Published September 29, 2011
This is a real case study involving MRO in circles. US Flan is a fictional name to which I have given a real life MRO merry-go-round story regarding MRO outsourcing (… or not!).
US Flan is a major manufacturer of food ingredients for ketchup processors. T. M. Doyle is their CPO and was told by the CEO to reduce spend by 20% and reduce any asset-related inventory by 35% (including MRO).
T. M. had already reduced some costs in the MRO area via stop-gap measures loosely dubbed “integrated supply” (VMI, purchasing services, etc.). Now the challenge would be to squeeze more savings from MRO storeroom operations.
T. M. went to a consulting company which recommended an expert third party MRO provider (not a distributor) that has a total focus to on-site MRO storeroom management programs.
After an initial assessment and a financial proposal with scope, 3PMRO programs were implemented, measured and proved to be successful.
T. M. decided to retire and was given accolades for his contributions to US Flan. New management was installed and, as always, looked for ways to improve on existing procedures. After all, what T. M. did was dubbed ” T. M.’s program” … not the ideas of the new regime.
“Well, look at this – the fee from the provider is clearly shown in the contract. If we do it ourselves, we can save the 3PMRO fees, and we can report the savings. After all, we are US Flan; we can buy much better than 3PMRO providers.”
Sure enough, MRO operations were taken back in-house and “fee” savings were reported. What was not reported was the cost of adding 264 suppliers; 16,000 transactions; downtime from stock-outs; and uncontrolled buy-around purchases, to say the least.
The merry-go-round has started to spin.
Guess what! The CPO who “de-outsourced” MRO is promoted to a new position with no responsibility regarding MRO spend, inventory, etc. A new CPO is installed and, as it happens, is looking for new areas of cost reduction.
“Wow, look at MRO! With the right 3PMRO expert, I can reduce suppliers, eliminate transactions, reduce inventory, recover downtime and control all aspects of MRO operations. There will be no cost to us to change since the MRO outsourcing costs are paid out of the benefits that accrue to us.”
A new 3PMRO provider is again installed and the merry-go-round has come full circle TWICE and will probably go again and again. The opportunity costs assumed by US Flan exist because the merry-go-round is fueled by who owns the program, not by consideration to objective TCO benefit opportunities.