Are you in the MRO parts business or pulp and paper?

The existence of a maintenance, repair and operations (MRO) storeroom in your mill represents a duplicated cost in the MRO supply chain that can be eliminated. There is dramatic value that can be released if you get out of the parts distribution business.

[ILLUSTRATION OMITTED]

Compare your manufacturing controls to the lack of control over and information about your MRO operations. Fiber, chemicals, fuel, and other production procurements are precise and linked to sales forecasts and production schedules. Production materials account for 90% of a typical plant's spending but only 10% of its transaction costs. MRO, at 6-10% of the spend, accounts for 80% of the transactions.

No matter how sophisticated the MRO process, few companies analyze and manage their MRO spend, the value of inventory, and the cost of spot buys. Uncontrolled sub-stocks exist, warranties are not exercised, and many audit trails are not intact. This would not be tolerated for production materials; why does the condition exist in MRO?

The existence of various cost reduction programs from "integrated supply" companies, e-procurement and other Internet programs provide many levels of cost recovery. Most do not provide the process to complete the transition to an "insourced" storeroom.

Companies have no problem recognizing the value of hiring outside accounting, security, janitorial, and other non-essential services. Why do companies continue to assume MRO distribution costs that are not recovered in the manufacturing process? Some of the reasons include:

* Resistance to change; inertia 

* MRO ownership--whose program is it?

* Antiquated pricing and quoting policies

* Entrenched suppliers; status quo 

* Total concentration on price as measurement of change

* Job protection

* No real alternative recognized

* Supplier protection of high profit; traditional distribution

REVIEWING THE STOREROOM PROCESS

Should you consider re-engineering your storeroom process? The following questions are designed to help you determine if value can be achieved. If you answer "yes" to more than 10 questions, you are leaving costs in your process that can be recovered.

 1. Does your MRO inventory turn less than twice per year?
 2. Do maintenance, engineering and production keep uncontrolled
    sub-stocks?
 3. Are there different stock numbers for equivalent brand names?
 4. Do you measure fill rates from inventory?
 5. Are fill rates less than 93%?
 6. Is inventory controlled and managed with a manual process?
 7. Does the requisition, purchase order (PO), receipt and payment
    process create paperwork?
 8. Does your audit trail require a three-way match among PO, receipt
    and invoice?
 9. Do you receive an invoice for each shipment?
10. Do requisitions have quoted prices?
11. Are POs priced before placement?
12. If purchase cards are utilized, is there purchasing control?
13. Is there an adequate audit trail?
14. Are 10% or more of the SKUs obsolete?
15. Does engineering purchase MRO directly?
16. Are your total MRO and OEM purchases over $1 million per year?
17. Is inventory reduction and cash recovery important to plant
    management?
18. Is personnel reduction included in cost reduction goals?
19. Is the reduction of transactions recognized as a cost recovery?
20. Does management have the will to improve the MRO buying and
    inventory management processes?

Many mills that ask themselves these questions will realize that inventory value equals annual MRO expense, one-time spot buys account for 50% of parts needed, and that fill rates from inventory do not exceed 90%. When you operate your own MRO stores, you are a parts distributor. You own inventory, replenish it, you hope someone requests it, and you add no mark-up when you sell it (issue it).

Distributors make money by applying markups (more on spot buys and less on quoted SKUs) and turning their own inventories rapidly. Any distributor owning inventory that turns once per year, contains many obsolete parts, and provides no offsetting margin when issued is losing money. You lose money when you operate your MRO storeroom.

When asked "what is your business?" do you answer "pulp and paper"? If you maintain a parts storeroom, you should add, "We are also in the MRO parts distribution business." Why are you distributing parts when you earn a living in the pulp and paper business?

HIRING AN OUTSIDE MRO MANAGEMENT FIRM

If your company is considering hiring a company to manage your MRO stores on site, there are several steps to follow:

Step 1: Selecting your supplier. Your supplier should be selected based on the following criteria:

* Sole source of revenue comes from onsite programs

* State-of-the-art materials management system that streamlines the process

* Purchasing power can effect continual savings

* Comprehensive inventory management

* Experience

* Trained personnel

* Ability to demonstrate successful operations

* Total corporate dedication to Storeroom-on-Site; no other considerations

* Compatible computer systems

* Ability to personalize the operation to each plant's goals

* Willingness to share costs

* Ability to measure savings

Your supplier should also have the ability to provide a site survey and business case process that accomplishes the following:

* Defines the company's current total MRO cost and resulting cost reductions

* Defines price model from supplier

* Predicts future inventory needs based on past consumption

* Shows the economic reasons to enter into on-site operations with your supplier

* Establishes cost reduction goals for the program

* Sets proforma scope of work

* Sets a time schedule of activities to get to opening day

Implementation requirements for the supplier should be as follows:

