By George E. Krauter
Companies are always looking for ways to reduce costs; simplification of business procedures can have a direct impact on a company’s bottom line. The process of purchasing, receiving and paying for MRO parts produces 80 percent of a firm’s processing costs while only accounting for six to ten percent of their total dollars purchased.
Although dot-com companies offer programs that purport to reduce the MRO burden and simplify the process, too many times the burden is actually shifted for other departments to bear and does not produce the savings projected for the company.
Consider the existing MRO supply chain from the manufacturer all the way to the engineer who consumes the part. Let’s use an automobile V-Belt manufacturer as an example.
First, the belt manufacturer receives orders from their authorized distributors, they ship the belt orders to regional warehouses maintained by these distributors. (Note: With some exceptions, the orders are not shipped to local distributor points). Second, the regional warehouses process incoming shipments and await orders to authorize shipments to their local distribution points. Third, the local distributors assume the burden of receiving inventory, processing incoming orders from their clients, shipping the belts and then creating invoices for the belts delivered. Fourth, the client who consumes the belts now has to duplicate the process once again to account for receipts, matching purchase orders to invoices and issuing payments.
BUT WAIT! Fifth is the movement of the belts to the client’s MRO storeroom requiring more processing costs to receive the parts into inventory and then control an audit trail when the belts are issued to the mechanic who will finally put the belts on the company’s asset.
There are five…count ‘em… five duplications of process activity for MRO; as stated, this is 80 percent of a company’s burden for six to ten percent of purchased value.
Let’s take a closer look at a typical MRO scenario: For example, to calculate the amount of paperwork and/or entry data activity, consider a mean average MRO purchase order of $500.00 (this includes orders for stock as well as those for spot buys… non-inventory MRO requirements). A typical P.O. set contains five copies (maybe more?}, the packing slip has three, the receipt has five to match the P.O., the invoice has five, and don’t forget the payment to the supplier to satisfy the invoice for the belts received. This amounts to 20 pieces of paper…20 activities of burden.
BUT WAIT! The average MRO P.O. will generate at least two shipments to satisfy the order…so add another receipt/ invoice activity to produce another nine for a total of 29 functions to control the P.O. audit cycle just at the user’s level. Combining activities can cut down on functions, but if you add all the other burden activities performed by the other members of the supply chain for replacement of inventory in the MRO storeroom and for spot buys, you have upwards of 50 functions per P.O. placed.
There has to be a better way. Business simplification is essential and can be a significant contributor to corporate net profit.
THE ANSWER? Study and understand the movement of parts through the existing MRO supply chain from the manufacturer through to the various distribution activities and finally to how parts are moved/controlled to points of consumption in the plant. Recognize the audit requirements of each member in the chain and take action to eliminate the duplications. If an MRO consuming company was vertically integrated, they would certainly recognize these duplicated functions and take action to eliminate/streamline them. Too many times companies do not recognize the benefits that can accrue from business simplification; they just continue on with the status quo.
There are companies who partner with MRO providers that have solved this dilemma and continue to produce sustained savings. Take time to consider methods to optimize your MRO supply chain burden via a business simplification plan that fits your particular MRO situation. It will pay off.
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: firstname.lastname@example.org.
George E. Krauter
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} Read More
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 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
Staples Advantage is the one supplier that offers all the business solutions you need, all with the expertise of a specialty vendor. Read More
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
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
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