Tackling MRO complexity to realise the benefits of supplier consolidation – an opportunity for UK manufacturing. By Richard Raybould
For most manufacturers, procurement strategies for direct spend items – such as raw materials and items forming part of the finished product – are carefully planned and scheduled to ensure value for money, high levels of availability and optimal inventory holding.
With indirect items such as maintenance, repair and overhaul (MRO) products and industrial consumables however, the procurement process is typically far more unpredictable and ad hoc. Purchasing from multiple local suppliers, holding excessive amounts of inventory due to unpredictable usage and thousands of order and invoice transactions are common occurrences for many manufacturing companies. As the cost for each individual item is generally relatively low, rationalising procurement is not frequently prioritised – and when it is, the task at hand can be complex and daunting.
Take for example a manufacturer holding 10,000 stock-keeping units (SKUs), being purchased by numerous individuals from stores staff to engineers, technicians, managers and production staff, and with no regulation over supplier choice or frequency of ordering. A single high use item – perhaps an abrasive disc, spanner or disposable glove – could be being purchased by different people, from different suppliers, at different prices, at the same time, and without consideration of stockouts or overstocking. Across one plant this could prove a minefield, but across a multi-site organisation, standardising the brand, model, price and stock could seem an insurmountable challenge. It is generally recognised that whilst spend on MRO and industrial supplies can represent around 15 to 20% of total spend this category can equate to 80% of purchasing transactions.¹
Optimising the MRO procurement process can therefore not only deliver significant savings in terms of pure product cost, but also in administrative costs, a reduction in inventory, and supply base.
In a study by the Aberdeen Group², a survey summarised the key challenges cited by those tasked with procuring industrial and MRO supplies.
Lack of visibility into spend was highlighted as a significant challenge faced by organisations aiming to streamline and optimise MRO procurement, closely followed by an inability to ensure compliance with supplier contracts.
Where multiple individuals are empowered to purchase, duplication of orders is highly likely as teams work in local silos and there is no centralised control over ordering, leading to a lack of accountability for MRO procurement.
Within multi-site organisations, buying practices at site level often result in individual loyalty to local, niche suppliers, meaning hundreds of companies may be issuing invoices to a single site. These suppliers often have a relatively small share of the company’s overall spend and are therefore unlikely to invest in delivering value adding initiatives.
A lack of traceability also leads to an inability to create accurate purchasing plans and strategies, as organisations rarely have a true picture of the volume of items used and the correct amount to be held in stock to maintain optimal service levels. The unpredictable demand of MRO items can lead to holding ‘just in case’ stocks which ties up cash in inventory and, as there is often a lack of traceability and a large number of people responsible for procurement, further stock could continue to be ordered due to a shortage in one area when large supplies are available elsewhere.
The implication therefore is an excessive number of MRO parts and SKUs, supplied by hundreds of local suppliers with no incentive to negotiate on price; a high volume of transactions expending unnecessary administration time; lack of standardisation and best practice amongst the supply base; and high obsolescence of MRO part numbers which may be frequently recreated despite high volumes of stock already in place.
The complexities of MRO procurement mean that the costs associated with procurement and inventory management are greater than the product item price, increasing the total cost of ownership many times over. In fact, in a typical cost profile of MRO and industrial supplies, only 40% of the total product spend can be attributed to the product itself. Some 35% is down to the cost of inventory – storage, handling and obsolescence costs – while the remaining 25% is accrued through the cost of procurement. This includes the hours of work associated with selecting products, ordering and receiving and making payment, as well as the cost of errors. This means that for every £100k of annual spend on MRO and industrial supplies products, the total cost of ownership is around £250k or more when all factors are considered.
The Aberdeen Group study also showed that ‘best in class’ companies were successful in achieving cost reductions of 19% by taking a considered approach to MRO and procurement. However, the benefits were not purely financial – best in class organisations also: achieved a 14% reduction in parts inventory; reduced supply base by 17%; and recorded a reduction in administrative costs of 18%.
The study, based on a benchmark of 150 companies, found that the organisations performing poorly could only record savings of 2-3% across each of the above categories, while even average companies noted a saving of between 7 and 9%, pointing to a clear opportunity for the majority of organisations.
So what constitutes ‘best practice’ in MRO and industrial supplies procurement and how are cost and production efficiency benefits really achieved?
A number of factors, which regulate people, processes and systems, contribute to best practice. To extract the greatest value, each facet should be seen not as a standalone concept but as a cog in a wider machine, linking to other aspects of procurement and bringing people and processes together to ensure everything – and everyone – operates uniformly.
Product optimisation and inventory management are closely related, for example. Organisations should regularly review usage of both OEM (original equipment manufacturer) and substitute parts to ensure the most suitable products are purchased and in stock, while applying lean and 5S principles helps avoid overstocking, obsolescence and stock-outs within an engineering stores environment. Product optimisation ensures that the same or similar items are not being purchased through multiple suppliers, reducing the supplier base, while rationalising the design and layout of the stores facility simplifies inventory management on site.
Applying best practice to MRO can also contribute to enhanced energy efficiency and even health & safety. Careful analysis of personal protective equipment (PPE) needs can help avoid over-specification and the associated overspend while maintaining correct protection for employees. Similarly, reviewing energy-intensive assets such as motors, drives and pumps to ensure the most efficient models are available – as well as implementing a robust repair/ replace policy – can cut costs through reducing energy consumption.
