MRO Spend Control: The next step on the road to manufacturing efficiency?

Terry Wilcox, Commercial Director at Proactis, the Spend Control Company, explains how manufacturers can take their IT investment to the next level in order to achieve greater efficiencies in an increasingly competitive market.
 
The idea of embracing developments in Information Technology to maximise efficiencies and create more effective manufacturing processes is not new.  There are few manufacturers who have yet to invest in Enterprise Resource Planning (ERP) and Supplier Relationship Management (SRM) systems, and the benefits are undisputed.

So, in an increasingly competitive market, what can manufacturers do next in order to drive further efficiencies and create that all important competitive edge? The importance of getting the right people ordering the right amount of the right stuff at the right time does not need to be spelled out to manufacturers. But one area that is often overshadowed by the big-ticket SRM and ERP systems is maintenance, repair and operating (MRO) costs. MRO supplies are crucial to business continuity and account for 54%[1] of all indirect enterprise purchasing transactions (as measured by number of requisitions), yet many manufacturers still do not have systems in place to automate the purchase-to-pay process for the goods and services that fall under this category. Worse still, 59% of manufacturers interviewed in a recent study by the Aberdeen Group1 cited that they do not have adequate visibility of their MRO spend.

Best in Class Manufacturers
The Aberdeen Groups study revealed that automation of activities across the entire purchase-to-pay process is a characteristic associated with organisations identified as Best in Class, and has enabled these organisations to achieve savings of 18% over the last three years.

But what does automation of the purchase-to-pay process mean? An end-to-end eProcurement solution is not just about ordering supplies online. At is simplest, eProcurement should enable manufacturers to broaden the range of employees who can carry out transactions whilst maintaining control and visibility over all elements of the organisations spend.  At its most effective, it should enable manufacturers to link suppliers into a collaborative purchasing network that delivers benefits throughout the supply chain.

First and foremost, eProcurement empowers all employees within an organisation to source the goods and services they need to perform their jobs effectively, quickly and efficiently, and in line with budgetary controls.  Workflow should be automated at every step of the purchase-to-pay process - from selecting the required goods and raising a purchase order, through to the authorisation of requisitions and orders, to receipting, invoice registration and matching.   The result is complete control over the cost pipeline.

At the next level, eProcurement turns purchasing and transaction data into valuable management information that can help inform and support business decisions.  Effective eProcurement incorporates reporting tools that provide management teams with full visibility of the organisations spend, and the ability to drill down on a supplier or even transaction basis, to ensure that best value is being realised at all levels.  Selected information can also be made available automatically to suppliers, to enable them to track the payment cycle and monitor their own performance on current and past transactions.

eProcurement In Practice
Located in Holyhead, North Wales, Anglesey Aluminium Metal Limited is one of the largest smelters of aluminium in the UK.  In operation since 1971, Anglesey Aluminium produces in the region of 145,000 tonnes of metal per annum.  This scale of production requires approximately 560 employees with an additional 70 full time contractors making it one of the major employers in North Wales and one of the largest consumers of power in the whole of Wales.  

Anglesey Aluminium implemented PROACTIS P2P (Purchase-to-Pay) Spend Control software to help control expenditure in anticipation of rocketing energy costs.

Anglesey Aluminium currently sources its 250-megawatt requirement for power directly from nearby Wylfa Power Station and has benefited from a ten-year contract, which has protected Anglesey Aluminium from the major price rises seen within the power market. Anglesey Aluminiums power contract ends in 2009 and Wylfa is due to close in 2010. The Company is in the process of sourcing power from other suppliers but will face electricity charges that are substantially higher than its current contract price. Anglesey Aluminium is taking positive steps now to control costs and minimise the impact on the business and its other stakeholders.

Phil Bedford, Senior Accountant at Anglesey Aluminium Metal Limited, comments: Like many large industrial and manufacturing organisations, we have a wide range of costs. Our smelting operation operates on a 24-hour, 365-day basis and the amount of raw material and power we consume is very much fixed. We have agreements in place for the provision of our direct materials and power, so at present we know how much our expenditure is in these areas.  We consume a huge amount of energy, approximately 12 percent of all the power used in Wales, so we are extremely sensitive to changes in power price. We recognised the need to make the business as cost efficient as possible to give it the best chance of survival in the future, this meant we had to have appropriate systems in place to report, monitor and control expenditure.

PROACTIS P2P complements the plants existing manufacturing systems, addressing an area of spend in which it was previously difficult to obtain accurate, up to date information, which made the expenditure control process all the more difficult. The system automates the entire purchase-to-pay process at Anglesey Aluminium and replaces the manual system in which requisitions took up to 11 days to reach the purchasing department and data often had to be replicated.  Requisitions can now be with the purchasing department within minutes and orders placed with suppliers on the same business day.

The software enables Anglesey Aluminium to reduce the administrative burden and drive cost savings for the organisation by offering greater control and visibility over its indirect spend: Because we have complete visibility over all of our spend, our staff have become more accountable and maverick spend has been reduced.  Also, because they know the purchasing process is much more efficient they are less inclined to over order and waste money on squirrel stocks where they keep extra stocks to avoid running out of essential items, comments Bedford.

Bedford also recognises the following benefits of the P2P software:

• Improved efficiency of the purchase-to-pay process allows purchasing staff to concentrate on the specialist, value-added elements of their roles such as contract negotiation and supplier relationship management
• Information gleaned from the reporting, price and budget checking capabilities of the software allows the purchasing and management teams to analyse spend at all stages of the purchasing process, putting them in a better position to make decisions and drive accountability throughout the organisation.

After extensive research, PROACTIS was the only supplier to provide a cost-effective P2P procurement solution that met all of our needs and could be integrated with our existing systems. The support and knowledge of the implementation team was also of a very high standard, concludes Bedford. 

Taking eProcurement to the Next Level
Automating purchase-to-pay processes to control MRO costs have delivered benefits to Anglesey Aluminium and sit at the heart of Aberdeens MRO recommendations.

But the benefits of eProcurement do not end with cost control.  Once an organisation has its own house in order in this respect, eProcurement can be taken a step further to enable collaboration between manufacturers and their suppliers. For example, eSourcing, eCommerce and Supplier Relationship applications hosted on a self-service portal can enable manufacturers and suppliers to develop more effective working relationships to the benefit of all involved, helping manufacturers to rest safe in the knowledge that they have the greatest possible control over their procurement process.