Thought Leadership and the Demise of your Third-Party Outsourcing Program: Part 2

By George E. Krauter

September 13, 2018 at 10:33 AM

In my first installment in this series, I pointed out how those within organizations opposed to outsourcing of the MRO function erect obstacles to success. These individuals or groups of individuals I identified as “obstructionists”, and I pointed out some of the methods they utilize to undermine those who are attempting to cut MRO costs through an outsourcing approach.

Listed below are several more tactics to be aware of in order to avoid a situation where your outsourcing plans are either delayed or set up for failure:

  • Falsely claiming to be your supplier - When you have an open book provision in your agreement with your provider, source data and supplier’s cost of goods are available for all to see.

Be aware, the obstructionist will call your supplier’s source (claiming to be your supplier) and obtain your supplier’s price which is devoid of the markup to which you have agreed. The obstructionist will now say that the part in question can be acquired for less than the agreed contract price, ergo: “THEIR PRICES ARE HIGH; THEY ARE COSTING US MONEY!!

  • Comparison of outdated pricing - When the prices in your MRO computer have not been updated to current unit prices, or when a particular part has not been purchased for a long period of time i.e. containing outdated pricing, a comparison to current pricing is erroneous. The obstructionist will cite specific SKU’s where the supplier’s correct and competitive price is higher than the price shown in the MRO computer.

For example: “I was paying $10.00 for SKU # 1234, and now my budget was charged $10.80 when I withdrew the part; this will crush my budget…These high prices are not worth it; this program does not work for me”

In this case, note that there is no mention that the SKU at $10.00 was purchased two years earlier and that, if purchased from the previous traditional supply base, would have been much higher than $10.80. The savings were there; facts are distorted.

  • Require single source - The obstructionist will require that a part be acquired from a particular source, i.e. a single source, and will not accept the part from any other source. This single source is directed by the obstructionist to quote a low-ball price for an RFQ received from the obstructionist. When an actual requisition is placed with your onsite supplier, who is not allowed to shop the part price, the single source will quote a higher price which gives the obstructionist more ammunition to prove that your supplier is high in price. Note that these situations occur for one-time spot buys designed to allow the requisitioner to by-pass the agreed procedure and buy (P Card?) where desired regardless of the total cost of doing so.
  • Request price of one; compare to price of larger quantities - Where prices are affected based on the quantity of the order, the obstructionist will request a price for a part (usually a onetime non-inventory SKU); quantity of ONE. Now the obstructionist will go to a source independently and request a price for 25 which will be substantially lower that the price for one.

For example: Flan Part #34: Quantity 1 each price: $25.

Flan Part #34:  Quantity 25 each price: $15.

With no allusion to the quantity difference, the obstructionist’s conclusion (voiced to management): “This new supply program is costing us money. Look at this; they are 40% high in price for this Flan part!!”

  • Compare low quality parts to no sub brands - An energy facility required a specific quality level for assembly tooling in order to provide optimum worker productivity and quality product performance. In this instance the obstructionist was a consultant who took umbrage from the outsourcing of the MRO storeroom to a proven source without the consultant’s input (aka fee). The consultant performed an independent study on the tooling and published a front-page companywide report stating that your supplier was 35% high in price and that, if the company moved away from your supplier, they would save at least 30% (given the difference of 5% to the consultant for their work in uncovering this opportunity). Upon investigation, your supplier found that the tools recommended by the consultant were of a totally unacceptable quality, and, if used, would decrease productivity, worker efficiencies, and cause significant downtime. Total cost would far exceed any price saving even without the consideration of worker dissatisfaction.

The consultant’s proposal was proven unacceptable and rejected. Management required that the consultant retract their claims; they did so in a small paragraph on a back page of the company report.  Quality performance vs. low price must be considered.

 A lesson learned regarding all of these tactics is that, on any given day, a price on any MRO SKU can be beaten. Your supplier has presented a price comparison guaranteeing a specific price reduction as a percentage of the aggregate.  Specific SKU’s of significance can be reduced in price to add to the overall price benefits, but should not be used as false generalizations to defeat the total benefits inherent in properly applied third party MRO outsourcing endeavors.



Tags: MRO outsourcing MRO efficiency MRO strategy MRO cost reduction
Category: Blog Post

George E. Krauter

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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.



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