MRO Strategies: Swamps, alligators and MRO

No matter the industry, every procurement group deals with maintenance, repair and operations (MRO) expenditures. For companies in the manufacturing space, MRO is obviously a very large portion of their total spending. But nearly every other type of organization also has MRO expenditures that require sourcing expertise, whether they are vertical sectors like retail, government, warehousing and distribution or even financial services.

MRO isn’t just a maintenance or repair process. It also involves sourcing and procurement strategies to optimize money spent on operational tools, supplies and services. Spares and consumables also require different methodologies. Gloves, for example, are used and discarded rather than being recycled back into inventory, and although parts are sometimes replaced after they wear out they might also be repeatedly repaired and reused. 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 original equipment manufacturer (OEM) often requires replacement parts and spares, schematic diagrams, maintenance and user training, and diagnostic tools to 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.
• Internal customer departments 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 and operate a piece of electromechanical production line equipment averages 20% of the initial equipment purchase cost. When extrapolated over a typical 10- to 15-year equipment life, the maintenance expense far outweighs the initial purchase cost.
• Inconsistent equipment, hardware or fleet standards can exponentially increase the number replacement parts that need to be kept in inventory.

During the last few months, I’ve directed three of Strategic Procurement Solutions’ 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 city’s procurement group had significant costs involved in the maintenance of their citywide infrastructure, including maintenance of streets, lighting, buildings, parks, water treatment facilities and more.

Another of our efficiency reviews was for a U.S. Fortune 200 oil and gas company. MRO expenditures for this process production company were a significant segment of its $3 billion in annual procurement spending, and covered maintenance of pipelines, pumps, valves, heat exchangers, storage tanks, vehicles and more. It also had significant capital expenditure project expenses that overlapped with MRO expenditures in respect to suppliers and products.

In between these two reviews, I helped analyze the supply chain operations of a global technology company with significant MRO expenses related to their ongoing acquisition, configuration and distribution of laptop, desktop and tablet computing devices around the world.

Annual cost reduction and 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 to address as they implemented our recommendations.

There are four ways to wade through the swamp of MRO to streamline efficiency and capture optimal savings:

Method 1 - Standardize, standardize, standardize: Organizations benefit greatly by standardizing throughout their infrastructure. Prior to entering the supply chain management consulting arena 16 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 more than 5,000 branch locations. To better manage our branch and ATM networks, we standardized our teller-line computer systems, ATMs, furniture, safe-deposit box arrays, security systems, signage and advertising 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 quickly and to optimally maintain equipment through our own maintenance infrastructure.

Method 2 - Get visibility into inventories: MRO expenditures can’t be managed until procurement has visibility into what is being held in inventory. I remember working with an electric utility company with around 5,000 employees. When we evaluated their MRO expenditures, we found the company inventoried 46 different brands and styles of work gloves in its six inventory warehouses. The energy firm’s project sponsor wanted to 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 conference room. We arranged the gloves into groups by type. Then, we brought the company’s maintenance managers into the room. Within an hour, it became clear that just eight styles of gloves would satisfy the requirements. With that decision made, the procurement group was able to solicit pricing from glove manufacturers and 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 3 - Leverage the power of strategic supplier relationships: No matter how competent our own MRO product management practices, the capabilities of key MRO distributors are usually more sophisticated. So partnering techniques like supplier-managed inventories (SMI), kanban and just in time (JIT) can be very helpful. Suppliers will apply their staffing and resources to help solve the client’s MRO challenges.

Method 4 - Negotiate all lifetime cost factors for capital purchases: Capital equipment acquisitions must be strategically planned and timed 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 only negotiate with the OEM for the purchase price for the initial equipment purchase and maybe an initial set of spare maintenance parts. Once the capital expenditure portion of the project is completed, the capital project manager or engineering, procurement and construction firm gallops off into the sunset and to their next project.

It’s only then that too many procurement groups discover that nobody pursued ongoing discounts with the OEM equipment provider. After the fact, what discount do you think the OEM will provide when then asked by the procurement group? Too often the answer is, “Here’s our published price list.”

Instead, top procurement teams must position themselves for the initial negotiation so that lifetime costs can be optimized. Ideally, OEM standards should be locked into multi-year contracts that address all lifetime total cost of ownership factors, including purchase price, installation cost, initial spares and provisioning, discounts on consumables, replacement parts, user training, maintenance training, maintenance services, the right to duplicate user manuals and more.

Many other techniques certainly apply to the swamp of the MRO spend category. But without a strategy and the right methods, the MRO swamp will bog a procurement group down and eat them for lunch. However, with the right approach, we can manage this challenging category.