Indirect Procurement: ORM Versus Mro
The term ORM (Operating Resource Management) is now used commonly to describe the many ordinary office products and services that organizations purchase day to day: office supplies, furniture, forms, travel services, computers, janitorial and maintenance services, light bulbs, extension cords, and the like. Usually thought of as high-volume and low-dollar items, they nonetheless amount to a significant portion of a company’s total spending. To give some idea of the scale, in the U.S. alone in 2000, the overall market for ORM products and services reached $725 million.
ORM (Operating Resource Management): ordinary office products and services that organizations purchase day to day.
Over the years, the abbreviation MRO—for Maintenance, Repair and Operations—has come into popular use, and today most software vendors selling solutions for indirect materials (and, therefore, the popular business press) have begun to mistakenly lump all indirect goods together under this heading. But there is an important distinction that should be made. Office products should not be confused with mission critical overhaul or maintenance items. In purchasing, the two groups of goods are often known as white collar ORM (staples and notepads) and blue collar MRO (replacement parts), and the respective purchasing processes in terms of the levels of complexity, cost, and volume, vary enormously. Many analysts believe that MRO is in fact the much more important of the two.
“In spite of the current hype about the ability to buy office products or janitorial supplies over the Web,” contends Lisa Williams of the Yankee Group, “the real ’gating’ factor to growing this B2B e-commerce market will be the use of the Internet to manage and procure mission-critical items such as component parts, expensive plant spares, and outsourced manufactured items.”[2]
Certainly, procurement of white collar indirect supplies tends to be less complex than procurement of blue collar, or industrial, MRO, for obvious reasons. Indirect goods are seldom time or mission-critical, and as important as pencils or notepads are, items like these can be purchased from any number of wholesale—or retail—vendors, each selling similar, if not identical, brands. These items can easily be described and cataloged—black ball-point pens or bond white liquid paper—and therefore do not require the specialist expertise necessary when purchasing complex electrical repair components or highly engineered machine parts necessary for maintenance of complex manufacturing equipment. After all, it is much easier to quickly look up in a catalog—or run down to the local retail outlet—to purchase paper clips than it is to search for and procure a specially tempered, metal valve stem.
The consequences of misordering are also obviously different (see Table 2.1). Getting the wrong color ball point pen is bad, but buying the wrong shear pin or gasket for a critical assembly-line component can be catastrophic. Also blue collar MRO orders are often single-sourced, purchased in limited quantities, and are necessary to prevent the shutdown of the production lines. Blue collar MRO orders can easily amount to several hundreds of thousands of dollars, and require special service contracts. Blue collar items are often listed as inventory, tied into the company’s inventory system, and accompanied with critical and complex design and performance regulations. Purchasing and maintenance employees often need to do a good deal of time-consuming prescreening of suppliers in order to understand which vendors will be trustworthy. MRO buyers are usually looking for high levels of quality control and technical support from their suppliers, so that replacement parts are delivered quickly, often at a few hours’ notice. As a result, the average company uses up to 50 different MRO suppliers, and over a third of U.S. companies use 50 or more.[3]
There are two key cost areas in indirect procurement. The first is simply the straightforward inefficiency and labor-intensity of the process itself. For most companies, the centralized purchasing function has traditionally been responsible for buying a good portion of all indirect, non-production goods—whether blue or white collar—with around half of the workload of a typical purchasing department dedicated to these low-value, repetitive orders. The average level of productivity for this area is appalling, and it is one of the most laborintensive areas of modern business.
| Issues | “White Collar” ORM | “Blue Collar” MRO |
|---|---|---|
| Number of Orders | Moderate | Often hundreds of thousands |
| Quantity per Order | Few to moderate | Varies from one to thousands |
| Delivery Criticality | Generally low | Routine to critical to the point of work stoppage for delivery failures |
| Ratio of Single Source | Low | High percentage (up to 30% by count, more by value); may be singe/very limited sourced |
| Services/Contracts | Some | Almost always required—performance is critical in many cases |
| Accounting Tie Back | Generally only to a GL account | May be multiple—to work order, equipment, GL and other accounts, capital tie back as well |
| Controlled Inventory | Rarely | Always |
| Internal Item Master | None | Frequently—usually critical functionality |
| Vendor Performance Measurement | Minimal—usually by contract | Almost always—variable measurement criteria |
| Source: Gartner, “The MRD E-Procurement Civil War: Blue vs White,” Dan Miklovic & Carl Lenz, February 2000. |
Part of the problem is that indirect procurement policies are seldom standardized in large or multisite companies, varying greatly between departments and between branch and corporate office. The accompanying approval policies are usually cumbersome, sometimes requiring multiple levels of sign-off, which causes delays and internal inconvenience when employees wait for needed items and middle-management staff members put off signing burdensome paperwork. In exasperation, approval thresholds are raised, and spending anarchy ensues, with only the larger ticket items falling into an even more stringent and extended approval process.
There is a second area of cost. For most companies, this cumbersome, centralized process is augmented by independent, or maverick, buying by employees throughout the organization who buy items—paper, scissors, light bulbs—when needed independently, often at nondiscounted and even retail prices. This maverick buying—that tendency for individuals, or often entire departments, to buy “off-contract” without taking advantage of negotiated company discounts—is often rampant, particularly among larger companies, and typically can account for a staggering average of between 30% and 45% of all indirect procurement spending. To put the effect of this maverick buying phenomenon into perspective, consider that at these rates a typical billion-dollar company would be losing up to $10 million each year just in lost discounts alone. The smaller the company, the less formal the process, as a rule, and for those non-manufacturing companies that do not see purchasing as a core competency, a frightening 84% of indirect materials are purchased simply by employees visiting their local retail outlet.[4] This “rogue buying” can be a significant cost to companies, and even a modest reduction in maverick purchasing can significantly cut procurement costs.