From 2014 to 2017, the price of MRO inventory management services has been increasing 0.6 percentage points from 9.5% to 10.1% markup per item. Demand growth has been the primary factor contributing to increasing prices, while falling input costs have been preventing prices from rising at a more accelerated rate.
Rising demand has been pressuring prices upward during the period as providers have had leeway to raise prices without risking a loss of business. In particular, growth in manufacturing capacity utilization (MCU) and private investment in industrial equipment and machinery indicates buyers are operating and purchasing more machinery. Therefore, businesses need access to more MRO supplies that keep machines and the areas those machines occupy functioning and safe. As the number of MRO supplies in stockrooms increases, more buyers seek to outsource their stockroom management. Outsourcing MRO inventories better ensures a buyer’s operations rarely encounter downtime due to having no access to MRO supplies that keep machines operational.
Nevertheless, in the past three years, the prices of many critical MRO supplies have been falling, including the price of lubricating oils. Prices for lubricating oil have been decreasing as the price of crude oil has been declining. In turn, MRO inventory management service providers have been able to purchase lubricating oil at lower prices and pass these savings on to buyers in the form of reduced service rates. However, lubricating oil prices are at moderate risk of fluctuating unexpectedly. Therefore, to protect their margins, lubricating oil manufacturers tend to curb how much they lower prices, thereby limiting the impact of declines in service provider’s purchase costs on service rates. Meanwhile, prices for electrical equipment have also been declining due to declining copper prices, a key input in electrical equipment production, thus contributing to further downward pressure on service prices.
Finally, price volatility has been low because low market share concentration has been prompting competition among suppliers. Low price volatility enables buyers to accurately plan for their MRO inventory management service purchases. Buyers, however, are still advised to enter into SLAs that lock in a specific markup rate due to anticipated price growth in the three years to 2020.
Service prices for MRO inventory management are forecast to increase 0.2 percentage points in the three years to 2020 to reach a markup of 10.3%. This trend will be the result of key input costs returning to growth and demand remaining strong.
Both the price of lubricating oils and the price of electrical equipment are anticipated to return to growth in the coming years. Specifically, the price of lubricating oils will rise drastically. Crude oil prices are forecast to rebound as global oil production is slashed. Increases in the price of crude oil will promote price growth for lubricating oils, in turn encouraging service providers to increase MRO inventory management service rates. At the same time, the price of electrical equipment will grow on the back of global economic growth, raising suppliers’ purchase costs and further promoting growth in service rates.
Moreover, demand will remain strong during the period. The MCU and private investment in industrial equipment and machinery are forecast to further increase and contribute to growth in service prices. In addition, corporate profit is forecast to return to growth, thereby increasing demand from corporations and further encouraging service rates to rise.
Because prices are forecast to increase through 2020, buyers are encouraged to enter into SLA agreements now to take advantage of lower markups. Still, for buyers that do wait to procure services, ProcurementIQ expects that price volatility will remain low. Therefore, buyers will be able to accurately plan for purchases. Additionally, substitute goods like MRO inventory software are expected to become more viable as the software becomes more advanced. Buyers can use the increasing viability of substitute goods as leverage during negotiations with suppliers in an attempt to negotiate lower service prices.