In part 1 of this series, we described the huge opportunity that procurement organizations and supply chain organizations can bring to their MRO supply chain if they work together to go after a larger prize than just better managing a tool crib, implementing a simple e-procurement system and connecting to a large distributor. We also described how managed service provider models that work in the product supply chain (and in other domains such as cloud computing, contingent labor management and so on) are also just as attractive in the MRO supply chain.
In this installment, we’ll dive into some details about the potential value of such a managed service model, whether you do it yourself as a highly sophisticated organization or look to a third party if you are a bit further back in the maturity curve. Either way, the use of MRO as a service is valuable because it can realistically help you achieve:
- At least a 20% reduction in inventory in 18 months (or less)
- An increase in fill rate of up to 20% (or more) and fill-rates that can quickly approach 98%
- Drastic reduction of obsolete inventory and recall inventory
- Reduced returns
- Greater efficiency
- Procurement success well beyond the obvious
What kind of success? We'll get to that, but first let's explain how this MRO managed service approach can enable the first five benefits, and in doing so, will deliver the sixth.
1) When most organizations are told to reduce inventory, they simply reduce the fast-moving MRO inventory and do more frequent re-orders. However, all this does is increase shipping and handling costs and these costs could be potentially more than any savings from reducing holding costs. However, if you manage this the right way (either internally or via an MRO services provider), your approach should be an end-to-end holistic assessment of inventory that will help you identify the right stocking locations in the network, the right inventory levels, and the right planning processes and order policies and parameters to gradually correct levels so that, over time, both fast-moving and slow-moving inventory reach the optimal levels.
2) By properly segmenting item types and demand profiles, firms can then tune their inventory locations and levels to improve their fill rates. And if you add better replenishment planning, automated vendor collaboration, integrated logistics, automated order execution (including event management and alerting), and usage of RFID/barcodes for automated receiving, the fill rates can quickly approach 98% and stay there. Based on Spend Matters review of multiple MRO studies in the industry, this is far better than the roughly 75% average for companies without good MRO practices — and the 85%–90% level achieved for typical companies.
3) As a natural byproduct part of the holistic inventory assessment, you should be able to identify obsolete inventory, which should be returned if possible or sold (in a forward auction) as soon as possible, as well as recall inventory, which can be returned for useable inventory. Also, the advantage of using an MRO services provider here shines because of their databases and analytics tools that can also identify duplicates and substitutions. This helps you identify your bad source data (and the processes causing it) and also identify further inventory optimization opportunities.
4) Managing MRO suppliers is like managing any supplier in terms of measuring performance on cost, on-time delivery, customer service and so on. Measuring purchased cost reductions is basically built into the DNA of procurement professionals, but quality costs and other TCO elements are also important. The challenge, though, is building the supplier performance monitoring capabilities for metrics like quality and delivery that pinpoint supplier performance opportunities to improve. You might be able to get some of this from one of your suppliers, namely the big distributors, but it doesn’t “scale” across suppliers. This is where neutral MRO service providers can also be useful to help reduce returns by standing up a supplier measurement capability across all your critical spend segments and suppliers. And if you measure your services provider itself on these supply performance outcomes, you are aligning its interests with those of your suppliers. This in turn helps ensure that you are getting the right products to the right locations at the right time by proactively monitoring shipping and communications all the way through to consumption — regardless of whether it’s a VMI program for critical spares, a supplier-neutral automated dispensing system for small high-use floor supplies or a more traditional tool crib operation.
5) The MRO services provider will apply its best practices, refined processes and expertise to the MRO category and do the job more effectively (e.g., better materials planning to support predictive maintenance) and efficiently, freeing your team to focus on more strategic categories and other value generation efforts that they are more suited for.
6) This is just the tip of the iceberg that can come from MRO as a service. You can see that there are many value streams here:
a) issue prevention with proactive monitoring and management
b) supplier performance improvement through better supplier engagement and development
c) “tail spend” management through the direction of tactical buying in a more industrialized process to a service provider who can serve those requests much more scalably than your organization doing it in a one-off manner
d) getting 100% of MRO under deeper management (i.e., high quality of deep spend/supply influence rather than high quantity of low-impact late-stage influence of spot buying)
The essence of such an MRO-as-a-service relationship is using the managed service provider as a transparent, objective, high-IP extension of your procurement and supply chain team. It’s in essence a highly flexible and high domain expertise laden model for better managing the MRO supply chain. By supersizing your category of MRO and treating it more strategically, you can extract more value out of it and in essence elevate procurement’s value by embedding this high value portfolio of capabilities and services.
Such a provider does this in a few ways:
a) An MRO-as-a-service provider has the dedicated team and tools to track every order placed, every communication made, every response and monitor for any potential issues. Did the supplier acknowledge on time? Ship on time? Send the proper SKU codes in their response? And was the product received on time?
b) A MRO-as-a-service provider not only monitors stock levels and shipments, but overall supplier performance over time. The MRO-as-a-service provider identifies suppliers who are performing poorly or interjecting unnecessary risk and proactively engages with those suppliers to identify issues, create corrective actions and implement change management plans to make those actions permanent.
c) An MRO-as-a-service provider will proactively monitor all MRO requirements and get all MRO spend under proper management.
In addition, an MRO-as-a-service provider will enable an organization to get full visibility into it's MRO supply base, which is something that many organizations don't have. And the results may be shocking. It's not uncommon for an organization that may think it only has a few hundred MRO suppliers to have more than 4,000 MRO suppliers and have no clue how many are critical sole-source providers of rare or unique parts. The value provided by the this visibility alone is substantial — especially since the average organization will never achieve this level of visibility on its own since data is not only scattered across so many systems. These include e-procurement, e-sourcing, ERP, warehousing systems, maintenance systems, supplier systems and custom systems. And it might not even be in any system at all. Many small “mom-and-pop” MRO suppliers are still taking orders and sending invoices through e-mail and even fax.
With this visibility, the MRO-as-a-service provider can build detailed benchmarks and scorecards and even use predictive analytics to determine when performance degradations are only hiccups or when they are likely to suggest possible issues that need to be proactively addressed before performance decreases or a disruption occurs. And this is just the beginning. In our next article, we will discuss how modern MRO-as-a-service platforms enable next-generation supply chain performance.