In terms of processes and systems, best practice in accounts payable and e-commerce are also linked – both online ordering and receiving consolidated invoices electronically cut down on transaction costs as well as saving employees’ time, freeing them up for value-adding projects. Efficient category management meanwhile, through implementing supplier service level agreements (SLAs) and scorecards, should aim to achieve in excess of 80% contract spend consolidation compliance.
To further optimise efficiencies among production or maintenance employees, lineside supply is an important factor to consider which involves making high volume industrial consumables available close to the point of use, rather than a long ‘walk and wait’ trip to stores. This approach improves plant productivity by ensuring employees remain at or close to their work stations.
Best practice, however, cannot be implemented successfully without being aligned to clear goals. Joel Roth, in his book ‘The 20% Solution: A practical guide to dramatic cost reduction in MROP procurement’, notes that: “When asked for their MRO goals, many procurement managers offer vague statements like ‘lower costs, better service, higher quality.’ Or, ‘I’d like to cut prices by 10%.’ Goals that are general are useless; they must be specific and measurable. Moreover, goals must be related to activity levels: it is probably unrealistic to expect a 20% cost reduction if production volume is increasing by 20%.”
The following examples of SMART – specific, measurable, achievable, realistic and timely – goals applied to the optimisation of MRO procurement help to demonstrate this principle:
• Improve signed-off operational cost savings by 25% over 3 years through vendor consolidation and partnering with strategic suppliers
• Reduce purchase to pay costs by 20% through the application of consolidated invoicing and vendor reduction
• Reduce working capital tied up in inventory by 10% over two years through the use of vendor managed inventory and consignment stock
• Reduce product consumption by 25% for fast moving consumables by implementing industrial vending
• Reduce the number of MRO related SKUs by 25% over three years through product standardisation and OEM conversion
Developing strategic relationships with a smaller number of suppliers can help achieve all of these objectives, as stronger partnerships lead to the delivery of value-adding services. By replacing a large, fragmented supplier base with fewer, longer-term relationships, organisations can leverage reductions in transaction costs and operational cost savings as the vendor is as motivated as the company itself to not only achieve savings, but add value through close collaboration. With fewer suppliers also comes more streamlined ordering, a reduction in the number of invoices, and less time spent on administration and stock handling.
Returning to the concept of best practice in MRO procurement, one additional factor can be implemented which has the potential to impact all other aspects – from product optimisation to category management – and manage the setting and measurement of goals: vendor managed inventory.
Choosing to outsource the management of industrial supplies and MRO is a strategy recognised by the Aberdeen Group as part of its 2006 report.
For organisations operating at ‘average’ level (that is, undertaking some best practice activity but recording savings of only around 7-9% compared to the 19% possible), the report recommends outsourcing specific areas of MRO procurement and management as one method of improving performance. The report notes that, as external providers understand market dynamics they are therefore able to leverage more favourable agreements, and also focus on more strategic cost reductions.
Far from considering MRO procurement a box ticked for companies ranked as best in class, the report recommends outsourcing key elements to maintain savings and make further gains in cost and efficiency benefits.
With the outsourcing of elements of MRO through vendor managed inventory and the use of on-site supplier personnel recognised within the industry as a viable tool for increased cost savings and enhanced efficiency, identifying a trusted supplier with whom to collaborate is just stage one of a multi-faceted partnership.
A suitable value adding supply partner must have excellent relationships with the manufacturers of MRO products and industrial consumables – able to not only leverage buying power, but also benefit from technical expertise, exclusive product ranges and OEM support. The supplier must be able to demonstrate past results, validated if possible by independent third parties, detailing the cost savings achieved alongside customer testimonials. They should have a track record of successfully implementing lean engineering stores and vendor managed inventory solutions, demonstrated by their own best-in-class supply chain, and show how their activities have delivered added value over and above pure cost savings.
One of Brammer’s key solutions for MRO procurement and management is its Insite service - effectively a dedicated Brammer branch housed within a customer site geared entirely to meeting the needs of that organisation.
By dealing with only one supplier, ordering is rationalised and purchasing power is leveraged. Without each local site ordering from their preferred supplier with different costs and codes, time spent processing paperwork is vastly reduced. Only one invoice per month can be produced, covering all items consumed, meaning organisations do not have to tie up resources in non-value adding activity – a major benefit of supply chain consolidation. When orders are received, they can be shipped as part of a consolidated delivery, creating further handling efficiencies as well as economies of scale.
To maintain and improve plant uptime, having the correct MRO products available at the time of need is imperative. While it is tempting to keep high inventories in stock, bringing on board a strategic MRO supplier can drive down unnecessary inventory and the associated costs. Effective MRO partners will often be able to deliver critical parts within 1-2 working days, therefore eliminating the need to hold these products on-shelf in stores.
By reducing the amount of customer-owned inventory and replacing with in-house consignment stock, paid for only once used, customers are able to reduce the amount of working capital tied up in stock. But, for a partnership with an MRO supplier to be successful, a number of prerequisites must exist. Responsibilities for each party must be clearly defined, with standards and objectives agreed at the outset. As this is a partnership approach, rather than a traditional supplier-customer model, regular reporting and reviews at the appropriate level must also be conducted to both communicate successes and highlight development areas – especially across multi-site organisations.
Richard Raybould is Head of Site Based Services at Brammer
To download the full white paper, please visit http://www.brammer.co.uk/insite
1. The 20% Solution: A practical guide to dramatic cost reduction in MROP procurement – Joel Roth, 2008.
2. The Maintenance, Repair and Operating Supplies Benchmark Report: Strategies for Improved MRO Spend Management – The Aberdeen Group, 2006.