Learning the Complex World of MRO

Published March 25, 2013

A plant manager in South Carolina was so incensed over the lack of availability of MRO parts that he placed all routine MRO in free access areas. The only parts he locked up were high-value, critical OEM SKUs. Of course, the MRO spend soared; however, the plant manager saw no alternative. Subsequently, a 3PMRO provider made a proposal that guaranteed a world-class MRO store operation with substantial cost reductions, i.e. the solution providing MRO reliability with year after year savings.

Corporate Purchasing had negotiated national agreements for all common categories of spare parts. None existed for the MRO category of critical OEM spares. When Corporate Purchasing heard of the 3PMRO proposal in South Carolina, they went to senior management and said, “We have these LTAs, plus we have invested in SAP. All plants must comply.”  Senior management told South Carolina to use the tools supplied (LTAs and SAP) and manage their MRO situation accordingly. Although LTAs plus SAP are valuable tools, their utility in this plant caused the storeroom to be unreliable. This caused the plant manager in South Carolina to return to the previously (high-cost) method of MRO availability to achieve reliability, i.e., “I have other battles to fight … can’t win them all”.

Here is a clear case of senior management and Corporate Purchasing having little knowledge of the complexities of MRO supply. The actions they apply to their production supply chain are successful. They assume that these same actions will be successful when applied to all things, i.e., the MRO supply chain. This assumption is in error because achieving total cost of ownership benefits and reliability support for each plant is far different for spare parts than it is for any other category of materials or services.

Here is another situation that furthers the MRO dilemma.

A company has two successful 3PMRO plants providing and exceeding KPIs and plant reliability needs. A third plant has an unsuccessful integrated supply operation in that the provider has not provided the investment and/or focus needed to capture the potential cost benefits that exist. The plant management recognized this and put forth plans to switch providers to the same company that has provided success in the other two facilities.

Since the spend for the new plant was over a pre-determined level, the corporation required a reverse auction. Certainly, reverse auctions have value for specific commodities. They may have value for MRO if piece price is the only determinant for selecting a supplier. “May have” is significant in that the reverse auction process has many flaws which allow supplier participants to hedge or low-ball their quotes while recovering margin from non-quoted parts and one-time spot buys.

In this case, the reverse auction was on price as well as on performance; how do you reverse auction performance? What happened is that five competitors participated in the reverse auction for MRO, and the low bidder on price won. Management assumed that the low bidder would provide all of the performance necessary for an optimum and reliable TCO program.

What really happened is that the low bidder had a significant profit squeeze and was forced to increase mark-up on the spot buys (25% of spend) in order to recover. However, the big glitch was that the low bid did not provide enough margin for qualified associates and the winner supplied low-paid, inexperienced associates to work the program. This resulted in an even lower performance factor than the plant experienced before the reverse auction activity.

The conclusion is that corporations do not generally realize that success in the highly visible areas of the supply chain does not apply successfully in the world of MRO. Companies must learn to recognize that MRO is in fact different and needs different considerations in order to provide the plants with the reliability to meet their numbers. MRO is generally less than 6% of the total spend, and yet costly market baskets and reverse auctions are instituted causing months of delays in supplier selection and loss of cost reductions that are never recovered.

Corporations need to take a closer look at the real world differences of the MRO supply chain and the cost differentials that exist in support of a reliable plant.