Value-Chain Report -- Stop Overspending For MRO Materials

Dec. 21, 2004
Industry leaders are achieving significant cost savings and improved working capital efficiency through integrated supply relationships and MRO outsourcing.

In every factory or distribution center there are materials and services used in production or maintenance to maintain, repair and operate facilities, machinery and equipment. These materials are referred to as MRO (Maintenance, Repair & Operating) materials and services. Although some MRO items, such as special tools, can be expensive, individual purchases of MRO materials, such as fittings, fasteners, wiring and similar supplies, tend to be relatively low value. These types of purchases can seem inconsequential and are frequently below approval thresholds. However, when you add them up at the end of the year, what was thought to be a relatively small expense category can become a surprisingly large cost with a significant impact on profitability. These seemingly small purchases, being made by many people across many functional areas, are often uncontrolled and under-leveraged, creating excess costs, unneeded inventory and waste. Identifying MRO Inefficiencies Although each manufacturing plant and distribution center is unique, our experience with companies across a variety of industries indicates that waste and inefficiency in MRO materials management typically manifest themselves in three areas:

  1. Large Or Slow Moving Inventories In many firms, there are "invisible" or "hidden" pools of MRO materials. These result from workers stockpiling consumable or repair materials not used when originally withdrawn from stock and, although they are physically available, are not visible to the maintenance inventory system and, therefore, are not known to exist to workers in other parts of the factory where they might otherwise be utilized. Instead, more of the same materials are purchased, resulting in unnecessary spending. In addition, without a proactive inventory management process, obsolete and inactive spare parts and other MRO materials tend to accumulate over time, tying up cash on inventory that will likely never be used.
  2. Wasted Time And Resources Because MRO purchasing is, in many firms, performed by the users of the MRO materials themselves, significant time and energy can be spent sourcing non-core or non-strategic MRO materials. We have often seen different users in the same firm buying the same commodity from different suppliers, with neither benefiting from lower prices that might be achieved by leveraging the combined purchases.
  3. ERP Or Other Systems Deficiencies Most leading ERP solutions have modules that address MRO inventory procurement and inventory management. However, unless these modules are implemented and configured correctly, users are often left to figure out how to use standard functionality to handle their MRO materials management activities. For midsized and smaller firms, the systems typically in use may only provide poor or limited visibility for MRO inventories and usually lack robust maintenance and repair functionality.
Integrated Supply And MRO Outsourcing An integrated supply relationship with firms specializing in MRO outsourcing can eliminate the inefficiencies described above by transforming the MRO supply chain with world-class materials-management processes and systems. Leading integrated supply companies, such as Setech Inc. (, can provide manufacturers with superior capabilities in managing MRO materials procurement and inventory. These capabilities typically include:
  • onsite management,
  • inventory control and financial leverage,
  • plant-level materials management discipline,
  • non-stock sourcing capabilities and
  • functionally robust, integrated information systems.
According to Frank Lynn & Associates Inc., Chicago-based integrated supply consultants, "The economics behind integrated supply are compelling. Integrated supply provides tools that, when executed properly in a strong relationship, can result in dramatic savings." So where do MRO savings come from? According to Geoff Peters, COO of Setech, benefits realized by Setech clients are derived from multiple areas of improvement. Peters cites the following areas as typical:
  • Unit Cost Reduction By leveraging purchases across multiple facilities, lower prices can frequently be obtained from suppliers.
  • Longer Product Life Parts with frequent replacement rates are identified and longer life parts are substituted.
  • Substitution/Conversion In many cases, instead of using expensive OEM spares, less expensive suppliers for the same MRO part can be identified.
  • Technology Upgrade Outdated designs can often be replaced with newer, improved designs at lower cost.
  • Reduced Obsolescence Spare parts are linked directly to specific machines or equipment. When the equipment is removed from service, spares no longer needed can be transferred with the equipment or sold back to the supplier.
  • Reduced Inventory With specialized systems, parts usage can be monitored and safety stocks reduced to optimal levels.
  • Repair Programs Parts that require frequent repairs are identified and more cost effective parts or repairs are utilized.
  • Warranty Recovery/Replacement Specialized systems monitor warranty programs on all major spares and equipment and pursues warranty recovery or no cost/low cost replacement, rather than new purchases at full cost.
  • Logistics Cost Reductions Leverage transportation savings and/or closer sources of supply to reduce freight expense.
When implemented properly, MRO outsourcing programs can yield significant benefits. Examples of companies benefiting from MRO outsourcing programs include:
  • A Tier 1 automotive supplier credits its MRO outsourcing program with a savings of more than $40 million during its first two years in the relationship.
  • A transmission manufacturing plant for one of the Big Three car companies credits its MRO outsourcing program with average annual savings of more than 15% over the past six years.
  • A division of one of the Big Three car companies has documented savings of more than 10% annually since starting its MRO outsourcing program in 1988.
Evaluating Potential Integrated Suppliers Although every MRO outsourcing arrangement is unique, some of the key elements that should be considered in evaluating a potential integrated supply relationship include:
  • Will the integrated supplier manage 100% of MRO spend regardless of inventory turns? Many potential partners only want to manage fast-moving parts.
  • Is the integrated supplier skilled at managing commodity suppliers and filling gaps in overall MRO coverage?
  • Is the integrated supplier independent and free to select the best supplier to meet your needs or are there specific distributors or products that the supplier is obligated to use?
  • Are product costs passed along at actual cost or are they marked up? If so, how much?
  • Does the integrated supplier have expertise in procuring not only catalog products, but also "make to print" or custom manufactured parts?
  • Can the integrated supplier provide a best-in-class MRO inventory management system that easily shares data with your business systems?
  • Are the integrated supplier's systems and processes ISO 9000 certified?
MRO outsourcing with an experienced, capable integrated supply partner can provide significant savings and operating improvements. In some cases, the integrated supplier can even provide cash for MRO inventories, making the MRO outsourcing cash positive from the very beginning. Annual savings resulting from more effective MRO purchasing practices, inventory replenishment and management provide on-going benefits. Client companies also benefit from immediate access to world-class MRO systems and processes that would otherwise have to be developed internally and independently. Kevin O'Brien is managing principal of MidWest Group, a management consulting firm specializing in supply-chain/operations and customer-relationship-management process improvement and related solutions. He can be reached at [email protected].

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