Published June 17, 2012
HAVE YOU BEEN ASKED THIS QUESTION BY MANAGEMENT?
To release value from our MRO operations, do we need to outsource our MRO storeroom to a 3PMRO provider? Why can’t we obtain the lower price, the asset recovery dollars and the critical storeroom reliability ourselves?
The purpose of this article is to outline the answers to the question so we are all prepared when we are asked: Why Can’t We Do It Ourselves?
- The industrial MRO consumer is not positioned in the MRO supply chain to realize functional discounts.
- Manufacturers who sell products via distribution will not, except for rare occasions, sell around their distributors to the users.
- Selling directly (manufacturer to user) does not eliminate the existing cost of distribution. Either the user or the manufacturer shoulders the cost; the costs do not go away.
- Manufacturers have distributors because it is not economical for them to process orders and ship to all potential clients, let alone exercise sales and marketing programs.
- The nature of MRO orders carries a wide diversity of products spread out over many categories. The average MRO order is $150; the number of transactions for the manufacturer would increase prohibitively as would the transactions for the user if all supplies were purchased directly.
The concept of bringing the distributor on-site so the user is out of the internal distribution business is designed to reduce costs for the user.
- Optimum cost reduction comes from eliminating an existing step in the MRO supply chain. If the user “did it ourselves,” there is no step elimination and optimum cost reductions are not realized.
- The “integrators” are an offshoot of traditional distributors. These distributors maintain warehouses, local stocks and all the costs associated with MRO distribution. When the “integrator” obtains a client, there is cost reduction for the user, however, there is no elimination of a “cost step” in the chain. The integrated supply program will eventually fail because it cannot deliver year-after-year savings.
- Traditional distributors who operate/incorporate programs called “integrated supply” do so from a defensive position. Traditional distributors make more profit with traditional purchase orders than they do with “integrated supply” scenarios.
- Profitability considerations of the distributor dictate that the integrated function utilizes the inventories and assumes a proportionate share of corporate overhead. These considerations are manifest in the financial proposals to the industrial consumer. The effect is an improvement, but the optimum cost position is not achieved. In addition, the distributor/integrator will supply authorized brands only; this denies the cost saving opportunities available from alternate sourcing.
By definition, users will continue to own inventory if they “do it ourselves.” If they utilize “vendor stocking,” there would be multiple suppliers to audit with multiple invoicing variations creating higher administrative costs (add more people). In addition, users do not have the computer capabilities to control multiple inventory ownership, inventory controls, reporting and visibility of usage.