Rooting out ‘negligent procurement spend and invisible inventory’ – the maintenance, repair and operations (MRO) dilemma
By Dr Jan Nell
Executive Summary
How does MRO spend affect your statement of profit and loss and balance sheet?
‘How do we put our balance sheet on a diet?’
Introduction
According to Brian Andrew, a speaker at the 2016 Smart Procurement World Conference in Cape Town: ‘Many businesses have a cost source that they have not yet considered controlling effectively. Most businesses have at some time experienced a financial squeeze and struggle with finding costs to cut without impacting business operations.’ But there is an overlooked item hidden in our financials – the process costs of procuring maintenance, repair and operations (MRO) goods.
Moreover, USA MRO procurement expert Joel Roth has pointed out that MRO procurement consumes man-hours in many different ways: ‘Purchasing, receiving, store-keeping and intra-company materials movement; purchase orders issued; invoices processed; accounts payable checks; cost and material accounting; data entry; database maintenance; bidding, sourcing and negotiating; inventory obsolescence and overstock; expediting and tracing of open orders; missed or late deliveries; errors and quality deviations’.
‘Of the $110 billion USA businesses spend annually on MRO supplies − light bulbs to cleaning supplies to nuts and bolts − some $12 billion of the purchase never gets used,’ says Deb Oler, vice-president and general manager at Grainger, citing research conducted by the organisation’s consulting services team.
What Are MRO Supplies?
First of all, let us be clear about what we mean by ‘MRO supplies’. It implies supplies consumed in the production process but which do not become part of the end product, or are not central to the organisation’s saleable output. That definition includes items such as parts for capital equipment assets, repair components, cutting fluids, lubricants, and tooling, as well as office supplies, cleaning and other janitorial products, furniture, lighting fixtures, building supplies, safety supplies, and other consumables that are not tied directly to the organisation’s core products or services. In short, all purchases needed to keep a business up and running.
The spend on MRO inventory can be very substantial. Just two examples: The Helicopter Association International’s annual survey of operating performance shows that 40% to 45% of expenditures are maintenance-related.
And at a Tier 1 automotive supplier, approximately 40% of the annual procurement expenditure is consumed by MRO materials. As organisations continue to do battle on the cost front, few see the likelihood of MRO spend falling. A recent survey showed that nearly 60% of manufacturing industry managers surveyed expect to maintain their levels of MRO spend.
Another take on this MRO spend − organisations spend R 1 000 000 on a truck or heavy metal equipment, then go on to spend R 2 000 000 on parts and components without considering the fact that, in essence, that asset ended costing their organisation R 3 000 000. Times are tough, they have been ever since the 2010 recession; the market is flat, customers are holding back on CAPEX and other spend. Yet here we sit with negligent, erratic, and irresponsible spend and poor inventory management staring us in the face – an effective MRO reduction project can save your organisation money, or maybe even save your organisation!
Frightening Statistics
Moreover, according to MRO Connection (2016), the statistics speak for themselves when it comes to managing MRO within an organisation.
Source: MRO Connection | Figure 1 MRO statistics
When an organisation addresses corporate governance and operational excellence, it requires the inclusion of a leading practice in indirect materials or MRO. Organisations also realise that production reliability and risk reduction are dependent on parts availability. Also, by its nature MRO is multi-disciplinary and organisations find that they have a shortage in either experience or knowledge. It is important that asset- intensive organisations analyse their MRO supply chain operations and enact decisions that will improve visibility into their MRO, improve reliability, and create a competitive advantage to drive profits, embodying the adage of Visibility, Reliability, and Profitability.
If you have ever been challenged by the procurement issues surrounding MRO – you are not alone. Even the most seasoned procurement pros find this arena daunting and highly frustrating, especially in organisations with substantial production, manufacturing and processing activities. The task of keeping the organisation supplied with the myriad parts, materials, and services needed to keep the machinery humming sometimes seems to resist all the usual procurement best practices and disciplines. It is a high spend beast that is difficult to tame.
When it comes to MRO, the user community typically has strong and emotional attachments to their parts and suppliers; they have a much greater stake in avoiding downtime and outages than in saving on inventory and adhering to procurement processes. To them; it is not about the 9% savings, it is about keeping the machine uptime and availability or keeping the line running.
More so on machines with maintenance and repair contracts (MARC), as well as contract obligations reflecting key performance indicators (KPIs). And then some; by its very nature, MRO encompasses a complex mix of highly technical products and specialised services which can be difficult to understand and to manage.
MRP Bad Practices
For example, in a typical industrial operation, MRO can involve:
A huge focus on spending CAPEX with a total lack of continued focus on the MRO spend which follows.
A large MRO spend spread over many sites and categories.
A large number of stock-keeping units (SKUs). A Fortune 100 manufacturing operation may require 25 000 – 50 000 unique MRO SKUs, many of which are used only on certain equipment.
Unpredictable demand – with MRO terms, it is difficult to accurately predict usage requirements. Some 70% of the MRO items in inventory may turn less than once every two years.
A ‘Just in case’ mentality. ‘I cannot afford to wait for this part, so I will buy some just in case. What is more; I am probably only going to need two bearings, but to safe, let us order four.’
