Many maintenance shops across the country have achieved varying degrees of success in controlling inventory costs by reducing the number of spare parts held in inventory, removing obsolete inventory, tracking parts usage, and so on. For those maintenance folks that have looked externally for savings, one of the greatest frustrations is trying to get what you want from your suppliers when you want it. Making maintenance or operations departments responsible for the purchasing agents and/or procurement software provides no relief.
There are four areas where simple improvements can help you manage your suppliers better: goal setting, negotiations with suppliers, order policy and record keeping.
It is important for you to prove to management that you are properly handling your suppliers, minimizing your costs and improving the overall service-level of your department. This can be accomplished through the determination of simple performance indicators, setting targets for improving them, and tracking them accordingly using CMMS and related software.
Some examples of targets are:
- Reduce number of rush orders to three per month by September, 2001;
- Reduce inventory level by 10 percent per year for the next three years;
- Double inventory turns over the next three years;
- Decrease number of suppliers by 10 percent by September, 2002.
Other targets would involve: shipping charges, number of order pick-ups, ratio of number and dollar value of purchase orders to number of purchasing agents, long distance phone charges, obsolete inventory, etc.
Negotiations with suppliers
At least once a year, you should approach each of your major suppliers to negotiate prices and discuss service-level agreements. Prepare a report which compares supplier history for a given product family or summarizes all products purchased through the supplier. You can use this data to measure the suitability of various vendors. It also provides a basis for negotiating better service and prices.
It’s better to rely on as few suppliers as possible to strengthen your bargaining position. Maintain a roster of backup suppliers in case primary suppliers are unable to deliver due to strikes, shortages, etc.
For multi-plant environments, purchase high-volume common parts centrally from a single supplier. This is difficult to coordinate and win local cooperation for, but it will lead to substantial savings, better service and increased productivity. While companies’ central purchasing departments will likely negotiate blanket agreements based on such things as price, service-level expectations and estimated annual volume, individual plants still control their own releases from the supplier.
A CMMS with multi-warehouse capability is key to allow plants to effectively manage their suppliers. If all plants have access to the same purchasing system through a wide-area network, client-server environment, or the Internet, each plant can obtain parts from its own storage facility, a regional storage facility, central stores, and/or another plant. This will lower overall inventory levels across the operation.
Here are some rules to remember when ordering from suppliers:
1. CMMS — Reaching a predetermined reorder point triggers the stockkeeper, maintenance personnel, or purchasing agent to initiate a purchase order. A CMMS removes the guesswork about when to reorder stocked parts, thereby minimizing costly stockouts. As well, the purchaser can prepare a requisition directly from within the work order screen of the CMMS. Then the CMMS or an interfacing purchasing module of an ERP system can generate the purchase order.
2. Spare parts — Every purchased piece of equipment seems to be accompanied by a spare parts list which is three times the value of the original equipment. Check to see if the part is common to another piece of equipment; check for generic alternatives from cheaper, local sources; ask about reconditioned or used parts; investigate tooling an expensive part in-house or at a local machine shop; weigh the cost of stocking the part versus the net cost of downtime, plus a possible premium for a rush order. Parts usage history obtained from your CMMS can help you make these decisions. Advanced CMMS packages will even analyze current lead-times, reorder points, and min./max. levels to suggest lower cost alternatives based on historical actuals.
3. Expensive items (capital expenditures) — Try to obtain at least three quotes, making sure every vendor is quoting on exactly the same specifications. Compare the extra time and labour cost of processing the extra quotations (say an added 20 minutes), with the potential savings of thousands of dollars and you may find it’s worth the trouble. Also, don’t buy a Rolls Royce when what you need is a wheelbarrow. For example, determine the life remaining on a piece of equipment — don’t buy expensive replacement parts which will out-last and out-perform the equipment itself. A CMMS can help compare maintenance costs associated with different vendors’ equipment by looking at total cost of ownership and life cycle costs. This is especially useful across multiple plants.
4. Contractors — Whenever possible, try to obtain three quotations prior to contracting work. If you’re rushed, at least get a verbal estimate of the total cost. If this is not possible, obtain a verbal estimate of the contractor’s per diem rate and probable expenses. If you forget all of the above, at least ask for and discuss a written confirmation of work performed, materials used, and expenses incurred prior to the contractor’s departure. Do this while the details are fresh in everyone’s mind. By recording this information on the CMMS, future contract work can be better controlled. Some CMMS packages have separate modules to track contract maintenance hours and dollars separately from internal labour, purchased parts/services and overhead.
5. Expediting — This is a must for critical parts, expensive items, or items with long lead times. Expeditors are a nuisance to suppliers, but invaluable to you for ensuring that deadlines are met and downtime is minimized. A CMMS can act as a tickler file for triggering key dates for expediting. But, a good supplier partnership goes a long way to ensure that expediting is replaced by simply meeting established service level goals.
6. E-procurement — The Internet offers huge potential for sourcing parts and services from around the globe; a variety of e-marketplaces such as auctions, buying groups, shopping malls, and brokers are accessible online. Replacing the Electronic Data Interchange (EDI) software of yesteryear, the CMMS can interface with these e-marketplaces or to a given supplier, and complete transactions electronically including quotations, order selection via electronic catalogue, purchasing, receiving, invoicing and even payment. This eliminates errors, reduces transaction times, and improves efficiency through the elimination of paper. But, caveat emptor — let the buyer beware; although supplier pricing is more competitive given the efficiencies and greater options, be wary of those vendors that compromise quality and delivery in order to compete on cost.
Good supplier management requires you to keep proper records. The following shows some of the supplier history captured by a good CMMS:
- Parts purchased from a given supplier;
- Total volume purchased (current year to date, last year);
- Average lead time; of late shipments and duration of delay;
- Number of over-shipments;
- Number of short-shipments;
- Number and value of damaged goods shipped;
- Number of substitutions; and
- Number of times improperly invoiced.
Rather than relying on gut feelings or vague recollections, suitable records are powerful tools in negotiating with suppliers.
David Berger is the managing director of Grant Thornton Management Consulting in Canada and the founding president of the Plant Engineering and Maintenance Association of Canada. You can reach David at dberger@GrantThornton.ca