Outsourcing of Indirect Spend Dollars is Common Practice. Why is MRO Different?

By George E. Krauter

November 21, 2017 at 5:57 PM

Total spend in manufacturing facilities can be placed into three categories: materials for production; projects for capital investments; and parts and services for indirect expenditures. Although there seems to be a dearth of information regarding percentages of spend for each of these categories, an acceptable estimate is that the amount allocated to indirect is about 20% of the total expenditure; parts for MRO materials are 5% of the total (25% of total indirect).

The indirect category consists of dollars spent in the following areas: legal, security, literature, cafeteria, grounds, contractors, consultants, and finally, MRO supplies.

With some rare exceptions, all of these indirect categories are outsourced to experts in their respective fields. A company does not cook so they outsource the cafeteria. A company does not know the intricacies of security, so they let security companies do it for them. Consultants are hired to provide needed expertise in areas where the company is deficient. The company is not in the legal business; not in the catering business; and not in the security business; they are in their own manufacturing business; they outsource jobs that are outside their scope of expertise.

Why then do they continue to operate their own MRO storeroom when they are not in the hardware store business?

Consider some comparisons of MRO vs. production activity in the table below:

 

Category

Production

MRO

Cost controls

high

low

Usage and purchase history

high

low

Dollar value per purchase order

high

low

Buyer expertise

high

low

Administrative order cost

similar

similar

Emergencies

low

high

Number of suppliers

low

high

This comparison points us towards an obvious conclusion:  the cost of supplying MRO is upside down when compared to other company expenditures for other parts and services. Therefore, MRO provides the largest percentage opportunity for cost recovery when compared to other target areas in the facility. The opportunity can be realized by outsourcing the management of the MRO supply chain to MRO experts just like the company outsourced all the other indirect activities to achieve the accrued benefits.

What are the potential savings?

Let's assume that outsourcing will result in a 25% reduction in a company's total cost of ownership (TCO). Also consider a single site where the total annual spend is $100,000,000. In this particular situation, MRO would be $5,000,000 (5%) and a 25% savings would result in a $1,200,000 TCO benefit.                                        

If the company has five comparable sites, the benefits amount to $6,250,000. Can this level of profit contribution be realized from any other cost reduction program throughout the company?

Every action taken in ordering, receiving, stocking, issuing and paying for MRO parts is a cost incurred that is not recovered. In addition, if MRO parts are paid for before they are used, unnecessary costs are incurred that could have been recovered. Time to reexamine how MRO is being managed? Yes, if cost savings has been identified as a key corporate goal.



Tags: MRO supply chain MRO Cost indirect spend outsourcing indirect spend categories
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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