Are You Walking By Your Best Cost Reduction Opportunity?

Eliminating the disproportionate costs between MRO materials and their procurement/distribution should be considered a significant opportunity for profit expansion. Too often, companies ignore them.

Id 7466 Cost Savings

MRO (Maintenance Repair and Operating) supplies are expenditures companies make that are not a part of the products they produce or the services the offer. 

MRO storerooms exist within manufacturing plants, as well as institutional campuses for hospitals, universities, schools, etc. These facilities are generally considered necessary to support plant maintenance, assets, production activities, and employee safety. There is a dramatic imbalance between the cost of MRO materials (the goods) and the cost to procure and internally distribute those products. These disproportionate costs are not directly recovered in the company’s revenue stream; therefore, lowering/eliminating them should be considered a significant opportunity for profit expansion. Many companies ignore MRO, opting instead to focus on what they perceive to be bigger cost reduction initiatives. In many cases, they are walking by their best opportunity. 

It is proven that, when a company implements MRO improvements the benefits are short-lived and not sustained. It matters not which discipline institutes the improvements, they just don’t stick, because MRO stores operations are not a sole function assigned to a specific management professional. The MRO management function is typically assigned to individuals who maintain job descriptions with much higher priorities. This is the main reason that companies do not see the potential value that can be released from the MRO process; the effects caused by unreliable stores operations are accepted as a “way of life” and the beat goes on.

Maintenance professionals will not “put up with it”…will not allow these vagrancies of poor MRO stores service to defeat their mantra to provide a reliable plant. In the real world, each maintenance professional protects each project by utilizing methods to ensure they have the critical spares needed, when they need them, and in the quantity necessary to complete their mission. These methods include:

  • Accumulation of uncontrolled sub-stocks
  • Adding SKU’s with descriptions known only to the requestor
  • Increasing re-order points and re-order quantities
  • Buying around the MRO storeroom and corporate agreements
  • Engaging suppliers to “hold” special inventory without commitment

All of these activities are deemed necessary by maintenance professionals to protect their projects when the MRO store is deemed unreliable. At the same time, these necessities constitute additional unmeasured costs that impact plant profitability such as increased inventory, exceptional freight costs, higher unit pricing, SKU duplications, budget discrepancies, and so on.

Now enter corporate policies, often geared to controlling and improving corporate performance for stockholders. Applying generic principles are safe and proven methods for the corporation; they provide a safe haven for practitioners, but do not recognize the nuances inherent in the MRO world. Here is an example: The corporation requires that ANY contract worth over $20 million must go out to quote, require a reverse auction or some other method that is an acceptable best-buy practice. This may be fine for all things but not for MRO operations. Under these conditions, the MRO contract is awarded to the low-price bidder while assuming all of the complex MRO operational requirements will be met. Corporate directs the plant to use the long term agreement [LTA] via the corporate assigned supply base with the agreed pricing (many times decided by questionable market basket procedures). Here is where MRO differs: the assigned suppliers have only priced less than 10% of the historical MRO spend [which in itself is questionable] as opposed to all the other non-MRO bid requests where usage/services are clearly defined and identified. In addition, pricing for MRO spot-buys are not contained in the corporate RFQ’s [and subsequent agreements] and are left to the discretion of the supplier. So, the assigned supplier is chosen via a low-bid on less than 10% of the historical spend while spot-buys (30-40% of spend) remains uncontrolled…more contributions to MRO unreliability. The effect can be a corporate commitment to a supplier[s] who, because of a profit squeeze, cannot provide the services needed for a reliable stores operation.

George Krauter, Vice President, Storeroom Solutions, Inc.

How can MRO operations be connected to Reliable Maintenance and still satisfy the corporate need for an optimum cost position?  History shows over and over that the plant will not invest in MRO improvement and that corporate services are not always in tune with the plant’s real MRO needs. The answer is a customized third party MRO contract with a provider that has on-site stores management as its core revenue source. This provider must be able to demonstrate a focus and commitment to world class MRO management that is specifically coordinated to the plant’s maintenance reliability objectives. Under these conditions, the company’s investment in MRO stores goes from an uncontrolled profit drain to a lower, contained, and predictable cost that increases reliability, ergo a profit contributor.

George Krauter serves as Vice President of Storeroom Solutions, Inc. He brings more than 50 years of experience in establishing cost recovery methods for the MRO supply chain. Contact George at 610-246-6492 or via email atgkrauter@storeroomsolutions.comwww.StoreroomSolutions.com

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