The MRO Dilemma: Major Time, Minor Spend Your MRO situation is solved at optimum total cost of ownership (TCO)
A universal situation in the world of the maintenance, repair and operations (MRO) supply chain is that managing the process consumes an inordinate amount of time from all plant departments. The MRO spend is only six to 10 percent of a plant’s total, but it absorbs 70 to 80 percent of all transactions and causes 50 percent of the emergencies affecting plant reliability.
Many companies apply improvement ideas outlined in multiple publications, so, why then, do the conditions continue to exist? The lack of effectiveness comes from the fact that plant disciplines are multiple and varied. Many have ideas on how to run the MRO operation and which suppliers to use based on how the MRO process affects their individual job performance. Improvement ideas are often met with resistance and ongoing “MRO spats” cause any discussion about change to be sidelined. Managers give up on the MRO change opportunity and instead tackle other improvements with a better chance to bear fruit. Ironically, major deterrents to MRO improvements are production emergencies caused by unreliable MRO. There is no time to consider MRO supply chain improvements because of the existing MRO problems.
In a typical MRO storeroom, a company incurs significant costs to have parts on hand when needed. These costs are shouldered to ensure plant assets are reliable, facilities are maintained and safety regulations are satisfied.
THESE COSTS INCLUDE:
- Financial Impact:
- Price of parts;
- Cost of inventory;
- Direct personnel costs (e.g., storeroom personnel);
- Indirect personnel costs (e.g., paper processing and chargeback accounting).
- Nonfinancial Impact:
- Extended downtime;
- Management opportunity costs;
- Worker inefficiencies;
- Incorrect parts;
- Duplicated / uncontrolled substocks.
Since MRO constitutes just six to 10 percent of a company’s total expenditure, the ineffectiveness of MRO supply chain management exists without recognition that there is considerable value that can be released from MRO operations. On a percentage basis, MRO contains the highest level of cost reduction available. How? First, take the costs assumed from financial impact.
Price is the area most often addressed by cost reduction programs. Actually, price reductions are near the low-end of recoverable MRO values. Parts are issued (i.e., sold) at the purchase price with no markup. The storeroom is a “store” and any store selling (i.e., issuing) material without markup loses money; therefore, the existence of a company-owned MRO storeroom is a profit drain.
Why is price the king in selecting a supplier?
The answers are:
- Price comparisons are among the easiest and best ways to measure value.
- Price is the way management measures purchasing performance.
- Management directs purchasing to buy for less, even if cheaper parts cause higher total costs.
- Inventory: Generally, MRO inventory turns less than once per year. The MRO storeroom is a store, so how can a store return a profit with negative inventory turnover?
Why is this inventory turnover situation allowed to exist?
- The threat of downtime caused by a lack of parts availability justifies increasing minimum/maximum order levels just in case something goes wrong.
- Minimum/maximum order levels are rarely adjusted, even when a particular part is no longer or rarely used.
- Duplicate parts exist under different descriptions and different SKU numbers, causing duplicated and excessive inventory levels.
- Obsolete inventory recovery programs are not instigated, mainly because maintenance is reluctant to get rid of parts it may need and finance is reluctant to absorb a negative hit to the balance sheet when MRO inventory is considered an asset.
- Incoming freight: You now have a desirable freight agreement, so why not use it with your supplier?
- Direct personnel: Who issues purchase orders? Is the order already placed before purchasing gets it? Do you really need all the parts requisitioned? Are the descriptions accurate and consistent? Did you get the correct part?
MRO procedures are rarely adjusted because MRO is at the tail end of priority consideration; there is no time to consider change and there is little agreement as to what the change should be.
With regard to indirect personnel costs, generally, transactions involving MRO parts are 80 percent of all transactions processed and less than 10 percent of total dollars spent. Transactions can be consolidated by installing a single MRO source with semimonthly audit trails.
Next, look to nonfinancial impacts. Any one of the following can exceed all the costs listed in the financial impact list.
- DOWNTIME: The cost of an asset with downtime is excessive and affects all production performances.
- OPPORTUNITY COSTS: What values could be realized if time spent on MRO problems could be recovered and reallocated?
- IDLE WORKERS: How much does it cost to pay a worker to do nothing?
- INCORRECT PARTS: You thought you had the right part, but you don’t, so emergency shipments and emergency pricing abound. More downtime, more idle workers.
- DUPLICATED SUBSTOCKS: You have substocks for parts because the storeroom is unreliable, which creates an unnecessary burden on budgets. What could you do with added budget dollars if you did not need these substocks and could rely on an efficient MRO stores operation?
How can you take the actions necessary to resolve the MRO dilemma? Do you have time to do it yourself? Do you have the knowledge or expertise to implement and sustain a plan that would succeed? Even with the necessary experience and incentive to change, disciplines generally do not interact with each other, meaning MRO procedures are subject to the quirks of stakeholders with different priorities. Stakeholders are among the major reasons why the condition continues to exist.
There are many articles, blogs and books on MRO espousing procedures that would save money, release time for more important issues, improve procedures, increase reliability, etc. However, you are still spending time on your MRO supply chain. By employing some of the recommended improvements, benefits can accrue, but your MRO problems will still exist and you will not be at optimum.
Why do it at all? Because the optimum solution exists. Get out of the MRO business! Let an expert do it. Here’s how:
- Select one supplier who will share all costs and has the experience and the commitment to succeed. Make sure this supplier has a successful implementation department and is flexible enough to meet the needs of all plant MRO functions.
- The supplier must offer asset management services, SKU analysis and computerized maintenance management system (CMMS) capabilities and have a corporate commitment for success in on-site MRO supply chain management.
- Tell the supplier the price you will pay that meets your price reduction goals; do not go out on quote.
- Write a statement of work with your selected supplier that solves your MRO supply situation.
- Require key performance indicators (KPIs) with incentives that ensure success.
- Get cooperation and buy-in from all plant disciplines.
- Implement properly! Poor implementation is a major cause of failure.
- Audit, measure, report and sustain.
By doing so, you now have the time to get on with your core business opportunities – your areas of expertise. Your MRO situation is solved at optimum total cost of ownership (TCO). You are relieved of the malignancy of MRO while obtaining world-class control of MRO contributions to plant reliability.