Fixing MRO procurement: manufacturers must optimize maintenance, repair and operations processes to streamline the supply chain for parts and supplies

Fixing MRO procurement: manufacturers must optimize maintenance, repair and operations processes to streamline the supply chain for parts and supplies – Supply Chain Management

Larry Tuck

Asset-intensive industries–those that depend on complex and costly machinery to manufacture products–have made great strides in improving efficiency and reducing cost in areas ranging from scheduling manufacturing equipment to inventory management. The next frontier for optimizing processes of these industries is in managing maintenance, repair and operations (MRO), says a report titled “Flexible MRO Procurement: Solving the MRO Supply Puzzle,” from the Yankee Group.

MRO procurement for these companies involves sourcing and buying not only production consumables, such as grease, oil, nuts and bolts, but also specialty items, such as filtration parts, electronics, instrumentation and services (e.g., motor rewinding and safety training). Improper MRO management leads to three possible outcomes, according to the report:

* Running out of parts. Manufacturing downtime due to machine failures can cost thousands or even millions of dollars. Picture the breakdown of a machine in a paper manufacturing plant that winds manufactured and just-dried paper on large rolls. When the winder breaks, the entire paper manufacturing process stops. If the maintenance department does not have the parts to repair the equipment, the machine operators stand idle, and in-process materials become unusable.

* Having too much inventory. The result is excess carrying costs associated with obsolescence, storage and handling.

* Failing to aggregate spend and leverage MRO procurement. When individual plants source and purchase MRO items, the lack of spend aggregation and visibility prevents companies from capitalizing on volume discounts and sourcing from low-cost suppliers.

“The cost of manufacturing downtime in those types of industries is much more severe or acute than in other industries,” says Mike Dominy, a senior analyst for the Yankee Group and author of the report. “An awful lot of the costs of those industries are tied up in those assets. And because of the cost of the big assets, like a blast furnace to make steel or pulp and paper manufacturing machines, you have to run them as much as possible. The output from those machines is where you make your money.”

Traditionally, asset-intensive manufacturers (e.g., steel, pulp and paper, chemical and automotive producers) have held excess inventory or relied on local distributors to avoid downtime–inefficient solutions, but preferable to having a production line come to a halt.

“MRO, we’re finding, is a category that a lot of our clients never paid much attention to,” says Mike Gallucci, manager of commodity services at Freemarkets. “It’s often left up to individual plants to manage, or in the case of office supplies, an office manager. There’s never been a focus on trying to understand what they have in terms of an MRO spending. Now we’re seeing a shift to people realizing, wow, we spend a lot on MRO items. What can we do to try to rationalize our supply base, control costs in this area, and basically bring some discipline and process to an area that never really had any before.”

But companies often encounter internal resistance to changes in MRO procurement procedures, Dominy says. “The maintenance folks who care for those pieces of equipment take a lot of pride in the performance of the equipment. Their whole purpose in life is to keep the machines up and running, and reducing MRO inventory may not seem to be in line with that goal.

“When someone comes in from headquarters and tries to exert control over the spare parts that are required to keep their ‘baby’ running, there’s going to be a lot of resistance to that. The people who do maintenance on the big capital machines have been around a long time. They’ve seen a lot of initiatives and fads come and go, many of those with not a lot of success.”

In addition, executives often view MRO management as nonstrategic, simplistic and easy for a procurement outsourcer to manage. But according to the report, this orientation misses the complexity associated with managing MRO and the dramatic impact ineffective MRO management can have on a manufacturer’s success.

“Even people from the procurement world look at an MRO part and think, ‘that’s a bolt,’ but it may be more complicated than that,” Dominy notes.

To be fair, he adds, “There have been a lot of other fish to fry in the procurement organization–rationalizing the supplier base and getting control over less mission-critical MRO items, like office supplies. There was a lot of work that could be done there first, so it’s not surprising that these more complicated MRO issues haven’t been addressed.”

Challenges Abound

The largest obstacle to rationalizing MRO procurement is probably the vast amount of data involved. For example, service parts for a manufacturing plant may include thousands of discrete items sourced from dozens of suppliers, and large manufacturing plants typically operate multiple plants across the country and around the world.

