How can data improve stakeholder management?
Research by Manchester Business School and RS Components into maintenance, repair and operations procurement found that data, and the insight it yields, can keep conversations with stakeholders objective and resolve potential conflict.
Maintenance, repair and operations (MRO) procurement is fiendishly complex. Like many other areas of indirect procurement, understanding the true scale of an organisation’s spend on items that ensure the continued functioning of production and manufacturing is a challenge not always met. Multiple suppliers, a wide variety of product categories and vast diversity across operating sites and procurement systems, combined with an underestimation of MRO costs, result in many organisations overlooking it.
Stakeholder management also poses great demands on MRO procurement. The typical stakeholder challenges associated with indirect procurement – such as compliance, visibility and managing relationships – apply, but the sheer complexity of MRO procurement means it is difficult for the procurement function alone to manage. Inevitably other stakeholders – finance, engineering and operations – get involved, each with their own key performance indicators (KPIs) and objectives. Conflict and complexity are inevitable and can jeopardise fully achieving potential savings and efficiency savings.
Manchester Business School undertook research with RS Components to identify and evaluate best practice in realising MRO cost savings.
After a survey of procurement professionals, interviews with MBS academics and analysing data held by RS Components, the research identified challenges associated with MRO procurement.
It points to the necessity for the four divisions involved in MRO procurement to align their objectives, by analysing their KPIs for potential areas of inter-departmental conflict. From this they can create new, co-ordinated KPIs for each department which run in parallel to the overall organisation’s aims. For the procurement function specifically, this means understanding the aims and challenges the other stakeholders face.
For engineering functions, the quality of products which are immediately available, reduced sourcing time and maximised engineering time are prioritised in their KPIs. In addition, minimised downtime and maximised production time governs the department, so it’s essential the parts for planned and unplanned maintenance and repairs are readily available.
This does not mean having parts sitting on shelves and tying up working capital, but having the right parts in the right quantities and in locations that can be accessed. For parts not held in stock, the process of acquiring them should be easy and quick. Inferior products taking too long to arrive, which may be part of cost-based deals that the procurement function has negotiated, will not enable the engineering function to meet their KPIs based on avoiding downtime.
Like engineering, an operations department’s key aim in MRO procurement is to ensure maximum operational efficiency and minimal downtime. Like finance, operations need to reduce working capital and risk exposure. And like procurement, operations need to ensure efficient and well-managed stores and inventory.
But the importance of the overall running of the business – sometimes at the expense of budgets – can mean stores are overstocked to minimise the risk of running out of products. Too much capital will be tied up in an inefficient inventory, and the department will be over-budgeted. Procurement functions may have agreed contracts or suppliers deals which do not provide enough control for the operations department. Finance functions may impose restricted cash flow and budgets, reducing its flexibility.
It is the finance division’s KPIs that are typically reported to the board, and against which the business’ overall performance will be judged – in financial terms. As such, they often dictate the KPIs of other departments. Cash flow, cost reduction, inventory reduction and process management will guide finance’s KPIs. However, this risks conflict between divisions and stakeholders and can ignore the organisation’s greater goals. One problem is finance’s involvement in procurement is often only during budgeting cycles. This can result in a procurement strategy struggling to achieve KPIs that align to the finance division.
If demonstrating cost efficiency is procurement’s primary goal, a negative impact on other departments and the goals they are seeking is likely. Typically, procurement KPIs are focused on costs achieved via supplier discounts. They are negotiated based on volumes or values of orders, then benchmarked against discounts offered by competing suppliers in a particular category and previous discounts achieved.
This suits negotiations with suppliers of planned high volumes of single items over time. But won’t work for the supply of unplanned, multiple items, in low or even one-off volumes, which characterise MRO procurement. KPIs aligned to this will compromise other stakeholders’ performance measures and the overall objectives and efficiency of the organisation.
Instead, procurement needs to take a wider view of its role in MRO procurement, facilitated by a total cost savings approach that recognises process costs, which can be as much as twice the value of product costs in MRO procurement. Negotiating terms for deferred payments or other working capital concessions can enable the best – not always the lowest – price for products, and rationalising the supplier database can reduce the administrative burden.
Aligned to this, the quality of products must be a KPI for procurement. Working with suppliers and the engineering function will enable it to identify product standards and therefore potential alternatives at the same standard but at a lower cost. The engineering function will also prioritise on-time delivery, and this must be mirrored in procurement KPIs. Cost may come first for procurement, but the potential downtime caused by essential parts not being available is likely to outweigh any savings achieved at the procurement stage.
Inventory management will also play a vital role in on-time delivery. KPIs focused on visibility of inventories will help avoid rush orders to fill gaps and outages, as well as overstocking on a “just in case” basis, both of which are costly to the organisation.
Unlike direct procurement, procurement professionals cannot control the orders for MRO purchases because processes are often outside standardised procurement systems. But when no one division has overall control over MRO procurement, getting to grips with costs and inventory management becomes nearly impossible due to the sheer complexity of operation.
Effective stakeholder management is essential for MRO savings and efficiency gains to be made. Understanding the KPIs and challenges that the key stakeholders face in MRO procurement, can help manage relationships and develop MRO strategy. But ultimately, to realise potential savings from MRO will require all key stakeholders to align their objectives.
☛ Klaus Göldenbot is responsible for sales, marketing and corporate customer service globally at RS Components