Third-party MRO providers drive profitability

What’s on your shelf? When it comes to the spare parts, components and consumables in your storeroom, it’s not an idle question.
In fact, idleness has everything to do with the answer. After all, the manufacturing and distribution industries are changing at a rapid pace. Due to ever-increasing global competition and evolving consumer expectations, manufacturers are being pressured to produce at more efficient levels now than ever before.

Likewise, distribution centers throughout the United States are altering their practices to ship fewer full pallets and cartons with long lead times to more individual items for consumers and business customers that have to meet ever-tighter order cutoff times. In that high-performance environment, any downtime is costly; extended downtime because a needed part isn’t on the storeroom shelf is even more so.

For many manufacturers and distributors, this environment has put a focus on developing in-house maintenance, repair and operations (MRO) resources as a best practice.

Yet, many others are realizing just how difficult this management can be, not to mention how costly. With so many aspects involved in MRO management, they are seeking the services of third-party MRO providers instead, including SDI, Storeroom Solutions and Wolseley Industrial Group.

These third parties are not only helping manufacturers and distributors solve issues like buying leverage and inventory reduction by managing their storerooms and assisting them with their spare parts needs. They are also saving time and money by performing MRO services for them.

First, these third parties are managing procurement and ensuring the right amount of parts are delivered to customers when and where they want them. And second, they are helping companies purchase the right parts to begin with so they are no longer wasting money on expediting, rushed shipment and obsolete parts.

In return, the MRO industry is growing steadily. In fact, it is presently valued at $460 billion, with no signs that its value will decline anytime soon.

With this impending growth in mind, which companies should consider using the services of third-party MRO providers? Which pain points should they address when they hire them? And, perhaps most importantly, when should they outsource to third parties (and when should they not)?

A continuum of pain points
Oftentimes, companies choose to outsource to third-party MRO providers after they have dealt with far too many pain points—for far too long.

“From stock-outs of mission-critical parts that lead to unplanned downtime to the proliferation of their supply base, as well as low maintenance labor productivity due to the time spent waiting for parts they need for their machines, companies will typically encounter a variety of pain points before they outsource,” says Kurt Meiers, director of strategic sourcing at SDI.

In addition to productivity issues, Timothy Gregg, general manager of new business development at Wolseley Industrial Group, has found that potential customers lack control of their budgets and the data they have calculated for inventory.

“They know they spend millions in MRO, but since they don’t have control of their budgets, they often don’t know exactly what they spend their monies on,” Gregg explains. “And since they have too much inventory and lack the visibility of their data within their system, their catalog content is unreliable. They simply do not know how to get their arms around the data.”

Mike Weinberg, senior vice president of sales and marketing at Storeroom Solutions, believes a majority of manufacturers and distributors also recognize the need to initiate process improvements, and the value that can be realized as a result. But they oftentimes don’t know how to implement these processes into their operations.

“They recognize they need help to accomplish their overall goal of better profitability and management to drive down cost and improve quality,” Weinberg says. “If they don’t receive assistance, their process improvements may be poorly managed, leading to more pain points, such as poor maintenance efficiency and out of control inventory, that can further erode their plants’ profitability.”

A breadth of MRO services
When manufacturers and distributors seek the services of a third-party MRO provider, they may not know what should be improved upon first. After all, MRO is difficult to manage since so many people oversee it: There is no single point of accountability.

“Unlike direct materials, you have thousands of suppliers that make up the MRO supply chain; of that population, less than 5% will make up the majority of the spend,” Weinberg says. “There is a long ‘tail,’ so to speak, to the supply chain that is comprised of OEM suppliers and specialty distributors, which must still be managed. It is very systems and resources intensive.”

Consequently, many manufacturers and distributors now prefer to outsource the management of MRO to a third party that has the competence to manage the entire “tail” of the resources. The competitive nature of global markets has forced them to focus only on their core functions, and not non-core tasks like MRO.

“They realize MRO is a daunting task and they don’t want to be experts in areas that aren’t driving profits, so they’ll choose to invest in other aspects of their businesses instead—ones that definitely produce revenue and profit,” Weinberg adds. “They would rather hire a party that has the competence to do the job well.”

