Maintenance, repair and operations (MRO) is a critical part of the supply chain. Unfortunately, it is also an often overlooked business function. To gain a better understanding of MRO, we reached out to one expert in the area: Michael Croasdale, senior project manager at Source One Management Services, LLC, a procurement service provider based in Pennsylvania.
Croasdale, 26, was recently recognized among the winners of the Institute of Supply Management and ThomasNet 30 Under 30 Rising Supply Chain Stars Recognition Program. Carole Boyle, marketing content strategist at Source One, who nominated Michael for the program, called him an “out-of-the-box thinker who is trusted to deliver results — along with U.S. $20 million in savings for clients in his three years at the company.”
Below, Croasdale shares his insight on how procurement organizations can better manage MRO as a spend category. He also shares some “MRO war stories” he has heard working with procurement organizations, which can be used as a guide for what not to do when tackling MRO. In an upcoming Part 2 of our conversation, Croasdale will offer tips for procurement organizations on selecting an MRO provider and discuss MRO provider supplier relationships.
Spend Matters: How would you define MRO?
Michael Croasdale: MRO probably has the broadest definition of any category in sourcing. I’ve seen companies define their entire indirect spend as MRO, but for Source One, MRO is anything used to maintain manufacturing and distribution facilities — stuff used on the shop floor. This can range from electrical supplies to cleaning supplies to bearing and power transmission products.
SM: How important is MRO to the business? And, are procurement organizations and companies generally realizing this importance?
MC: MRO is drastically important to the business, and procurement organizations and companies realize the importance. Ask any plant worker how important their MRO suppliers are, and they will tell you a story about how much it will cost if a machine goes down.
While folks on the ground understand the importance, managing it properly is a completely different story. MRO has so many moving parts that companies can easily find themselves lost in the weeds. The diversity of the products that fall under the category, the lack of spend visibility at the SKU level and the diversity of suppliers across regions makes proper sourcing and supplier management difficult.
In my experience, the stakeholders for the MRO category are not focused on cost as the top priority, instead valuing factors such as lead times, same-day delivery and vendor managed inventory (VMI). Within the MRO space, many purchases are unplanned. For example, a line shuts down due to a bad roller bearing. This specific bearing had never needed to be replaced before, so there are none in stock. But since the plant needs this part as quickly as possible to get the line up and running — cost is thrown out the window.
SM: In your experience, is procurement tackling MRO properly? What advice do you give to organizations to correctly address MRO and increase efficiencies in the spend category?
MC: Generally speaking the answer is no. In most cases, MRO is decentralized, especially within organizations with a large number of facilities. This isn’t necessarily a result of poor management — instead it stems from a perceived need for plant managers to be able to make purchases, especially emergency purchases, on the fly. But this decentralization causes a whole slew of problems. To start, facilities typically don’t speak to each other. They use different suppliers within the same category even for the same exact items or services, and there is limited standardization of manufacturers and/or processes and no national contracts in place. This creates a number of inefficiencies — the organization is not able to achieve economies of scale and because of it, suppliers often are not dedicating the attention that the organization deserves.
To start to remedy this, a thorough spend analysis is needed. Categorize it, and work with stakeholders to understand the suppliers that you are using under each category and at each location. You’ll likely wonder why you need so many suppliers within a particular category, especially if they are all doing or providing the same thing. Look for areas of opportunity for consolidation, evaluate the market and establish preferred suppliers. Set up national contracts with standardized pricing and defined service level agreements. Lock in category and manufacturer discounts to control costs on unplanned purchases. The list goes on but this will give you a solid foundation to start from.
SM: I’ve been told you have a number of “MRO war stories.” Can you share some of those — perhaps as examples of “what not to do” with MRO?
MC: I have two “war stories” that are perfect examples of things not to do in MRO. Both teach important lessons, namely: Don’t get complacent, and regardless of the potential gains, don’t do something that ultimately doesn’t make long-term, sustainable sense.
The first example is a diversified manufacturer that had been with their incumbent hardware provider for nearly 20 years. Over the years, the supplier continuously provided high levels of service, an onsite resource that was provided “free of charge,” and emergency support and rush deliveries. The comfort level between the client and the supplier had grown to such a point that the supplier was forecasting orders for the client and the supplier-provided onsite resource was placing orders. At some point in the relationship, procurement was given a goal to hit a 10% cost reduction target with their suppliers. Because of the strong relationship with their hardware supplier, procurement requested that the supplier cut their costs by 10%, and the supplier adjusted pricing accordingly. The procurement organization felt satisfied that it had reduced costs, and with very little stress or resistance. What they didn’t realize, and what we later uncovered in our research, was that the supplier was pricing items upwards of 200% over market. So, the lesson is that you must ensure that you are evaluating your suppliers on an annual or at least biannual basis to ensure you are receiving best in class pricing and service levels. Never give your suppliers so much control that you are no longer overseeing the actual procurement process of materials for your organization.
The second story illustrates the importance of quality assurance and total cost of ownership (TCO). A large chemical manufacturer required high grade 316 stainless steel piping for their operations. Due to the type of chemicals the plant works with and their corrosive properties, the plant often had issues with foreign manufacturers whose piping was labeled as 316 stainless steel and ended up being lower quality 304. Given these issues, the plant required the steel to be domestically produced. Procurement had recently worked to obtain lower pricing on 316 stainless through a sourcing event, but had done so without speaking to the plant managers. After onboarding the new supplier, the plants noticed that the new 316 piping was leading to a significantly higher amount of replacements, and thus a higher TCO. In this case, procurement’s focus on short-term cost savings, instead of TCO, led to a hasty decision with damaging effects.
Source One was brought in to benchmark the pricing achieved from the previously run sourcing event and look for additional areas of opportunity. What my team and I found was that the cost of the 316SS they were buying was actually significantly under market. This seemed too good to be true, so I recommended that we perform what is known as “The Moly Test” to verify that the quality of the product. We discovered that the steel they were purchasing was not actually 316, but instead was of much lower quality. To rectify the situation we resourced the PVF category with a much more stringent scope around quality assurance and testing procedures, as well as requiring the supplier to clearly indicate if the item was foreign manufactured or domestic. We ended up onboarding another new supplier, with competitive domestic 316SS pricing, and based on our understanding of the product lifecycle, we forecast the TCO to be reduced by nearly 30%. The lesson learned here is twofold: cost reduction cannot come at the expense of quality, and procurement cannot work in a silo. You must ensure alignment with the end users to understand the issues they are facing with category.
Stay tuned for Part 2 of our conversation with Croasdale on MRO, which will focus on selecting an MRO service provider and maintaining supplier relationships.