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Recent Impacts of e-Procurement on the MRO Industry (Maintenance, Repair and Operations)

Market research and procurement intelligence finds that billion dollar consumer packaged goods (CPG) companies with maintenance, repair and operations (MRO) constituting around five percent of their annual revenue have high and undesirable inventory levels and maverick buys. Low spend visibility for their low-value, high-volume indirect goods and services is one of their major issues. This is a key challenge for most mature businesses as they strive toward reducing their total cost of ownership.

There has always been a pressing need to increase spend under management and have better control over maverick spending in order to reduce the amount of associated paperwork and time in procuring these products.

Over the last four years, MRO providers have been increasingly focusing on enabling their customers to purchase goods through their online e-procurement platforms. This allows for quick and paperless transactions, saving time and capital for both the buyer and the supplier. This trend has skyrocketed post-2009 among major global MRO providers, mainly distributors who provide multiple brands and categories, thus enabling MRO buyers to consolidate their current suppliers. Large distributors now make as much as $2 billion annually through their e-procurement platforms. This article will explore the current impact e-procurement has on the global MRO industry, along with key developments in this area based on recent procurement analysis.

Understanding e-Procurement in the MRO space

The aim of e-procurement is to be able to purchase the right product or inventory in a time and cost effective manner. Reduction in maverick spend and maintaining optimum or lean inventory levels can help achieve overall cost savings by around 5-10%. Furthermore, paperless communication and invoicing, saves 50-70% of the time required throughconventional transactions. Depicted below is the role e-Procurement plays for a buyer and supplier.

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Figure 1: E-procurement function and benefits

Recent Developments in the e-Procurement Space Globally

  • With the availability of more than 500,000 MRO items across 14 categories, Amazonsupply now provides free one year returns and quick shipment, which increases its attractiveness to the B-B market. Amazonsupply is not expected to have an impact on large global MRO distributors as they do not provide the essentialexpertise and onsite support, which is of high importance to a large MRO buyer. Thus, distributors are still the preferred partners for global MRO buyers.
  • In-depth information about the product and other customer centered details such as product/brand comparison are becoming the focus of providers to improve the attractiveness of their e-Procurement servicesto their customer. E-Procurement solution providers now providetheir clients with eRequisition, eCatalogs, Supplier Integration, Implementation Services, and Product Visibility.
  • The MRO segments of industrial MRO, power transmission and fluid power have seen maximum development in the e-procurement space in the last two years in the B-B market.

Global Adoption Levels of e-Procurement among MRO Providers (Distributors/ Integrators)

The largest geographical MRO demand markets are Asia, Europe and North America. Though Asia holds the largest MRO market share, and is the fastest growing emerging region, it has lower levels of penetration for MRO integrators when compared to mature regions such as North America1.

The adoption of e-procurement depends on the geographic maturity of the MRO industry and the availability of MRO service providers capable of offering such services in the region. The United States, Canada and Western European countries witness the maximum penetration of e-procurement due to their large supplier base and high levels of integrator and distributor penetration. Depicted in Figure 2 are the estimated global e-procurement adoption levels in the MRO industry.

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Figure 2: Adoption of e-procurement by MRO distributors globally

The global e-procurement solutions provider market is currently fragmented, however, increase in mergers and acquisitions among large providers are slowly inclining the industry toward consolidation. The e-procurement market is expected to reach USD 1.5 Billion by 2014, with a Compounded Annual Growth rate (CAGR) of 5% over the last four years. E-procurement service providers are now moving toward a cloud-based delivery model (where software and associated data are centrally hosted on the cloud), which increases software flexibility without additional investment in infrastructure.  Outsourcing and providing on-premise solutions, are other models of e-Procurement deployment/ installation by global providers.

Recent Strategies E-Procurement has enabled for MRO Buyers:

  • Bundle Spend and Unbundle MRO items: In order to achieve better cost savings and spend visibility, e-Procurement must be leveraged in such a manner that the organisation can track spend on particular MRO items, enabling MRO categorisation and category wise spend levels .
  • Improve Supplier Relationship Management: Buyers aim at shifting into being their supplier’s key clients, by increasing the attractiveness of their current account. This can be done by consolidating spend in various categories to a few particular suppliers. This will help buyers implement complex strategies such as supplier integration or long term contracts with lower margins demanded by suppliers.
  • Linking MRO Inventory to the Provider: Organizations can now maintain lean inventory by linking inventory levels and usage to the ordering system of the supplier. This enables timely procurement and gives suppliers a head up on predicting demand. This approach, however, is possible only when buyers are willing to disclose and share their inventory information to a selected key supplier.

Challenges Faced WhileImplementing e-Procurement at an Organizational Level

Large MRO buyers require maintenance and after-sales service from their distributors/integrators, and hence engage in e-procurement only with MRO providers that are able to provide these services. Small- to medium-sized companies face higher initial investment costs due to the need for better infrastructure to facilitate e-procurement from their end. A few major challenges are listed in Figure 3.

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Figure 3

SUMMARY

E-procurement has enabled MRO distributors who have invested in an e-procurement infrastructure to increase global sales and has ensured paperless and transparent procurement processes to buyers who leverage this facility. This trend is set to be increasingly adopted by MRO providers globally and will pave the way to better spend visibility and tractability by buyers in the future.

References:

  1. W.W Grainger’s Factbook http://invest.grainger.com/phoenix.zhtml?c=76754&p=irol-irFactBook_pf (2012 Factbook, page 5)


part2Anup Varghese is a research analyst at Beroe-Inc, a procurement intelligence company. He has been studying the global e-Procurement industry in order to understand the current trends and developments in various geographies and markets so as to support fortune 500 companies in developing their sourcing strategies.

Anup focuses on understanding the procurement trends and best practises across industries. Currently, he is focusing on Maintenance, Repair and Operation (MRO) industry trends while analysing the various developments in local and global markets by studying new technologies and trends, providing trade statistics, product lifecycle analysis, risk evaluation of a supply base, input cost models for commodities, long/short term price forecasts and identifying suppliers in low-cost/ high-low-cost/ high-quality sourcing destinations.

Anup is a graduate from one of India’s top 10 engineering colleges (College of Engineering Guindy, Anna University) in the discipline of Manufacturing Engineering.


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