MRO as a Service (Part 1): Embedding Procurement as the Value Engine

MRO alhim/Adobe Stock

Maintenance, repair and operations (MRO) is a very important and overlooked business function that is an integral part of the supply chain. It not only keeps critical internal assets running efficiently but is also a gold mine of opportunities to reduce costs of MRO services and inventories of purchased supplies (spare parts and consumables). MRO is heavily reliant on an ecosystem of third parties (large equipment suppliers, local suppliers, distributors, facility services suppliers, etc.) to keep it optimized, and this is why procurement and supply chain groups should manage it as a critical spend category that is part of the core supply chain, not just a plant-specific tactical spending area.

Of course, not all MRO is tactical. For example, specialized support tools for semiconductor fabrication facilities are absolutely critical. Similarly, jet engine manufacturers paid on engine runtime have world-class MRO operations set up for their airline customers. And it goes without saying that petro-chemical facilities must have top notch MRO from a safety standpoint alone. It’s critical that manufacturing, logistics, and (customer) service delivery continue uninterrupted, but unfortunately, due to the total volume of MRO spend in most organizations, MRO typically sits buried as an overhead expense. In these organizations, this “overhead” spend typically falls into the indirect spending area that plays second fiddle to direct materials supply management. This seems fine as long as everything goes well, but the minute the production line goes down because a needed replacement part wasn't on the shelf (and has a 10-day re-order time), leaving MRO as unaddressed tail spend is simply no longer acceptable.

The problem, though, is that most procurement organizations simply do not treat MRO strategically. They tend to source “low hanging fruit” spend categories like basic industrial supplies (e.g., safety products, lubricants, solvents, etc.), electrical components, facilities supplies and so on, and then use a hodgepodge of e-procurement and e-catalog tools that they bolt onto their local ERP and maintenance systems. This is simply not robust enough for strategic MRO management, especially when organizations often experience:

  • over 20% excess and obsolete (E&O) inventory on the shelf due to poor inventory planning, materials management, product quality, data quality and other issues.
  • fill rates for most MRO storerooms that are closer to 75% than the desired 95+%
  • supplier “lock in” even in areas where alternative supply does exist
    (e.g., proprietary/masked part numbering by distributors)

So, what is an organization to do?

If MRO is Indeed Critical, Manage it That Way!

For procurement organizations, the biggest recommendation is to go beyond tactical commodity management and perform true category management. Tactical commodity management means that you are managing lower-level MRO spend categories like “non-critical” spending (per the famous Kraljic 2x2 matrix), which in turn means you’re likely managing the spend superficially and optimizing for efficiency. Yet, critical equipment spares are at a minimum critical or “bottleneck” categories, and maybe even strategic. Similarly, if you manage a large third-party service provider that is accountable for the operation of your mission-critical facilities, including MRO operations, that supplier relationship is quite strategic indeed. This is very different from tactical commodity management, where procurement helps rationalize suppliers in simpler, lower-level, SKU-based spend categories available in highly competitive markets.

In terms of technology support for such simpler MRO items, you can cobble together an MRO procurement ‘platform’ by using e-procurement (with supporting e-catalogs) that integrates internally to your ERP and maintenance systems that perform inventory management. This allows you to create re-order alerts (or auto-generated planned order) based upon basic inventory/order policies (i.e., min/max, order quantities, standard lead times, etc.). You may even be able to send out one-time RFQs or even allocate potentially multiple suppliers for a certain requirement and hope for the best. You may also use a large distributor as your supplier for many of these spend categories and connect to its systems via “punchout,” EDI or p-cards. And you may even use the distributor to serve as a “category captain” for MRO. Done right, this will work reasonably well most of the time to execute against an efficiency-focused commodity strategy.

But just because a tactical process "works well" doesn't mean it is a well-designed impactful process. In fact, all this process is likely to do is increase an organization's MRO overstock, tie up more cash flow, waste strategic sourcing man-hours on tactical work and decrease process quality. In this case, there are too many units of an infrequently used part, too much obsolete product and, more commonly, too many recalled products on the shelf. There are also too many expedited shipments when a stock-out occurs and the part is needed now. With this “set-it-and-forget it” system, the organization will not actively monitor stock levels and usage and just expedite a re-order when a minimum level is hit or a re-order gets put off because there was a higher priority.

There are so many examples of narrow and tactical approaches that are out of synch with the more sophisticated approaches used in the direct materials supply chain. The lack of refined category segmentation is clearly one. Another example is the poor adoption of optimization-based tools to perform proper multiechelon inventory positioning and to perform market-informed sourcing techniques (e.g., the use of bid optimization tools to source large market baskets such as freight, packaging and direct materials).

Finally, if you look at how many leading supply chains manage their supply markets that have characteristics similar to MRO (i.e., large numbers of line items supplied by a highly fragmented set of suppliers and intermediaries), such as direct materials components or shipping containers, they look to strategic services partners. In high tech, OEMs use contract manufacturers (CM) to manage the direct materials, but the OEMs don’t lose visibility of pricing or control of the tier 2 suppliers. In the logistics example, manufacturers use third-party logistics providers (3PLs) to manage the portfolio of assets and smaller service providers, but again, not outsourcing the controls or the visibility. The CMs and the 3PLs are strategic service providers even though the lower-level items and services they provide are fairly commoditized. These types of managed service providers, which are increasingly called business processes-as-a-service (BPaaS) providers, serve as extensions to the buyers and are thus aligned to their interests. This is different than distributors that may offer seemingly identical services. Distributors sell to buyers. BPaaS providers, or in this case, “MRO-as-a-service” providers, help buyers buy and manage their supply more effectively. The service can include outsourced processes, access to leveraged contracts with suppliers (without hidden supplier rebates that creates a conflict of interest), access to new technology tools and other value creators.

So, the bottom line is that procurement organizations should take a fresh look at all their categories and apply a form of category management that is more strategic in nature than just reducing supply chains down a reductionist spend taxonomy. (Our free downloadable next-generation category management research report outlines nine different ways to do this.) Organizations should look at all spend and supply in the context of supply chains and take a leadership role in applying appropriate supply chain practices to any value chain. In our research paper “Re-inventing Direct Procurement,” we described a dozen convergence areas where procurement could find tighter linkages with the supply chain. The same goes with the MRO supply chain.

Although the MRO supply chain is sort of the hidden supply chain, or perhaps the “Rodney Dangerfield of supply chains” by not getting enough respect, procurement can help the firm manage it more strategically (even though too many firms don’t). And in an increasingly everything-as-a-service economy, procurement’s ability to tap managed services providers that specialize in MRO, and can serve as an extension to them, is simply good best practice, internally tapping the power of supply markets to turn create more value for your stakeholders.

In the next installment of this series, we’ll dive into some pragmatic examples of how to use an MRO-as-a-service operating model to improve your MRO supply performance.

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