In Part 1 we discussed how maintenance, repair and operations (MRO) is a very important but yet often overlooked category in many procurement organizations. We also noted that this is unfortunate, because even though MRO is often in the unaddressed tail-spend category, it is ripe with opportunities that go well beyond reducing process costs or even purchased costs but also included reductions in inventory locations, inventory levels, expedited shipments, inventory write-offs, returns, expediting and production stoppages.
Properly managed MRO, as per our last post, also:
- increases fill rates (and can increase those rates by 20% or more in some organizations at the low end of “average”)
- reduces returns (via proactive monitoring and supplier communications that reduce misunderstandings and incorrect shipments)
- increases efficiency (as the right part is in the right location at the right time)
- improves supplier performance (as proactive monitoring not only prevents incorrect shipments but detects performance issues quickly), and
- increases the MRO spend under management.
The benefits of MRO go well beyond the inventory management, spend under management and efficiency savings discussed in our last post. While this is substantial for many organizations, it’s not an exhaustive list of the benefits that an organization can realize in treating the MRO supply chain strategically. We also mentioned how using an MRO-as-a-service provider can help deliver best practices and value in a way that 3PL providers can perform in logistics, contract manufacturers in manufacturing (e.g., FoxConn, Flextronics, etc.) or managed service providers (MSPs) in contingent labor.
By intelligently embedding an MRO-as-a-service provider into the procurement and supply chain operating model, you can build an agile supply organization that flexes and grows with the business. And it also evolves the value of MRO category staff in procurement and MRO operations groups from cost centers to value centers. Good MRO (-as-a-service) management should not only reduce stock level and overhead costs but also deliver other improvements:
- fill-rate improvements will lower stock-outs and production down-time that can result in huge disruptions and associated impact to top line performance
- increases in overall efficiency (which not only reduces manpower costs) that allow more manpower to be diverted to more strategic tasks.
- reductions in obsolete inventory and recalled inventory (which in turn allows repairs to be made faster and have repaired equipment run longer on better quality parts)
- improvements on supplier performance monitoring and management, which in turns focuses supplier improvement efforts where they are needed most to improve delivery performance, quality levels, complexity reduction and so on.
New value streams can only come from new capabilities.
For example, when the focus shifts from emergency expediting to broader performance improvements, an MRO-as-a-service provider will be able to help the organization focus on overall process improvement that goes beyond just process efficiencies and getting inventory levels right. Is the MRO network optimal? Maybe the stock levels are right and the re-order times and volumes are optimized, but is the network right? Maybe the supply network should be consolidated and shifted to allow for more JIT inventory for expensive slow-moving parts or maybe fast moving parts should come from a partner's nearby warehouse. Or perhaps you should use supplier-neutral dispensing machines rather than using tool cribs or desktop receipts.
Also, if the organization is using too many old, almost obsolete, parts that can only come from one supplier, maybe the focus needs to shift to lean efficiency improvements that would instead result in the update of certain pieces of equipment. This up-front spend, even if it seems unnecessary, might result in less repairs, lower operating costs and access to newer, cheaper and easier to obtain parts. This MRO-based service could result in significantly more longer-term savings than any inventory optimization ever could. The ability to brainstorm and evaluate such a set of broader options requires an objective business partner who can bring expertise to the table rather than a vested interest to buy a new machine — or not buy one. (Do you ever notice how used-cars mechanics tell you to hang on to your old car?)
While hard cost rewards are sweet, it’s risk and compliance support that can be the bread and butter for getting an MRO solution fully baked
In addition, good MRO (-as-a-service) providers can greatly increase organizational compliance and sustainability when backed with the proper platform and processes, especially when those providers are being measured on compliance and demonstrated saving. Compliance both with organizational policies and industry regulations can easily be obtained with a good platform and process that insures all relevant policies and compliance steps are tracked and checked against before an order is even made. In addition, sustainability data can be tracked and when there are multiple alternatives, and the most sustainable option utilized and tracked.
Not only does a good MRO platform and process ensure compliance and sustainability, but it also reduces risk and liability. A significant amount of MRO spend is to maintain equipment that must run not only efficiently but safely often subject to one or more safety regulations. Failure to use proper, compliant parts could result in a breakdown that could not only put people at risk but cause injury. Unless the organization can insure it is only using providers with proper training, certification and insurance, it could be greatly increasing its risk and liability. And if someone died in a breakdown or accident that was completely preventable, that could easily be a $5 million loss in addition to the loss of top talent. The Spend Matters team is aware of recent settlements that cost organizations $7 million or more when a service provider had an unfortunate accident. MRO environments need to be safe, especially for third-party contractors, so using best practices in MRO and in environmental, health and safety (EH&S) can reduce risk and out-of-pocket penalties.
The biggest value in MRO as a service is the “option value” to focus on strategic work.
A good MRO platform offered as a service can often be customized to the organization's workflows and processes, ensuring that each user of the platform can do her job as efficiently as possible, freeing up more time for more strategic and value-add activities. In addition, when views can be tailored to each type of user who only sees what she needs, there is a reduced risk of human error, which is a bonus that most people don't see.
More importantly, it frees up more time for strategic projects, which usually come in two basic forms:
- First, procurement can spend more time strategically sourcing high value categories, and if the organization has a modern platform for complex sourcing with advanced optimization and analytics, then it can easily save an additional 10% spend categories that were already sourced multiple times with traditional approaches.
- Secondly, procurement can finally spend time on MRO supply base and service level optimization, consolidating down from thousands to hundreds of suppliers for the majority of parts and services while insuring the right stock and service levels are obtained and that the selected suppliers are performing well. Then, it can institute supplier development and joint innovation programs to find ways to not only improve service but improve products (and even equipment) and services so that more can be done with less. This will elevate a lot of the key spend out of the "tail spend" and into key managed spend, which will elevate overall organizational performance.
The time freed can then be applied to strategic initiatives. Is the CFO trying to variabilize the firm’s assets from CapEx to OpEx? Looking to put in new energy management capabilities at the plant? Want to push inventory upstream to suppliers intelligently and also redesign the overall network? Itching to get RFID and some robotics in place? Want to test some additive manufacturing for an extinct part? Do your suppliers have some budget to co-create with you on some innovation project of theirs? You get the point.
What’s also compelling about strategically managed MRO-as-a-service is that you can use the provider as a partner who can fund capabilities and initiatives that you yourself couldn’t fund and implement yourself. This could include something like new predictive analytics and adaptive algorithms to help improve demand management, planning and scheduling, bid optimization, lean opportunity identification and other areas. Unlike the implementation of a new system for basic workflow automation, where the organization often sees a short-term benefit, an organization that adopts a platform-based MRO as a service should be managing the service provider to help deliver continual year-over-year benefits.
We also feel that a strong platform-backed “optimization-as-a-service” analytics capability has the potential to radically improve supply chain performance, and, as we will discuss in our next post, this change can go well beyond the MRO category.