Published May 24, 2012
I have a friend who has a very successful purchasing consulting business. She and I have worked closely on projects that have involved MRO and the introduction and implementation of 3PMRO concepts.
My friend has always observed that onsite integrated supply programs are not sustained in the long run because:
- When the integrator is able to right-size the initial MRO mess to a world-class operation, companies will take it back in house: “They cleaned it up; now we can do it ourselves”.
- Corporate egos get in the way: “We are the acme of spend; no one can buy better than we”.
- New management will change a process, i.e. “not invented by me”.
She is proven correct (in some instances) in that the company that has benefitted now believes that they can operate their MRO stores with less cost than their integrator.
The decision to change can be justified by assuming the successful purchasing process applied to the main supply chain would apply to MRO (nothing further from the truth), so the change is made for whatever subjective reason; and the company assumes the burden of managing MRO.
This is what happens:
- The number of suppliers goes from one to many
- Transactions go from 24/year to 10,000 plus
- Inventory turnover goes from 5-6 to less than one
- Spot buy pricing rolls upwards without control
- Fill rates drop from 98% to less than 85% if measured at all
- Sub-stocks grow as requisitioners protect supply needs
The most severe problem is the loss of expertise that occurs when the company staffs the MRO operation with storeroom clerks. This causes Facilities and Engineering personnel to take on the burden of new sourcing and finding state-of-the-art product information essential to their needs. Now these disciplines lose time that should be utilized within their areas of expertise. This loss of value is not measured.
So in the real world, the company has moved back into the hardware store business, which is far from their expertise and focus. Initially, cost savings can be reported, i.e. saving the “cost” of the integrator. Remember, the integrator showed substantial net reductions over the course of the agreement; nevertheless, the integrator’s cost of operation that produced the on-going savings is now viewed as a cost that can be recovered.
The initial savings claimed by the “changers” is slowly and surely eroded and, as time goes by, the additional cost is absorbed and ignored. The company goes on with making and marketing the products for which they excel, and the MRO profit drag is not recognized.
WAIT – Time goes by and here comes new management; the new people say,”Why are we in the MRO business? We build products profitably; our area of expertise does not include MRO Distribution. Let’s go 3PMRO and recover the cost of our MRO operations.”
And around and around it goes!