Subject Area: Procurement Savings
One of the main short comings that I see in the approach to indirect materials and spare parts management procurement is that many people don’t think past the key decision as to whether to stock or not to stock an item.
After they reach the decision to acquire a spare part often little thought goes into working through the best way to acquire that part. That is how to generate procurement savings through changes to the procurement process rather than reducing quality.
Here is a story about how one company achieved a 33% procurement saving by taking a different path.
The part in question is a bearing, but no ordinary bearing.
It fits a massive gearbox at a remote mine site.
The company’s standard procurement process required that all parts ordered be delivered within four weeks of the issue of the P.O. The size of the company meant that they could make this demand and suppliers would do all they could to comply.
As per standard process, when the gearbox required repair or overhaul the required parts were ordered or drawn down from their inventory, including this bearing.
Because of the size of the gearbox the overhaul process typically took about nine months to complete. The bearing in question was pressed onto the main shaft at the end of the overhaul, as the gearbox was being reassembled so was not really required until month eight.
However, for the sake of procurement efficiency all parts were ordered at the beginning of the overhaul and as per company policy all were delivered within the four week window.
So, this bearing landed in the workshop at the end of the first month of the overhaul and was not actually required for maybe seven months.
After realizing that there could be a better way, the procurement team asked the supplier if they could deliver the bearing in month seven.
Not only did the supplier commit to this but, by taking off the artificial constraint of an unnecessarily short delivery, the supplier could also reduce the price.
How much? The original price was $66,000 and the new price was $44,000 – a saving of $22,000 or 33%
This is a great example of the application of Inventory Reduction Action #6 (More Closely Match Delivery With Usage) as per in the Inventory Cash Release (ICR) Process.
Next time you decide that a part should be ordered, go the extra step, and ask whether your company is imposing any artificial constraints that work to increase the cost of that item.
There just may be ways to generate procurement savings through recognizing the constraints your company imposes.
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Posted by: Phillip Slater