Thought Leadership and the Demise of Your Third-Party MRO Outsourcing Program: Part 4

By George E. Krauter

October 12, 2018 at 8:45 AM

When one defines third-party MRO (3PMRO) success, one assumes that fundamental operations are being executed and that expectations are being met (i.e., ROI goals are surpassed} and that benefits are sustained throughout the term of the agreement.  However, under some circumstances, success can be inhibited by detractors or obstructionists.

Those who oppose the idea of implementing a 3PMRO approach could employ multiple strategies for undermining the value of the new MRO outsourcing agenda. Below are some of the tactics to recognize and overcome when you are responsible for administering a successful 3PMRO program:

Refusal to recognize brand change productivity benefits - Of the items in the scope of work for of the 3PMRO provider, productivity is of prime importance and often overlooked; it must be defined and measured as a KPI function. One of the KPI productivity requirements is to recommend brand changes to new products that will increase efficiencies in plant operations.

The provider has agreed that there will be no brand change without consent from designated plant personnel. Those who are obstructionists to the 3PMRO plan, will sign off on the change, reap the benefits of brand change, and, when the KPI benefits are reported by your provider, refuse to approve the KPI credit to your program. Listed below are some common refusal statements:

  •  “I never approved the change”
  •   “The old brand was better”
  •   “The new part has a higher cost; not worth it”
  •   “We do not see the benefit from the submitted KPI”.

Keep documentation of all productivity approvals and require proof of KPI performance from the provider.

Refusal to recognize that inventory recovery reduces the cost of money expenditures - Every 3PMRO scope of work must contain a KPI that requires MRO inventory reductions. (It is critical to note that MRO inventory reductions must be accomplished with increased request full rates when parts are issued. Too many times, when management orders reductions in inventory expenditures, parts are not available when needed, high cost rush orders occur, and production is affected adversely).

The provider reports his inventory reduction performance (along with increases in fill rates) in line with the KPI agreement in the scope of work. All KPI performance reporting is critical to continually prove the benefits of 3PMRO operations. In this case, the obstructionist will say that any reduction in MRO inventory has no cash flow expenditure reduction value. The dissenter will refer to corporate (varied) accounting policies, etc., etc. “We, at the plant level, get no credit when we reduce MRO inventory”.  Remember, the obstructionist’s goal is to “obstruct”, to defeat the program by proving lack of value.

One manager stated that, “we don’t call it inventory, since we expense it when it comes into MRO stock; ergo, no value can be claimed for reductions” Well, if it has no asset value, why count it and control it?

Refusal to recognize consolidation of transactions as a savings benefit - Another important KPI requirement of an optimum 3PMRO agreement is the consolidation of transactions. In a traditional MRO purchase cycle, there are eight transactions that are created per P.O. issued:

  1. The P.O. itself
  2. Receipts: Add two. Since there are an average of two shipments per P.O. issued: Add two more transactions.
  3. Invoices received: Add Two. Each receipt generates its own invoice: Add two more transactions.
  4. Charge Backs: Add Two. Each receipt requires a charge back to the cost code; add two more transactions.
  5. Pay the invoices: Add One. Invoice payment requires at least one more transaction.

Therefore, there are eight actions to complete the traditional MRO P.O. cycle. The average P.O. order placed for MRO is about $500.00.

Here is an example of transaction burden vs. a proper 3PMRO process: You classify certain parts as MRO, and you have calculated a yearly spend of $1,000,000. for those classifications you call MRO. You create 2,000 P.O. cycles that generate 16,000 transactions. If your MRO spend is $2,000,000, your burden is 32,000.

Traditionally MRO spend in a manufacturing facility is between 6 and 10% of the total amount purchased for all goods and services. However, the number of MRO transactions can be over 80% of all transactions created companywide; this is upside down and can be/is solved by 3PMRO. The 3PMRO invoice cycle cuts transactions to just 24 consolidated yearly invoices with total control of the MRO audit trail.

So, going from 16,000 transactions to 24 with increased control has value. Some companies who offer outsourced purchasing programs will state that the P.O. cycle has a cost of $100 (their reason for outsourcing the purchasing function to them). This reasoning has little value because the company does not recover all of the costs that are calculated to reach the $100. figure.

However, there are savings that occur, and it is incumbent for management to calculate the effects of zero paperwork passing through departments vs. the excessive burden without 3PMRO.

