seem to have time to “keep it running.” They don’t have time to shop for the best deals. Instead, they send the same noncompetitive purchase orders to the same vendors and take whatever pricing they get. And their receiving dock looks like a major courier service depot – full of emergency shipments. Cycle counts are mysteriously high because received parts aren’t always checked into inventory. Or, cycle counts are mysteriously low because parts are not always checked out of inventory and/or are lost to theft.
Many of these organizations have solid maintenance, repair and operations (MRO) policies that dictate that they:
- Pre-negotiate prices for high volume parts;
- Obtain multiple quotes for high priced parts;
- Check inventory levels frequently to avoid both outages and overstocking;
- Check parts into and out of inventory to guard against shrinkage.
The policies include workflows showing smooth information handoffs between the maintenance, purchasing and accounts payable departments. It all works well on paper, but reality is far messier and more difficult.
These organizations may have a solid computerized maintenance management system (CMMS) or enterprise asset management (EAM) system. But these systems often don’t close the loop on MRO purchases. Many CMMS/EAM users are forced to use manual purchasing processes to overcome this shortcoming.
If this describes your organization, welcome to the majority – the majority with a suboptimal MRO purchasing process and a system that doesn’t support closed loop MRO purchasing.
What Is Closed Loop MRO Purchasing?
A closed loop MRO purchasing system automatically checks the CMMS/EAM at least daily to determine which parts are below their reorder point. When parts are found, the system automatically alerts the purchasing team that they need to make a purchase. When an order for the items is placed, the system automatically updates the quantity on order information in the CMMS/EAM. And when the parts are received, the system automatically decrements the quantity on order and increments the quantity on hand. This is all done automatically without the maintenance staff having to log into their CMMS/EAM to run reports or manually update information.
Closed loop MRO purchasing leads to multiple benefits:
- Fewer parts outages that result in higher uptime and more reliable assets and equipment;
- Fewer emergency shipments, resulting in lower shipping costs;
- Lower inventory levels, resulting in both lower depreciation expense and working capital utilization;
- Lower purchase prices, resulting in a lower overall maintenance spend;
- Lots of time saved and more accurate inventory information through the elimination of tedious, manual work.
It all sounds good. Who wouldn’t want that? But how do you get there? You need two key components: a CMMS/EAM system and a procurement management system. If you are reading this article, you probably already have a CMMS/EAM. What you need is a procurement management system with several key features to enable closed loop MRO purchasing and make the most of it.
Integration capability is the single most important feature. Your procurement management system must be able to integrate easily with your CMMS/EAM. The systems must be able to work together to realize the benefits described in the previous section. Look for a procurement management system that has a well-defined application programming interface (API). Ideally, it should be a web service API so communication with your CMMS/EAM can be in real time. This enables better parts inventory management and ensures timely and accurate inventory updates. Why should you care about this? How often do you have to overnight a part to ensure continued operations because you didn’t have it on hand? Did you pay a premium for the part? Was the shipping expensive?
Without closed loop MRO purchasing, it’s easy to blow through reorder points. People get busy. They check inventory levels too infrequently. Required purchases languish and go unordered. To address this, reorder points may be set higher than they should be, or staff members maintain their own personal parts stashes just in case. This excess inventory drives up parts expense, sucks up more working capital and increases depreciation expense.
Has anyone in your organization ever cut a purchase order, but failed to update the CMMS/EAM quantity on order information? Then, another team member sees that the part is below the reorder point but has not been ordered yet. So that person places another order.
Has anyone in your organization ever received a shipment and decided to update the inventory in the CMMS/EAM later, only to forget to do so? Or, is it just too much of a hassle to update the inventory information so staff members don’t bother doing so?
Whatever the reasons, when purchasing doesn’t integrate with your CMMS/EAM, it is significantly more difficult to manage your parts inventory.
Look for a procurement management system that has integration capability that allows it to:
- Automatically check inventory multiple times a day;
- Automatically notify the purchasing team when you need to reorder parts;
- Automatically update the quantity on order and quantity on hand information.
While integration capability is the most important feature of a procurement management system, it is not the only critical one. You’ll want several other capabilities in your procurement management system.
Proactive Pricing Analytics
The best procurement management systems enable you to get the best price for expensive, low volume items, high volume commodity items and everything in between. You probably have some parts that you can get from only one supplier. In that case, you are a price taker, with little to no negotiating leverage. But, the majority of your parts can be sourced from many different suppliers. Your procurement management system should help you keep these suppliers competitive by checking prices on every part in every quote for every order.
Look for a procurement management system that automatically compares the price you receive today to the price you paid in the past for the same or equivalent parts. Are prices going up? By how much? Can your supplier do anything about price increases or is it out of the supplier’s control? Look for a procurement management system that puts historical pricing information all in one place and enables you to establish price thresholds with automatic alerts to help you identify savings opportunities.
One key point: You should not have to run reports to get this information and then manually compare historical prices to the quotes you receive. Do you have time to do this? No, you don’t and you should not have to track down the pricing information. The information should find you when you need it.