* Supplier must have the experience to create a personalized agreement that reflects the goals of each site

* Supplier must assign specific implementation personnel who are trained to implement and who have no other job assignment

* Ability to complete tasks needed to prepare for "opening day"

* Established system of tracking and benchmark audits

Your MRO supplier should also have the following capabilities:

* Recognize and have the ability to show all affected client personnel the value of the effort and gain cooperation

* Demonstrate a non-competitive atmosphere with existing and new sources

* Be able to show how continuous improvement will occur and how it will be implemented and measured

Keep in mind that unless your selected supplier can demonstrate dedication and proficiency in all of the "ingredients," your program will fail. Failure means that your company will not try an on-site program again and will be denied the dramatic cost reductions that are available.

Step 2: Defining your MRO spend as a percentage of operating cost. Most companies do not know what their MRO spend is and do not have a clear definition of what constitutes MRO. Your supplier should be able to accurately calculate MRO spend. In addition, your selected supplier should be able to supply categories of expense material that you may not classify as MRO in your facility. Take these steps:

* Agree on the categories to be applied and the annual spend for those categories.

* Conduct a site survey with your chosen supplier to define your existing MRO costs (both financial and non-financial) and compare these costs to the cost of having the supplier come on site to operate your MRO stores. You now have the reasons to assume the "cost of change," which becomes your business case.

Step 3. Site Buy-In. Present the business case to all plant disciplines to obtain support and buy-in from all concerned with cost and spend reductions. All departments must see the value and support the process for the program to succeed.

Step 4: Implementation. The implementation process must be close to perfect to placate any "naysayers." Your supplier should have been able to demonstrate implementation expertise while identifying potential pitfalls.

During implementation, compatibility of computer systems is resolved and a master contract is constructed and signed. A scope of work is a part of the master contract and reflects the terms and conditions of the agreement.

Pricing, incentives and continuous improvement clauses are contained in the scope of work.

Step 5: Measurement and Continuous Improvement. Every successful program must be measured against goals and improve year after year.

Step 6: Evaluating Value. By removing yourself from the "parts business" and selecting the proper on-site supplier process, you can:

* Define, reduce and control your spend;

* Decrease downtime;

* Increase parts availability;

* Experience continual improvements;

* Recover time for critical activities.

MRO CASE STUDY

The following illustrates an MRO situation and the benefits that accrued to outsourcing spare parts management.

The situation:

* MRO stores operated one shift with one attendant.

* Issues were not recorded.

* Stock was reordered via requisition to purchasing.

* Two purchasing clerks placed purchase orders on non-priced blanket orders.

* Spot buys were placed via purchasing and/or directly with suppliers by engineers.

* MRO transactions accounted for 75% of all transactions created.

* Fill rates were estimated to be 90%, with downtime and lost production blamed on purchasing, stores, and facilities.

* Spend was estimated to be $1.5 million; expensed inventory estimated to be $1 million.

* Slippage was estimated to be 10%.

The solution:

* On-site supplier-managed MRO storeroom.

* The effect was a net price reduction of 10.3%.

* Inventory recovery was $280,000.

* Warranty recovery amounted to $36,000.

* Slippage was eliminated

* Fill rates were increased to 99.1%.

* Downtime was defined and not attributed to stores.

* Elimination of 12,500 transactions resulted in the recovery of 5500 work hours.

* Web-based computer system was installed to handle charge backs, budget control and provide Sarbanes-Oxley audit trail compliance.

MULTIPLE DEFINITIONS

There are multiple definitions of "integrated supply" in the market, many of which have failed. Many integrators have discontinued operations to return to traditional distribution methods.

The fact remains that the on-site process does remove a cost step in the supply chain, which is a measurable benefit to the MRO consumer. Defining MRO costs, finding the right supplier and personalizing the process and committing to the program will, in fact, place you in the optimum MRO cost position.

ABOUT THE AUTHOR:

George Krauter is vice president of sales & marketing, Storeroom Solutions. The company has offices in Montrose and Conshohocken, Pennsylvania, USA. Krauter has enjoyed a long career in sales and marketing in all functions within the industrial supply chain. He was the founder, president and CEO (retired) of Industrial Systems Associates, which focused on MRO distribution concepts. Krauter holds a BA and MBA from Temple University. Contact him by phone at + 1 610 246-6492.

[ILLUSTRATION OMITTED]

GEORGE KRAUTER, STOREROOM SOLUTIONS

WHAT YOU WILL LEARN

* Reasons to eliminate a MRO storeroom in your mill.

* How an outside supplier may be able to better manage the MRO process.

* What to look for in a potential supplier.

ADDITIONAL RESOURCES

* www.storeroomsolutions.com.