Or, ‘I will save money by ordering large amounts of MRO components in order to get the volume price breaks.’
Magpie stores. Every technician keeps his/her little private heap of parts to fix machines in emergency situations with frustrated customers breathing down their necks. This all adds up.
MRO parts are booked out to jobs but never returned to the warehouse or on-site store.
A large number of suppliers, including local vendors on each site.
By its very nature MRO purchases are nearly always done ad hoc and on an urgent basis – this leads to organisations paying higher prices than what market-related prices actually are and what could be negotiated in a planned and well though through MRO contract on a non-urgent basis (scheduled, planned maintenance and ‘bottom up’ forecasting is the key).
Decentralised MRO processes (sourcing, purchase requests, orders, inventory management) with inconsistent practices and processes.
Maverick spend due to a lack of process control.
MRO inventory is treated ‘differently to other well-managed inventory which follows strict procurement and stock preservation policies.
Spot buys. Unplanned purchases for items not set up in inventory can account for as much as 50% of the annual spend.
Master data management across plants/operations remains a challenge. Part level information is typically inconsistent or incomplete, with no common part numbering scheme/taxonomy. The same items are identified in many ways in different systems.
Saving Your Organisation Money Which Goes To The Bottom Line
The consequences of poor purchasing decisions of goods and services can be quite significant. And as purchased goods and services can account for up to 80% when expressed in terms of an organisation’s revenue, many managers involved in purchasing simply just do not realise the significant contribution that this can make to overall profits, growth and risk minimisation! The following extract from an income statement (simplified for illustration) reflects the impact on the bottom line / net profit rand value and margin (%) a R5 000 swing in purchasing costs could make:
Concluding Remarks
There are many more examples of MRO bad practices.
Unfortunately, though, MRO supply is often overlooked as an ‘inventory’ responsibility; as a consequence, it is rarely handled with the rigour and attention that it should be. It is crucial for organisations to understand and manage costs, given the various uncertainties and the volatility of the global economy.
Yet, MRO supply activities have little direct accountability and are driven too often by stock outs rather than to any overarching supply chain plan. Frequently, situations occur where MRO inventory is expensed and sits in an area without any identifiable locator system, ID, or usage history. Although more organisations are starting to view MRO supplies as true costs that can be tracked and controlled, clearly there is room for systematic control and more efficient methods of handling.
In closing; question yourself and your organisation’s MRO practices. The following link provides a questionnaire to complete (preferably by the CEO, FD, or FM) on MRO within your organisation:
http://www.nellconsulting.co.za/Maintenance,-Repairs,-and-Operational-spend-MRO-reduction/
AUTHOR │ Dr Jan Nell, Managing Director, Hesperides Sans Frontieres
Sources
Andrew, B as quoted by James, N. 2018. Category supply contracts cannot adequately manage indirect costs. Available at
http://www.engineeringnews.co.za/article/category-supply-contracts-cannot-adequately-manage-indirect-costs-2016-06-17/rep_id:4136 (accessed 10 September 2018).
Bidaye, A. 2018. 3 Strategic levers to pull for managing MRO spend. Available at
http://spendmatters.com/2016/10/12/3-levers-for-managing-mro-spend/ (accessed 10 September 2018).
Croasdale, M. 2018. New white paper offers MRO strategic sourcing insights. Available at
https://www.sourceoneinc.com/8-31-mro-sourcing-whitepaper/ (accessed September 2018).
GEP. 2018. Available at:
https://www.smartbygep.com/insight/research-reports/gartner-magic-quadrant-strategic-sourcing-application-suites?utm_source=SpendMatters&utm_medium=Website-Banner&utm_campaign=gartner-magic-quadrant-strategic-sourcing-application-suites&utm_term=SpendMatters-Website-Banner-10281-August-2018&utm_content=SBG (accessed 10 September 2018).
Improve your bottom line. 2018. Available at
https://www.slideshare.net/Ariba/improve-your-bottom-line-by-increasing-mro-spend-under-management?qid=b1a1ec9c-1107-4e31-a121-d80a3436e17f&v=&b=&from_search=1 (accessed 10 September 2018).
Krauter, GE. 2018. Gaining efficiencies from MRO waste reduction. My purchasing centre. Available at
http://www.mypurchasingcenter.com/mro-indirect/blogs/gaining-efficiencies-mro-waste-reduction/ (accessed 10 September 2018).
MRO Connection. 2018. Revitalise your MRO. Available at www.mroconnection.com (accessed 10 September 2018).
MRO Health Check. 2018. Available at http://www.xtivity.com/services/mro-health-check/ (accessed 10 September 2018).
Roth, J as quoted by Raybould, R. 2018. MRO procurement made simple. Available at
https://www.engineerlive.com/content/mro-procurement-made-simple (accessed 10 September 2018).
Singh, H. 2018. Driving MRO savings through procurement analytics. Available at
http://www.mypurchasingcenter.com/mro-indirect/industry-articles/driving-mro-savings-through-procurement-analytics/ (accessed 10 September 2018).
www.smartprocurement.co.za.
NOTES
Roth, as quoted by Raybould, 2018, The 20% solution.
My Purchasing Centre, 2016.
MRO Connection, 2016.
GEP, 2016.
