Trimming the Fat From Indirect Procurement

Nov. 12, 2010

Industrial manufacturers are looking to sharply reduce transactional costs and the number of purchase orders.

When it comes to the procurement of all the materials that make a manufacturing facility run, from drill bits, to safety goggles, to light bulbs and janitorial supplies, tracking down suppliers isn't the problem. There are thousands. But reducing the amount of time and energy spent to purchase those key operational items is far trickier.

Since the start of the recession, companies have begun paying increased attention to their indirect procurement system. While direct procurement involves the materials an organization buys that go into their finished product, indirect procurement is the purchasing of items not directly related to the product being made, such as computers, gasoline for a truck fleet and paper clips.

Much of that process has become outsourced and one reason why is that maintenance, repair and operations procurement has a knack for racking up unseen costs.

According to Erik Gershwind, executive vice president and chief operating officer at MSC Industrial Supply, one of the largest industrial equipment distributors in the world, maintenance, repair and operations procurement falls into what he calls the "80/20 rule."

Eric Gershwind: "It's the 20% of the dollar value that takes up 80% of the time for a buyer or purchasing department." "It's the 20% of the dollar value that takes up 80% of the time for a buyer or purchasing department," says Gershwind. "The traditional way of buying MRO supplies would be the purchasing manager to get cutting tools through a metalworking distributor and light bulbs through an electrical distributor. What happens is, with these very small-dollar items, they end up having to spend an awful lot of time searching for the product, placing four or five purchase orders, receiving and putting away these shipments, and you've invested too much time for so little dollar value."

Technology and management consultancy group Accenture estimates that indirect procurement costs range from 10% and 15% of a company's annual revenue and outsourcing the process could save anywhere from 8% to 12% on operations materials.

"The real money isn't just in lowering the per-piece price of an item, like it is on the direct side," says MSC's Gershwind. "It's in attacking the transactional costs and bringing down the number of purchase orders you have to place."