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MRO offers big savings; best-in-class companies are proving the competitive advantages of a well-managed maintenance, repair, and operating supplies program.

Until recently, companies have largely neglected MRO (maintenance, repair, and operating) supplies as a potential area of cost reduction. MRO is typically comprised of a high number of low value, nonstrategic items that are often managed in a decentralized manner. These factors combine to make effective management of MRO particularly challenging.

When viewed at the category level, MRO presents an excellent opportunity for savings through aggregation and standardization of the process across sites. The right sourcing and procurement strategies can drive these savings while ensuring availability of needed items. It's important to note that savings and availability are not mutually exclusive objectives. But to realize these goals, you need an approach to MRO that is strategic and centralized.

Aberdeen Research recently conducted a study on the MRO practices of more than 150 companies. (See "The Maintenance, Repair and Operating Supplies Benchmark Report," on www.aberdeen.com.) The research examined the drivers, hurdles, strategies, tactical action plans, and technology used in the MRO space. It also looked into the main pressures driving companies to adopt a MRO category spend management program (see Exhibit 1). The findings revealed that in leading organizations, the focus is on more than just reducing the costs of the individual items; rather, it's on the total delivered costs of the entire MRO program. Such costs include freight, loading, unloading, packaging, and, in some cases, warehousing and inventory management.

Key Business Value Findings

Our study results highlighted the advantages of a well-managed MRO program. In particular, we found that:

* Best-in-class companies have reduced MRO costs by 19 percent.

* Reducing administrative costs provides a strong opportunity for savings as 54 percent of transactions are related to MRO on average.

* Online ordering and payment are top actions for reducing administrative costs.

The study found that the biggest challenge to improving MRO spend management is a lack of visibility into this spend. This challenge, which is common among other areas of corporate spend as well, is best addressed by a spend analysis or spend intelligence program. A spend analysis initiative that provides visibility is a crucial step to achieving MRO cost-savings objectives.

A Closer Look at Best in Class

Let's now examine some of the specific advantages that the leaders enjoy over the rest of the pack, according to our survey findings:

* Just over half (51 percent) of best-in-class enterprises automate some or all of the source-to-pay process for MRO programs vs. 30 percent of industry-average companies.

* Best-in-class enterprises are more likely than their peers to utilize technologies to improve MRO spend management. The two technology areas in which the leaders have built the widest competitive gap are strategic sourcing systems and spend analysis/intelligence systems. Best-in-class organizations use these two technologies at rates of about 45 percent greater than industry-average organizations. Best-in-class companies are also the least likely to rely on spreadsheets and phone/fax/e-mail.

Exhibit 2 gives some additional comparisons of how the leaders perform vs. their average and laggard competitors

Asset Utilization and Outsourcing

The research also examined such related dynamics as asset utilization and outsourcing.

Assets such as machines and other equipment need to be operating when they're needed--at full capacity and peak efficiency. One trend identified in the study is an increase in the number of companies scheduling planned downtime to maintain equipment, resulting in the consumption of MRO supplies. In fact, to keep equipment operating at peak efficiency, MRO supplies may be replaced at faster intervals--using more supplies than before and driving up the costs of specific MRO items.

On the other hand, keeping equipment at peak-performance levels enables the enterprise to maintain a higher level of quality, resulting in less scrap and higher yields. In such cases, we see that the specific cost of the MRO items on an annual basis may increase; however, the better resulting quality has cost-savings ramifications on the manufactured products (fewer defects, fewer returns). MRO category spend initiatives must take into account these benefits as part of the overall strategy and resist focusing only on one-dimensional MBO cost reduction.

Finally, the MRO survey asked about outsourcing. The question of whether or not to outsource the sourcing and procurement of MRO supplies often comes up, specifically for laggard and industry-average performers. In our survey, those enterprises that outsource MRO are more likely than their industry-average and laggard companies to have MRO cost reductions and administrative cost reductions. However, they fall below best-in-class performers. Does this suggest that outsourcing will also yield results that are below best in class? Not necessarily, as 30 percent of best-in-class organizations currently outsource.

Recommendations for Action

Based on the survey findings and related Aberdeen research, we recommend the following actions to get companies on the road to better management of their MRO spend.

* Control ad-hoc MRO: Unplanned MRO purchases (spot buys) represent 18 percent of all MRO expenditures today.

* Extend electronic payment: Just 16 percent of all MRO transactions are settled with electronic payments; this remains a large opportunity to reduce transaction costs.

* Focus on spend analysis/intelligence: Spend analysis/intelligence, which is crucial to providing visibility into MRO spend, is in use by only 38 percent of respondents.

Vance Checketts and Vishal Patel are analysts in the Global Supply Management practice of AberdeenGroup.
EXHIBIT 1

Top Pressures Driving MRO Category
Spend Management Program

                                         % of respondents

MRO spending has become a much larger
portion of overall spend                       59%

Need to improve asset utilization              55%

Need to reduce inventory costs                 49%

Lean or quality programs have made MRO
management more important                      44%

Note: Table made from bar graph.

EXHIBIT 2

                                Best in
Key Performance Indicator        Class    Average   Laggard

Online MRO transactions
as a % of total MRO spend         21%       14%       7%

Electronic MRO payments
as a % of total M RO payments     26%       19%       15%

MRO savings over the
last 12 months                    19%       7%        3%

MRO administrative cost
reduction                         18%       7%        2%

MRO inventory reductions for
the past 3 years                  14%       8%        2%

MRO supply base reduction
for the past 3 years              17%       9%        3%
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Title Annotation:SUPPLY MANAGEmENT
Author:Checketts, Vance; Patel, Vishal
Publication:Supply Chain Management Review
Geographic Code:1USA
Date:Nov 1, 2006
Words:998
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