I have seen the obstructionist deny any value of transaction consolidation: “I still have the people (with nothing to do); I am saving nothing” or” I have less people in my department; I am less important.”

In the continual quest to prove that 3PMRO has optimum ROI value, a company must measure and agree to the benefits of consolidation. There is substantial controversy created when an MRO provider attempts to put values to the new 3PMRO supply chain transaction process.

Refusal to be objective on critical spare identification – An MRO provider must be willing to commit to a KPI of 100% availability for parts that are identified as “critical spares”. If the individual assigned to decide which part is “critical” happens to be an obstructionist who provides misinformation, your program could be in jeopardy.

There are three methods the obstructionist can employ to create dissention:

  • Require excessive min/max quantities to be in stock at all times causing your provider excessive costs and loss of profit or require inadequate min/max quantities with the hope there are stock outs causing down time.
  • Identify every SKU in stores as “critical” including soap, dope and rope. This would mean that any missed issue request would be viewed against the corresponding KPI and allow any stock out to be blamed for downtime.
  • Provide any given critical SKU with erroneous descriptions and/or sourcing to affect the issue of incorrect parts to a needed asset…more cause of downtime.

The individual or department who is responsible for identifying which parts are critical and which are not must be positive regarding the 3PMRO process and be proactive in keeping information flow to the provider in order for all to keep abreast with changes in production requirements.



Tags: MRO outsourcing MRO delays MRO costs MRO obstacles MRO goals
Category: Blog Post

George E. Krauter

user_avatar

George Krauter, former founder and president of Industrial Systems Assoc. [I.S.A.] has retired as vice president of Synovos.

Currently, he has initiated, "George Krauter Consulting [GKC]"  for effective reliability and cost recovery for consumers  of MRO materials. George is a recognized authority on the management of the MRO supply chain and support for maintenance reliability programs. His book, "OUTSOURCING MRO...FINDING A BETTER WAY" is available from Amazon and from Reliability Web.com.

He is published in Uptime, Modern Distribution Management, and Supply and Demand Chain Executive. George has conducted seminars across North America, in Europe, and in the U.A.R. as well as a guest speaker at Temple U., Howard U., Duke, and MIT.

George is a graduate of Temple University; he lives with his wife, Joyce, in Bucks County, PA. All grand kids live within eating distance. He can be reached anytime:   georgekrauter@comcast.net.



Please add a comment

You must be logged in to leave a reply. Login »


Related Content

Guidance for Addressing the New Talent Acquisition Challenge

Dennis Bouley

The US Labor Department reported in March of this year that there were 6.6 million job openings, a record high. Although most of us applaud these numbers Read More

Millennials in Supply Chain Management Seek Advancement and Development Opportunities

Marisa Brown

Millennials working in the supply chain management field don’t fit the mold that the older generation assumes for them. APQC’s recent study Read More

Thought Leadership and the Demise of your Third-party Outsourcing Program: Part 3

George E. Krauter

Parts 1 and 2 of this series outlined some the pitfalls to anticipate and to avoid when your third-party MRO (3PMRO) program is in operation. This installment continues to explain how opponents to your Read More


Supplier Profiles

Staples

Staples Advantage is the one supplier that offers all the business solutions you need, all with the expertise of a specialty vendor. Read More

Digi-Key

It started in 1972 with an idea, a new concept in distribution. Today, Digi-Key Corporation is one of the fastest-growing electronic component distributors in the World. The stimulus for this growth is Digi-Key's customer-centered business philosophy… Read More

Lunney Advisory Group

Lunney Advisory Group was founded in 2007. Our firm is not your typical consulting company. Some members of our firm are highly qualified and experienced industry executives/practitioners while others are full time or adjunct university professors.… Read More


Webcasts

What CEOs Expect Of Purchasing

Guest Contributor

Procurement and supply management leaders have a seat at the table, and management’s expectations are high. But what do CEOs really want, and is purchasing delivering on these expectations? This webcast looks at how procurement and supply management … Read More

Growing Purchasing Influence On Indirect Spending

Guest Contributor

At world-class companies, purchasing’s influence touches just about every area of spending. But, how exactly do procurement teams get to the point where other departments approach them for help with sourcing such indirect categories as human resource… Read More

Procurement-Finance Collaboration

Guest Contributor

Procurement & finance are two business functions which are often at loggerheads with each other. One reason for this is the lack of perception alignment on an important metric of procurement and finance performance - 'savings'. Read More