Being able to compare the prices on a single quote to previous prices paid is great. But, you need more than that.
DILBERT © 2009 Scott Adams. Used by permission of UNIVERSAL UCLICK. All rights reserved.
Intuitive Quote Comparison
If you want to get the best prices, you have to shop around to find the best deals. That sounds great in theory, but have you ever tried to compare quotes from multiple vendors for a single purchase? It’s a hassle.
Do you print all the quotes out and do the thrilling stare and compare, hoping to catch any errors in the quotes? Did they quote open bearings when you asked for sealed ones? Did they quote one item when you asked for seven? Did they quote free on board (FOB) origin when you asked for FOB destination? Did they include taxes and shipping? Because you know they’ll include those on the invoice, even if they weren’t on the quote.
Or, do you custom build a spreadsheet and then copy and paste or enter manually product and price information into it? Did you get those comparison formulas right?
Do you have time to do this? No, you don’t.
Instead, look for a procurement management system that can analyze multiple quotes automatically, highlighting discrepancies between the request for quotation (RFQ) you sent and the quotes you received, whether with the actual parts or in the terms and conditions. This should be a visual comparison so you can quickly and easily see any potential problems.
Bonus points for a system that shows you a price spread analysis – the difference between the highest and lowest cost for each part in both dollars and percent. This tells you where you have room to negotiate with your vendors.
Also, if you have pre-negotiated pricing for specific parts, your procurement management system should alert you if your vendor’s price exceeds the agreed upon pricing.
Comparing pricing across multiple quotes is great, but you also want to benchmark that pricing to other vendors. Do they have better pricing? How would you know? Do you ever spot-check your vendors’ prices with supplier websites? Do you open multiple web browsers and search for each part? This is tedious and time consuming. Do you have time to do this? No, you don’t.
Your procurement management system should do it for you for every part on every quote. Even if you don’t purchase from these sources, you can use this information to negotiate better pricing. Doing so will allow you to cut your parts’ cost, in some cases, dramatically.
Once you find the right procurement management system and make the decision to implement it, the deployment has to go quickly and smoothly to spare your team as much anguish as possible and allow them to focus on their day jobs. You can’t wait six months or a year to get up and running. With that in mind, look for a software as a service (SaaS) solution. Otherwise, you will have to buy, manage and maintain additional hardware and software. SaaS solutions also make it much easier to bring multiple locations online quickly.
Implementation shouldn’t require numerous, highly paid consultants for data import, custom configuration and integration. If it does, you’ll see your up-front expenses grow two to three times before you even touch the system.
DILBERT © 2013 Scott Adams. Used by permission of UNIVERSAL UCLICK. All rights reserved.
Procurement Management Partner
So far, this article covered the importance of specific closed loop MRO purchasing functionality and key features you should look for in your procurement management system. It’s also worth considering what kind of vendor you want to work with.
Maintenance organizations can be an afterthought when compared to operations. They often operate with limited resources. Some procurement management vendors require you to take on a huge software implementation, manage a bunch of customizations and dramatically revamp the way you work.
Do you have time to do this? No, you don’t.
With that in mind, look for a procurement management partner who is nimble enough to make changes, add functionality, integrate with other systems and provide the support and attention you need to get up and running. You want a partner that uses an agile software development methodology. Otherwise, you will have to wait for months or quarters to get any changes you need made to the system.
These characteristics are hard to come by in large software companies. Enterprise resource planning (ERP) platforms are notoriously big, inflexible and expensive. Even larger midsized software companies have lost close touch with their clients.
Have you ever called a software vendor to ask for new functionality and been told they’ll add it to their list of things they’ll get to eventually? How often has your request fallen on deaf ears? How much money/hassle has that cost you while you wait? If you are successful in catching someone’s attention, do you get exactly what you want? How many compromises are you asked to make due to software architecture constraints or other customers asking for similar, but not the same functionality? When do you actually get to see the functionality? In a year?
The big, and even medium-sized, companies who boast of all the resources they can bring to bear to ensure your success won’t talk about their brittle legacy software code or the bureaucracy and the many other priorities that get in between you and those resources. Look for a partner who wants to collaborate with you and wants you to help shape their product road map.
DILBERT © 2014 Scott Adams. Used by permission of UNIVERSAL UCLICK. All rights reserved.
This article has given you a few things to keep in mind when considering your closed loop MRO purchasing options. Look for a system/partner that:
- Integrates quickly and easily with your CMMS/EAM;
- Automatically detects parts that need to be ordered and alerts your purchasing department;
- Automatically updates inventory information;
- Provides data-driven historic and comparative price analytics that will enable you to negotiate the best prices for all the parts you buy;
- Is nimble enough to make changes, add functionality and provide the kind of support and attention your business needs.
If you can implement a system like that, you will be able to drive your parts expense, depreciation expense and working capital utilization down while maximizing your uptime.