How Accurate Product Classification can save Big Dollars in MRO Procurement?

Globally, all Organizations work steadily towards making their businesses more profitable. Every new market, competition, and technology adds up to more and more business challenges.

One of the most important factors driving higher profitability is efficient cost management. How far is it practical for all organizations to reduce costs?

The majority of costs incurred by most organizations is on procuring direct and indirect materials. Many organizations fail to manage their MRO materials because of improper and inaccurate product classification. In addition, huge investments in ERP/EAM/CMMS tools do not yield desired results or the tools are significantly underutilized. And both these problems usually stem from the same issue – poor quality of data.

Supply chain transactions with poor quality data produce incorrect reporting and poor spend analytics capabilities. This in turn multiplies the risk of higher costs of sourcing, increases carrying cost and reduce visibility into sourcing inefficiencies.

Here are some of the most common scenarios we have seen firsthand of increased MRO spend arising from a poor data backbone.

• Scenario 1: Buying at a Higher price
  A company buying the materials like ‘bearing’ from a Non-preferred vendor, could result in higher costs i.e. Item purchased from Preferred vendor at $14 and Non-Preferred vendor at $20
• Scenario 2: Duplicate materials & vendors
  In several instances the same materials with unstructured description are purchased from different vendors at different prices ($8, $9, $11), which can vary between 25 to 60%
• Scenario 3: OEM vs Generic MRO materials
  In several instances, OEM materials are being purchased instead of generic MRO equivalents for 40-50% higher price i.e. OEM materials purchased at $110 while generic MRO equivalent was purchased at $60

These problems can be easily overcome by establishing a detailed product classification system, sanitized material data, proper descriptions / product meta data and a clean vendor master. This enables purchase price parity, volume rebates, and inventory optimization, among other cost savings and efficiency improvements.

At a recent supply chain forum, the Head of Supply Chain for a large Oil and Gas Company said “MRO Product Classification became a critical element in our overall spend analysis and helped in cost reduction initiatives. This enabled us to identify and establish preferred vendor agreements while converting costly OEM items to generic equivalents. Based on the newly established vendor relationships and reinforced buyer compliance, we are able to reduce annual MRO, direct & Indirect spend by over 12% in the first year, while significantly improving purchasing and procurement efficiencies”.

The most commonly used Product Classifications are,

• UNSPSC – United Nations Standard Products and Services Code
• eCl@ss
• eOTD – ECCMA Open Technical Dictionary
• ETIM – European Technical Information Model
• CPV – Common Procurement Vocabulary
• NAICS – North American Industry Classification System

At Enventure, we serve clients leveraging any of the above systems or in some cases provide a customized data schema based on client requirements. Here is an example of accurate product information for a typical MRO item.

Are you looking to reduce your MRO procurement costs? Talk to one of our experts for a free consultation.