“The largest users of MRO are the manufacturing companies, and they often have multiple facilities in multiple locations. So collecting that information can be a very arduous task,” says Gallucci.

“A lot of [the problem] has to do with the lack of clean data in existing enterprise systems. When you look at a lot of these items in the MRO space, the content is all over the place, and getting the information out of those systems can be a very challenging effort,” agrees Dominy.

Other challenges include:

* Highly fragmented suppliers. A highly fragmented supply base, representing multiple sources of supply, makes spend aggregation and visibility difficult.

* Manufacturer channel challenges. Supply channels with local distributors and manufacturers add complexities to the sourcing process. Manufacturers of MRO items ship direct to customers and use distributors, confusing customers. Some plants may receive parts from a distributor, while others receive parts from the manufacturer.

* Poor electronic content. MRO-related data often resides in multiple applications, and the data is inconsistent or missing. The specifications for many MRO items are precise and include information beyond price and size, making electronic content management and integration essential.

* Product standardization. The lack of product standardization across certain MRO items makes it difficult for companies to identify whether the item listed meets their requirements.

* Spend management. Multiple sources of supply and sources of consumption make aggregating and analyzing spend difficult.

* Price management. With thousands of suppliers and millions of parts to manage, companies find it nearly impossible to keep up-to-date pricing data on each item they purchase.

* Contract implementation. Companies struggle to implement and maintain contracts for MRO items. Traditional MRO purchasing is paper based and often follows undesirable practices, such as issuing a PO for items after an employee has received the item from an unauthorized supplier.

* Transaction cost per PO. The level of technology sophistication varies widely among players in the MRO sourcing process. A range of technologies and applications makes exchanging information and coordinating business partners challenging and costly.

Recommendations

MRO procurement for asset-intensive organizations cannot be easily outsourced to a business process outsourcer (BPO), Dominy says. Most outsourcers do fine with simpler items, such as officer supplies, which are often included under the MRO heading. “But when you get into blue-collar MRO or manufacturing MRO, outsourcing to a traditional outsourcer may not be the best course of action,” he says. Traditional outsourcers are most effective when they can aggregate requirements and source for high-volume items as opposed to providing some of the additional MRO requirements at a plant level.

Manufacturers should look for a BPO that has domain experience in MRO or a partner that focuses on the full breadth, depth and complexity associated with MRO sourcing and procurement. Dominy cites Freemarkets and Supplyforce as two companies that stand out in developing MRO procurement expertise.

Companies that want to reduce costs by improving MRO sourcing and procurement should take five key steps, the Yankee report concludes:

* Identify a few mission-critical commodity categories. Piloting a small but important group of commodities is essential for evaluating the MRO solution provider’s capabilities.

* Pick one sourcing and procurement provider that has MRO domain knowledge within commodity categories identified.

* Require the MRO solution provider to integrate its procurement and sourcing systems with your purchase order management system–usually an ERP, e-procurement or maintenance management system.

* Insist that the MRO solution provider translate all of the MRO-related POs, standardize a significant amount of the MRO product content, identify price negotiation opportunities and develop a channel rationalization strategy that leverages suppliers, OEMs and master distributors.

* Review the MRO solution provider’s performance. Companies should evaluate the MRO provider’s results and assess its capabilities to handle more commodities. Assuming the provider’s performance is satisfactory, manufacturers should add MRO items to the list of items being managed by the provider. Naturally, manufacturers should also conduct periodic reviews of the provider’s performance.

“MRO is key for asset-intensive companies,” says Dominy. “Because if one of those machines fails, that asset is not being used, and the revenue-generating capability of those machines stops. And for a manufacturing company, the output from those machines is the money.”

Larry Tuck is a California-based freelance writer specializing in business systems and technology.

Company Information

Freemarkets

Pittsburgh, Pa.

888/434-0500

www.freemarkets.com

Supplyforce

King of Prussia, Pa.

610/293-2260

www.supplyforce.com

The Yankee Group

Boston, Mass.

617/880-0227

www.yankeegroup.com

www.frontlinetoday.com

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