|No matter the industry, every procurement group deals with Maintenance, Repair, and Operating (MRO) expenditures. For companies in the manufacturing space, MRO is obviously a very large portion of their total spending. But nearly all organizations also have MRO expenditures which require sourcing expertise, whether they are verticals like retail, government, or even financial services.
MRO is a messy category for many reasons, including the following:
- Every organization’s MRO requirements are different. Capital equipment selected by a manufacturing firm from a particular OEM will require replacement parts (spares), schematic diagrams, maintenance and user training, diagnostic tools, etc. be procured from that OEM during the lifetime of the assets;
- Name brand tools, products and services often are available only through protected distributor territories, thus limiting competition in particular geographic areas;
- Our internal customers each seem to have strong opinions about which products or suppliers are the “best”;
- Initial capital project decisions live on for the lifetime of the assets. For example, the annual cost to maintain a piece of electro-mechanical production line equipment averages 20% of the initial equipment purchase cost. When extrapolated over a typical ten to fifteen year equipment life, the maintenance expense far outweighs the initial purchase cost;
- Inconsistent equipment, hardware, or fleet standards exponentially increase the replacement parts which need to be kept in inventory;
In the last few months, I’ve personally directed three of Strategic Procurement Solutions 360o Supply Management Efficiency Review projects for organizations in very different sectors. One of the projects reviewed Procure-to-Payment (P2P) operations for a metropolitan city spending around $200 Million each year. That procurement group had significant costs involved in the maintenance of their citywide infrastructure, including maintenance of streets, lighting, buildings, parks, water treatment facilities, etc.
Another of our efficiency reviews was for a US Fortune 200 oil/gas company. MRO expenditures for this process production company were a significant segment of their $3 Billion in annual procurement spending, and covered maintenance of pipelines, pumps, valves, heat exchangers, storage tanks, vehicles, etc. They also had significant CapX project expenses which overlapped with their MRO expenditures in respect to suppliers and products.
In between these two reviews, I helped to analyze the supply chain operations of a global technology company which had significant MRO expenses related to their ongoing acquisition, configuration, and distribution of laptop, desktop, and tablet computing devices.
Annual cost reduction/efficiency improvements we identified for each of these different clients ranged between $1.4 Million and $24 Million. In each case, MRO expenditures were among the most complex categories for the organization to address as they implement our recommendations.
The remainder of this article will discuss four ways to wade through the Swamp of MRO so as to streamline efficiency and capture optimal savings:
Method One – Standardize, Standardize, Standardize: Organizations benefit greatly by standardizing throughout their infrastructure. Prior to entering the SCM consulting arena sixteen years ago, I led much of the sourcing for one of the largest American financial services enterprises. Our organization had nearly 200,000 employees and 5,000+ branch locations. To better manage our branch and ATM networks, we standardized our teller-line ATM machines, computer systems, furniture, safe-deposit box arrays, security systems, signage, furniture, and displays. We even established several sizes of “Branch in a Box” which were configured for various standard branch layouts. This allowed us to reduce our costs to equip a new branch location in a prompt manner, and to optimally maintain equipment through our own maintenance infrastructure.
Method Two – Get Visibility into Inventories: MRO expenditures can’t be managed until procurement gets visibility into what is being held in inventory. I remember working with an electric utility company which had around 5,000 employees. When we evaluated their MRO expenditures, we found that the company inventoried 46 different brands/styles of work gloves in their six inventory warehouses. The energy firm’s project sponsor said “Let’s just send the inventory listing to people at each location and let them develop standards.”
But we wisely insisted on having samples of each pair of gloves brought to one central company conference room. We arranged the sample gloves into groups by type. Then we brought the company’s maintenance managers into the room. Within an hour, it became abundantly clear to the maintenance leaders that just eight styles of gloves would satisfy the company’s requirements. And with that decision made, the procurement group was able to solicit pricing from glove manufacturers/distributors and significantly lower their costs. Without the samples, though, they would never have been able to consolidate the glove selections just using the inventory listings.
Method Three – Leverage the Power of Strategic Supplier Relationships: No matter how competent our own MRO product management practices, those of key MRO distributors are usually more sophisticated. So partnering techniques like Supplier Managed Inventories (SMI), KanBan, and JIT can be very helpful. And our suppliers will apply their staffing and resources to help solve our MRO challenges.
Method Four – Negotiate All Lifetime Cost Factors for Capital Purchases: Capital equipment acquisitions must be strategically planned and timed so as to comprehensively address lifetime cost factors. The best time to negotiate ongoing discounts on replacement parts and training is when the initial acquisition occurs. Don’t allow what some companies do; which is to merely negotiate with the OEM the purchase price for the initial equipment purchase and (maybe) an initial set of spare maintenance parts. Once the CapX portion of the project is completed, the capital project manager (or EPC firm) just gallops off into the sunset and on to their next project.
It’s only then that too many procurement groups discover that nobody negotiated ongoing discounts with the OEM equipment provider. And after the fact, what discount do you think the OEM will provide when then asked by the procurement group? How about “Here’s our published price list.”
Instead, top procurement teams must position themselves for the initial negotiation so that lifetime costs can be positioned optimally. Optimally, OEM standards should be locked into multi-year contracts that comprehensively address all lifetime TCO factors, including Purchase Price, Installation Cost, Initial Spares; Discounts on Consumables, Replacement Parts, User Training, Maintenance Training, and Maintenance Services; Right to Duplicate User Manuals, etc. With these benefits locked in place for most or all of the asset lifetime, total cost advantages can be achieved.
Many other techniques certainly apply to the swamp of the MRO spend category. Without a strategy and the right methods, though, the MRO swamp will bog a procurement group down and eat them for lunch. But with the right approach, we can manage this challenging category.
Strategic Procurement Solutions helps companies and governmental groups to optimize their supply management operations. We do this in just a few short weeks through our 360o Supply Management Efficiency Assessments. Please contact us at Info@StrategicProcurementSolutions.com for information about this service.
About the Author – Mark Trowbridge, CPSM, C.P.M., MCIPS is one of Strategic Procurement Solutions founders. His 30 years in procurement leadership began in the Manufacturing, Airline, and Financial Services sectors…culminating in a role leading three-quarters of the strategic sourcing activities, and all of the contracts management responsibilities, for Bank of America (then, the USA’s third most-profitable company). During his final two years with Bank of America, Mark’s areas of responsibility delivered a Quarter Billion Dollars in cost reductions. During the last 15 years, Mr. Trowbridge has worked in the consulting field with many leading corporate and governmental clients. His business travels have taken him throughout North America, Europe, the Middle East, Asia, and Malaysia. He is a frequent author on supply management topics, with articles appearing in publications like Supply Chain Management Review, Inside Supply Management, IFPSM’s eZine, eSide Supply Management, and Strategic Procurement Solutions’ own Best Practices in Supply Management Journal. Mark’s is among the top 1% Most-Viewed LinkedIn profiles.