Tackling uncontrolled maintenance, repair and operations expenditure

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MRO.jpgMaintenance, repair and operations (MRO) expenditure can incorporate a multitude of different commodities, depending on the organisation and industry. Normally such expenditure includes those commodities that are not direct material inputs to actual products, but are rather associated with ‘keeping organisations and machines running’.

Unfortunately the category is often neglected due to its complexity, its informality and its perceived lower commercial impact.

However, through specific strategies and cooperation between stakeholders, substantial value can be derived, not only in terms of money saved, Volition Consulting Services, tells SmartProcurement.

MRO stock procurement can represent as much as 50% to 60% of external procurement expenditure, and a particularly high portion of total expenditure in asset-intensive supply chains. While the value of the spend may be large, the number of stock keeping units (SKU) procured can have a dizzying array of characteristics, from large and infrequent commodity purchases, such as coal, to small frequent purchases of low value items such as bolts and milk. In many organisations, the Procurement department is disempowered by insufficient technical knowledge, insufficient demand visibility / understanding and / or insufficient authority to manage these commodities.

This typically has the following consequences:

• A lack of technical knowledge for some procurement items.
• An expectation from internal customers to stock all items all of the time.
• Low level of integration with maintenance planning.
• Excessive inventories.
• High volumes of purchase orders for low values.
• A high risk of obsolescence for many items.
• Low first-pick-availability.

The problems above highlight the trade-off between cost (price and transactional cost), and the availability of items to internal customers who are often not concerned with cost.

In order to understand the problems associated with MRO, it is useful to analyse the demand type and volume characteristics of the procurement items.

In the figure below, the characteristics of the demand type are detailed on the left and the procurement and inventory management drivers on the right:

Demand type characteristics.jpgThe benefit of differentiating between the types of procurement is that it highlights even the smallest cost driver of a process and how to manage it appropriately. For example, transactional cost can frequently exceed the value of small and frequent purchases such as milk or bolts.

High value bulk items should be sourced through a robust process focused on price.

Regular consumption makes the management of stock relatively easy, assuming that supplier delivery performance is good. Key measures for this category are cost and delivery against schedule.

Planned MRO and routine MRO are the same items procured for different reasons; the higher the level of planned consumption, the higher the level of availability that can be expected from procurement. The key focus for procurement is lead time, as the risk of down time or additional maintenance work frequently outweighs the cost of the part.

The absence of critical items can stop a plant. They typically have long lead times. There is usually a small number of SKUs that must be held, usually for OEM machinery. The criticality of these parts is known and adequate stock is kept to cover breakdowns.

Diagnosing the problem

A large number of suppliers with a small spend may highlight opportunities to consolidate either suppliers or orders. Reducing the effort of placing orders by using catalogues or contracts creates procurement capacity to concentrate on high value sourcing projects. The key is to reduce the administrative burden, usually by effective use of technology.

% Spend vs % supplier.jpgA symptom of the administrative problems affecting procurement is shown in a typical profile of order values below:Value spend compared with spend by PO count.jpg

Many small orders are concentrated in a very small area of spend. Typically, large orders do get the required attention. The missed opportunity lies in middle-band orders that are typically being placed with the same supplier. These are ripe opportunities for sourcing. The initial formalisation of contracts, with the primary objective of reducing supply risk, can yield a benefit through improved performance, and supply a baseline for a sourcing intervention.

The product of small orders is also readily apparent in distorted stock holding patterns, as seen below.

Stock held against stock issued.jpgCurrent stockholding profiled by currently-in-stock and issued in the last year

The table above shows the scale of different problems; first that a few SKUs account for the majority of the spend. These items need to be planned and/or forecasted to more accurately understand the timing of their demand. An emphasis on inventory management policies and forecasting (where appropriate) will also reduce the potential for running out of stock. The bottom quadrants represent risk of obsolescence (stock already held), and the potential risk of ordering stock items that are redundant. These items should be inactivated.

Processes intervention

The following interventions offer excellent results:
1. Defining the commodity structure (group, category, item, etc.). After analysing maintenance and routine stock items, engage an internal subject matter expert for individual commodities as this can lend credibility to decisions regarding categorisation of items, associated inventory management and sourcing strategies.
2. The definition of procurement lead-times, preferably at a supplier and item level. Procurement of routine items depends on the lead time and is a major objective of the sourcing decision. Fixed lead times increase availability to end customers and lower stock-holding requirements.
3. Integrating the inventory management function with the maintenance schedule, combined with good supplier management, enables the Procurement function to confidently commit to internal service level agreements. Better notification from maintenance must be negotiated into a higher availability, rather than availability being assumed. This can reduce inventory levels and increase service levels.
4. Leveraging of scale. High volume orders (e.g. stationery) can be devolved into the business through the use of catalogues and enabled through technology, through either the ERP or desktop solutions provided by suppliers.
5. Business intelligence. Visibility of what is requisitioned and consumed is paramount in highlighting the risks of ordering items that have not been planned or forecast.

These interventions can be planned as a complete project or as individual projects. The current state of the Procurement function in terms of internal service provision will determine the scale of the intervention required. Current inventory stock-holding profiles will also identify the need to dispose of currently redundant stock and lower the risk of obsolescence.

Process differentiation benefits

The proposed process interventions above have the following benefits:

1. Increased capacity within the procurement department to focus on high value sourcing initiatives.
2. Increased value from suppliers through price negotiation and improved delivery performance.
3. Increased available of stock to internal customers.
4. Reduced risk of obsolete stock.

The reduction in procurement spend can be in the region of 5% to 35% for the complete MRO spend, and stockholding reduction in excess of 50% is common.

For more information on MRO expenditure mapping, contact Volition Procurement Consultant Grant Blair at gblair@volition.co.za

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