Hidden Costs of MRO Procurement: Understanding Transactional Processing

Did you know?
Processing a single MRO purchase order can cost anywhere from $50 to over $1,000 or sometimes more than the item itself. Multiply that by thousands of transactions, and the impact on your bottom line becomes staggering.

When it comes to purchasing maintenance, repair and operations (MRO) supplies, the acts of buying and selling belong to a web of systems. Every transaction is part of a process rather than a standalone event. This article explores what transactional processing involves, and costs associated with it, which may not always be apparent. It also discusses the role that integrated suppliers can play in helping businesses to manage this complex function and the benefits of this approach.

There are costs associated with every purchase. The obvious one is the price of the item being procured, whether it’s consumable goods, tools or parts. There may also be a delivery charge. Less obvious, however, are the transactional costs. Research shows that the cost of processing an MRO purchase order ranges from $50-$1,000 or more. Given the low value of many indirect procurement supplies, this can be more than the price of the actual product. Multiplied across thousands of transactions, it soon adds up.

Why are these transactional processing costs so significant? The answer lies in the old business adage that time is money. Specifically, employees spend time handling purchases. There’s the time involved in sourcing and ordering a product, then receiving and processing the product when it arrives on site. There’s also the time involved in generating a purchase order (PO) and settling invoices, accounts receivable and accounts payable, alongside the systems and software to manage these processes. That’s to say nothing of the time and money caught up in managing suppliers and handling problems in the procurement cycle, from delayed or missing deliveries to incorrect orders and wrong parts received.

“Inherently, transactions cost money,” states Josh Levin, Senior Director of Global Procurement at RS Integrated Supply. “One of the challenges many companies face, is getting their stakeholders to see beyond the cost of the part itself, and to understand the value of the overall transactions. With MRO, this poses an issue due to the volume of transactions involved.”

“That lack of visibility leads companies to underestimate the additional costs,” continues Levin. “Often, we find that there are individuals, and even departments, that are making purchasing decisions without seeking input from the procurement team. If these decisions are not aligned with the overall procurement strategy, this could create issues. Further, engineers and maintenance technicians, for instance, may spend a considerable part of their day looking for a specific part. Buying materials may not be the most efficient use of their time, especially when there is someone there to handle these tasks.”

“Transactional processing costs are fragmented across different functions, usually belonging to different parts of an organization, making it difficult to quantify,” agrees Costi Campi, Senior Vice President for Global Procurement at RS Integrated Supply. “Also, you associate the cost with the number of transactions, not the value of transactions – but the transaction cost is the same whether it’s for a PO for £1 or a PO for £1,000. Therefore, the cost of the transaction is important, but it needs to be in relation to the spend that goes through that transaction.”

One of the most effective ways to reduce the burden of transactional processing is to bring in an integrator to manage MRO procurement. Outsourcing brings major efficiency gains because when they no longer need to spend time searching for and ordering parts, staff can focus on their core responsibilities. “Transfer this non-core activity to somebody who does it as a core activity,” advises Campi. “You can then redeploy your resources to what is core for your business.”

“From a client’s perspective, it’s offloading the problem whereas we’ve made a core business in this MRO space,” adds David Wright, Procurement Lead for EMEA at RS Integrated Supply. “Our people are specialists, and we’ve created strong supply chains with potentially multiple approved suppliers per product category that we can go to and obtain the right combination for a particular request, whether that’s best availability, quickest lead time, or about cost price.”

Outsourcing also reduces overhead. No more POs, invoice processing or reconciliation, and no more supplier management. You receive one consolidated invoice from the integrator. This is the biggest advantage of outsourcing, argues Levin. “The hundreds or sometimes thousands of suppliers that the client deals with can be consolidated to one supplier, the integrator,” he says. “Now it’s one supplier and one PO. The integrator manages everything else. That’s one of the biggest efficiencies you can gain.”

“The other side of this is the leverage,” observes Campi. “Compared to when a client manages their own spend, they benefit from the leverage of their spending power being bundled together with a third party’s. This drives better value.”

Another benefit of working with an integrator is gaining access to processing software built specifically for the MRO industry. “That technology and streamlined process is our core competency,” says Levin. “Our system – RS SYNC™ – is proprietary software we use for all transactions. A digital marketplace sits in front of that software and is customized for each client. It’s part of the same suite, where we bring everything together. You no longer need to leave the system to complete a transaction and it’s a game changer.

“It’s about utilizing technology to automate and improve the workflows and approval processes,” he continues. “That is why, during any new client implementation, cleaning data is the first step. Each part has to be identified, have a manufacturer part number and an accurate item description,” notes Levin. “This allows for fact-based, data-led decision making and more strategic client conversations where we can focus on leveraging their spend and delivering stronger total cost of ownership results.”

“It’s a one-stop shop solution,” says Wright. “Our stores teams can access the same system so we can actively manage inventory and optimize stock levels. We can use the same system to manage the procurement process from an end-user request through to the PO then the goods receipt.”

Software such as RS SYNC™ provides another example of how working with a specialist integrator simplifies the buying of MRO supplies by reducing the friction between different parts of the system, creating a more streamlined and more efficient process that reduces the cost of processing transactions. That cost is no longer fragmented and hidden in a complex web that spans an array of different functions – and that cost is no longer disproportionately high compared to the value of the items being procured. Can your business afford to operate differently?