To better manage each facet of the “tail,” Meiers believes MRO should be perceived as a three-legged stool, as the following three distinct functions must occur to enable the process.

1. Sourcing and procurement: Manufacturers and distributors should focus on developing long-term, value-driven relationships with suppliers who can order spare parts and consumable materials more efficiently than they can. This efficiency reduces costs, and improves their supply chain processes.

2. Storeroom management: Manufacturers and distributors should analyze their parts needs and determine which inventory they actually need on their shelves. By reorganizing their storerooms, they can remove obsolete parts and reduce their inventory carrying, freight and handling costs.

3. Engineering services: Manufacturers and distributors should hire engineering services experts who provide assistance with issues like chronic equipment failure, emergency work and facility management. These experts can help eliminate excess expenditures—through information systems that improve the maintenance of their inventory.

“As manufacturers and distributors continue to realize they need all three of these ‘legs’ to make the stool ‘stand up,’ rather than just one or two of them, they are beginning to move more toward an end-to-end model,” Meiers says.

Through this end-to-end model, third parties are now providing a breadth of services that connect each discipline of the MRO supply chain, as data management is associated with strategic sourcing and transaction processing is aligned with storeroom operations.
Whether third parties provide extensions of storeroom management like integrated supply, procurement of materials and delivery, or services that improve spare part management processes, such as computerized maintenance management systems (CMMS), the end goal is clear: Create more efficiencies that save customers time and money.

“A holistic, enterprise approach to MRO will enable better cross-communication across clients’ entire organizations—to provide visibility, accountability, productivity, and, eventually, greater profitability,” Meiers says.

The best environment for MRO outsourcing
As manufacturers and distributors hire third-party MRO providers, they have likely already encountered a variety of circumstances that have led them to consider outsourcing in the first place—whether it’s the acquisition of a competitor, slow-moving or obsolete inventory, or substantial changes in business operations.

“They need the observations, insights and recommendations to drive improvement in their MRO supply chains,” Meiers says. “So they look to third parties that can not only access their MRO supply chains, but benchmark them against the broader market.”
Sometimes executive teams prefer not to commit the in-house resources required to manage MRO in a timely and cost-effective manner. Other times, companies have HR issues, production downtime, or even limited technological applications that lead them to outsourcing.

“When manufacturers and distributors consider outsourcing their MRO resources, they should look at the total cost of ownership for their inventory management techniques and controls, as well as their system platform and utilization, as some companies are much better at managing direct spend, rather than indirect spend like MRO,” Gregg says.

While looking internally, manufacturers and distributors should decide whether or not they have a culture that will accept outsourcing. With so many levels involved with MRO, they should determine what creates the most value for their organizations and how that value is created.

“They will also need to have the right level of executive support, as well as buy-in from stakeholders, each of whom are impacted by MRO in some way or another,” Meiers says. “They should also be open to collaboration and change, especially the idea of working together with a third-party MRO provider to achieve their goals.”

“Ultimately, third parties work to help their clients uncover the insights they need to transform their businesses,” Meiers adds. “And then, they can provide whichever capabilities are needed to succeed—whatever it takes to help them get there.”

When all is said and done, the relationship between third-party MRO providers and their clients is very much a partnership, one that will potentially result in long-term productivity and profitability.

Why distributors consider third-party MROs
Traditionally, the market for third-party MROs has been highly automated manufacturers or operators of complex machines, like commercial airlines or mining equipment.

These organizations typically spent millions upon millions of dollars a year on spare parts. Not to mention, their uptime was critical.
Now that distributors are investing heavily in automation and competing on customer service, such as next-day and same-day delivery, uptime is critical for them as well. For those reasons, distributors might be the next market for third-party MROs.

“As organizations use larger volumes of items under the MRO umbrella, they will seek to drive efficiency, as well as greater levels of value from this portion of their business,” says Kurt Meiers, director of strategic sourcing at SDI. “And, in doing so, they will begin to look to the market for holistic supply chain-related solutions.”

Companies mentioned in this article
SDI Group
Storeroom Solutions
Wolseley Industrial Group