Unit Price or TCO: Which Best Defines Optimum MRO Cost Recovery?

By George E. Krauter

October 27, 2017 at 6:09 AM

Does optimum maintenance, repair, and operations (MRO) cost recovery come from reductions in unit price or from decreases in total cost of ownership (TCO)? In many cases, TCO considerations are emerging as the focus of supplier selection.  Although factors other than unit price factor significantly in supplier selection(s), low price was, and is, the principal determinant because it is perceived as measurable.  Since market basket processes compare less than 4% of the buy price change from quote date to contract date, the market basket process is flawed. Obtaining optimum TCO requires that the MRO consumer must eliminate the duplications in their MRO supply chain. That is, apply change procedures that will provide proper support for plant reliability goals.

If it is perceived that TCO considerations provide optimum opportunities to capture measurable savings, the unit price factor becomes but a small factor in supplier selection.  However, there are obstacles in the MRO supply chain that will resist change and detract from obtaining true TCO value.

For example:

  • “I WILL NOT CHANGE; IT WON’T WORK” (Also known as “Not my idea!”)
  • “WE TRIED OUTSOURCING; IT FAILED” (What version failed?  Provider blamed?)
  • “THIS IS THE WAY WE’VE ALWAYS DONE IT” (Change benefits occur in manufacturing; why do MRO procedures remain the same?)
  • “WE HAVE NO TIME TO CHANGE; TOO MANY MRO PROBLEMS” (Classic cause and effect)

The MRO supply chain consists of the manufacturer, the master distributor, the local distributor and the MRO storeroom within the facility. That represents four duplications.  Actually, add a fifth: the areas consisting of “sub stocks” (“back up” critical spares to guard against down time) containing considerable dollars that are duplicated in stores inventory. Each of these companies in the MRO chain has functions that they perform, and each has different and sometimes conflicting agendas.  Each represents a cost factor that is applied to the part when that part is consumed…charged to someone’s budget.  The obstacles to TCO come into play as a result of the different agendas in the chain.

Consider a situation if all of these verticals were owned and controlled by one company.  Would these duplications of cost be allowed under a “lean” program?  Would the personal agendas be allowed to continue to the detriment of the prosperity of the company? They would not. The duplications would be eliminated; so why are they allowed to continue to exist in the current MRO supply chain?

TCO considerations require that the Purchasing function climb up the supply chain ladder and cut the duplications and knock down the barriers.   Supplier selections should center on a supplier’s focus and how that supplier can work in tandem to eliminate duplications and provide TCO goals when the parts are consumed ̶ not purchased ̶ to achieve optimum return on TCO efforts.

The answer?   Establish a process where a selected MRO supplier becomes capable of managing the company’s total MRO supply chain and does so on-site. A mutually conceived statement of work agreement with the right provider will eliminate supply chain duplications and optimize TCO year after year; existing MRO situations that detract from plant reliability are optimized.

Tags: MRO TCO Unit price maintenance operations
Category: Blog Post

George E. Krauter


George Krauter currently serves as Vice President for Synovos in Radnor, Pa. He is recognized as the originator of the concept that became known as “integrated supply.” He has participated as a guest speaker at Reliability 2.0, ISM Indirect Conference, International Maintenance Conference (IMC), The Conference Board, and events for APICS, SMRP, and ISM professional chapters. 

George is recognized as an authority on methods to achieve reliable, maintenance-connected MRO storerooms; he has published his experiences in Uptime Magazine, Food Manufacturing, My Purchasing Center, and Supply & Demand Chain Executive. He holds a B.A. and M.B.A.A. from Temple University (Philadelphia) and has conducted seminars internationally (Oslo, Abu Dhabi) as well as sessions at Duke University, MIT, Howard University, and Temple. He lives in Bucks County, Pa., with his wife Joyce; all grandkids live within eating distance. You may reach George by phone at 610-246-6492.

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