By George E. Krauter
There are many questions raised concerning how the MRO supply chain should be controlled and how potential values can be released. “Should our MRO supply chain be outsourced to MRO storeroom experts to cut costs and increase value to our requisitioners, or can we do IT ourselves?” In consideration of the outsourcing option, potential providers are asked to present proposals that would achieve optimum cost positions when MRO is consumed. At some time during the presentation, there are always the same two questions asked [If not verbally asked, they exist].
The following two questions are always top of mind:
FAQ #1: Companies want to know if a potential provider has MRO experience in their particular market. They will ask: “Do you currently operate MRO storerooms for companies in our industry? Does outsourcing work in our industry?”
In fact, this question is not really relevant. In the real world of MRO in-plant distribution, it does not matter what the company produces or in what industry the company participates. With the exception of some OEM parts that cannot be commercialized, MRO is MRO no matter where it is consumed.
Here is a real live example:
In a presentation to a fish processing company [who was determined to get out of the MRO business] all questions concerning the outsourcing process were satisfied until the purchasing director stated that she was OK with the proposal but wanted to see where we managed MRO on-site with a fish processing company. We had no other client in the fish industry; However, we had an on-site store operation with a newspaper publisher just 30 miles away. I offered the opportunity to visit our store to see the values that were being realized; she countered with, “What do newspapers have to do with fish?” I countered with, “They wrap fish bones in newspapers after eating the fish.” Even though this was a lame answer, the visit occurred and the purchasing director reported back to the plant manager of the fish company that the MRO SKU’s at the newspaper were just about the same as the SKU’s in the fish company’s storeroom. The newspaper had the same MRO problems as the fish company; however, the newspaper’s problems were solved via outsourcing. Eventually, the fish company’s MRO problems would be solved with the same outsourced MRO management expertise regardless of industry difference.
Regarding FAQ #2, let’s step back and understand that the outsourcing process has many facets of measurable cost reduction opportunities. A major value that accrues is the reduction of transactions to just two invoices per month with increased audit trail control. Event though MRO transactions account for about 80% of all transactions, the MRO represents only 6 to 10 % of all dollars spent.
For example, a company who spends $3 million/year on MRO will create over 20,000 transactions via the conventional purchase order process. The invoice process via a proper outsourcing agreement would incorporate just two invoices per month [24/year] effecting a substantial saving for the company if the personnel involved are properly utilized.
So here’s FAQ #2: “If I agree to move forward with the outsourcing opportunity, what do I do with all the people who are idle because 20,000 transactions have been eliminated?”
Here is a real live example:
A shelving manufacturer implemented a MRO outsource program that exceeded all of the predicted KPI’s in the provider’s proposal.
Purchasing and finance had to realign their work force. They still needed personnel to process transactions for production materials, capital projects and other indirect expenditures; they did not need the staff formerly required to control MRO [80% of the former burden].
Here is what happened: Each employee was interviewed based upon their personal goals. Some were offered a retirement package, some were promoted into other disciplines [sales, customer service, etc.], some were hired to work for the on-site MRO provider, and, MOST IMPORTANT, Purchasing was able to take on other procurement projects that they could not do previously because of all the voluminous MRO activity. For example, they took on advertising, PR sourcing, and were able to outsource other non-core functions.
The effect? Procurement increased their value to the company by assuming additional duties which recovered opportunity costs for other company disciplines. Charge back audit control was increased contributing to a total decrease in inventory and MRO expenditures.
Conclusion for FAQ #1: MRO considerations are basically the same among diverse industries.
Conclusion for FAQ #2: With MRO outsourcing, procurement is able to provide increased value to their company with non-MRO improvements; procurement and accounting personnel experience improvements in their work careers.
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.
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George E. Krauter
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