It Starts With Parts

What a difference a decade makes. When managers at International Truck and Engine Corp.'s Indianapolis plant considered entering an extended service agreement for equipment maintenance five years ago, they took two years to decide to move ahead. This was after the plant had already been buying supplies from Rockwell Automation for five years. "We were a little tentative," says Rick Powell, manufacturing services business team leader. "It was the first time we had relinquished some of our internal controls-our own people doing it. We watched it very closely to make sure we were getting what we were promised. As we've seen the results, we've grown in that relationship." The service agreement has been such a success (more than 15% ROI) at the 1,200-employee diesel-engine factory, that the managers are currently negotiating a longer-term contract with Milwaukee-based Rockwell to outsource even more equipment parts and service management. And, the move to outsourcing of equipment management is spreading to other International Engine sites. "They've been able to capture warranty costs that might otherwise not have been fought for," says Terry Wicker, materials resource leader. "They've negotiated repair rates that are lower than what we could have repaired the part for. They do a really good job of tracking the upgrades, the warranty and where the parts are used and installed. We've drawn upon their expertise in their field. We have a Rockwell person here on site 24/7 if we need it." As manufacturers continue to squeeze their capital assets not just for savings but for strategic value, the focus on improving MRO will continue, experts say, and the leasing of expertise, along with the outsourcing of equipment-parts service and management is increasing in both practice and scope. Rockwell's asset management services business is growing by 25% a year, and consulting firm Accenture has identified aftermarket sales and service as a key profit-growth opportunity for industrial equipment manufacturers. "It's a huge opportunity for both manufactures and their suppliers to tighten up their supply chain," says Dean Teglia, managing partner for Accenture's North American Industrial Equipment Practice. Benefits For Both Sides As Teglia notes, the growth of parts-management agreements benefits both industrial equipment manufacturers as well as their manufacturing customers. On the industrial equipment manufacturer side, Accenture reports that service and parts maintenance contracts typically account for just 10% to 25% of a suppliers' sales, but also typically accounts for 25% to 50% of profits. Additionally, the relationship puts the supplier closer to the customer, where opportunities for sales, upgrades and other products are more apparent. "It's a huge competitive strategy to have people onsite," Teglia says. "They can innovate on parts before the customer even asks for it." On the customer side, the agreements tend to make good financial sense, says Craig Resnick, research director, ARC Advisory Group, Dedham, Mass. "We have certainly seen the trend of leasing verses buying, moving things from the capital side of the ledger to the expense side." Capital savings include not just labor but inventory. Parts agreements usually include a relinquishing of all or some parts inventory ownership to the vendor. This not only removes the cost of carrying inventory but the cost of managing and mothballing obsolete inventory. Powell says in his plant, the Rockwell agreement has eliminated the need, among other things, to manage circuit boards, a key part that has a short shelf life and had in the past frequently resulted in obsolete inventory. Now it's Rockwell's job to keep the most current spares in the plant, and if there are obsolete ones, Rockwell owns them. According to Steve Stall, business manager/plant services, clients of Rockwell's asset management business have had inventory reduction costs of between 20% and 40%. Additionally, Resnick notes that outsourcing asset management also adds important intellectual capital during a time when manufacturers are reducing staffs. Onsite experts can help manufacturers collect strategic operating information and use it to improve machine efficiency. He references an agreement Rockwell and Kraft Foods Inc. have: "When you are walking around these Kraft plants, there are people with Kraft badges, but they don't work for Kraft, they work for Rockwell." Pressures From Within, Without Resnick says he's seen increased outsourcing of equipment parts maintenance and management since the mid-'90s, when the emergence of online purchasing started eroding prices in the industrial equipment sector. Most recently, reduced headcount throughout manufacturing means more outsourcing everywhere. Research points to this trend in the industrial equipment arena-which includes manufacturers and distributors-increasing. The industrial equipment sector is a mature, consolidating market where competitors are doing all they can to differentiate themselves. According to Pembroke Consulting, Philadelphia, wholesales prices for industrial products are increasing less than 1.5% per year, and personnel costs for distributors are increasing 4% a year. "If this scenario continues over the next three years, we estimate a typical industrial distribution company could experience profit declines ranging from 25% to 50% or more," says Adam J. Fein, Pembroke president. Indeed, distributors are providing more outsourcing services as well. Grainger offers Grainger Integrated Supply service, which can include on-site inventory management stockroom solutions, and procurement services. Consultants expect to see increased battles among distributors and manufacturers for equipment parts service and maintenance. What's next? They'll begin servicing each other's equipment and parts as a way to gain market share. In fact, the contract that the Indianapolis International Engine plant is negotiating includes a provision for Rockwell to manage and replace some non-Rockwell parts. "All of these industrial parts manufacturers are trying to expand their service parts footprints," Teglia says. "Having more service parts ownership leads to ultimately owning more industrial equipment."