How Well Are You Managing Procurement Compliance?

Procurement compliance often presents a difficult challenge for any manufacturing organization, regardless of how strict and well managed it may be. While many procurement teams feel they have effectively leveraged spend through preferred supplier negotiations and purchasing processes, reality is that they have only hit the tip of the iceberg. The main factor that holds every organization back is data quality, or lack thereof, related to inventoried parts. Some parts, and their associated description, radiate with accuracy and attribute information. Unfortunately, this only represents about 10%, arguably much less, of the items in a given database. More realistic are parts that barely have a part number or any type of description that would allow the preferred supplier to accurately provide a replacement part. Without clean data there is a good chance that the agreement, which was originally negotiated with the preferred supplier, doesn't accurately represent the organizations true spend. Without quality data product group reporting lacks accuracy that could very well change the margin, cost savings, inventory commitments, etc., that are deserved when negotiating. In most cases, the majority of companies can't tell definitively what they bought, who they bought it from, and how much they bought it for in the past week, let alone the past twelve months. P-cards, free text, VMI one line invoices… these are all contributors to poor data and insufficient item detail information.

In order to maximize spend leverage and utilize preferred supplier programs to their full potential, procurement teams first need to address the data issue. By implementing a data cleansing project, legacy data will be cleaned, standardized, and enhanced so as to provide an item master that is consistent amongst product groups, while containing accurate and attribute-rich descriptions. Once clean, data will be formatted to meet the specific configuration requirements of the chosen ERP. Since each enterprise system is unique, it is imperative that a strategy be developed to ensure that the cleansed deliverable meets technical criteria such as file format, character limitations, field population, etc. A defined Standard Operating Procedure developed at the beginning of the cleansing initiative should clearly articulate the formatting requirements. During the cleansing process, duplicates will be identified at both the plant and corporate level. On average, duplication within a standard item master ranges from 10-20%, but can sometimes climb as high as 30%. Duplicate identification provides significant opportunities to reduce on hand inventory and further leverage spend. For best results, it’s also a great time to run an OEM to MRO item conversion project in parallel with the cleansing initiative. Be careful though, while some parts may seem to be identical at first glance there can be minor variations that can have devastating effects on machinery if used improperly. It is best to include members from the engineering team as well as an external subject matter expert when making these interchange decisions.

Now that you have implemented a data cleansing project and finally have quality data to generate accurate reports, you’ll be quite shocked to learn just how many hidden cost savings opportunities can be discovered during the Inventory Optimizationand Spend Analysis. The key to maximizing spend leverage and effectively utilizing preferred supplier programs is to manage procurement compliance at the SKU level. While you may have thought this was impossible before you had clean data to work with, your new corporate item master enables clear and detailed visibility right down to the individual item. If you’re wondering how you will control compliance at the plant level, there are solutions available to enforce buyers and purchasing agents to order “Preferred” items over “Non-Preferred” items, as well as, third-party procurement organizations that will manage all purchasing and procurement functions for you. By managing compliance at the SKU level, you’ll be able to take your procurement performance to an all time high as you begin saving the company millions each year.

For more information on Strategic Procurement and Compliance solutions, visit www.imaltd.com or contact info@imaltd.com.

Leveraging OEM to MRO Conversion Opportunities

Regardless of what manufacturing industry you look at, OEM to MRO conversion represents a significant cost savings opportunity for any organization. To their own benefit, Original Equipment Manufacturers heavily promote their parts for ongoing equipment maintenance and repairs. You can’t blame them; it’s excellent revenue sustainability. The problem is that the price variance between an OEM and a standard MRO item is often astronomical.

Although it may seem like an easy task to convert all OEM items to standard MRO parts, it most definitely is not. The challenge is to identify equivalent MRO interchange items that can be sourced elsewhere to safely replace these costly OEM items. While most MRO manufacturers are quite generous when providing part specifications, OEM’s usually are not. If you’re lucky, you may be able to retrieve a limited amount of information online or by contacting the OEM directly, but there’s a very good chance you’ll come up empty handed. In most cases, obtaining OEM attribute information requires an on-site subject matter expert to physically inspect OEM parts and collect information such as type, size, material and description.

It is a time-consuming and laborious task that manufacturing organizations rarely leverage to the full potential, however, the return on investment opportunity is tremendous. For example, in a given manufacturing organization OEM items represent on average 40% of total inventory. To further illustrate the savings potential, the purchase price reduction opportunity on OEM to MRO interchange items can range from 25-75%, if not greater. You don’t have to be a mathematician to realize that’s a lot of money that could be kept in pocket.

For more information on OEM to MRO Conversion and IMA services, visit www.imaltd.com or contact info@imaltd.com.