“Integrated MRO Supply Management”
A Three Dimensional View
By Thomas Terfehr
_________________________________________________________________
The pressures on suppliers to help their c ustomers i mprove bus iness perfor mance are
enor mous in this global economy.
Business complexit y, cost pressures and e ver increasing quality standards are at the root of these pressures. The ‘extended enterprise’
supply chain model, with a focus on rapid product desi gn, lean manufacturing, a nd J IT
inventories, has proven its effectiveness a s a competiti ve weapon. This is having a
maj or impa ct on how direct materials (those materials and c omponents that ulti matel y
become part of the pr oduct which is sold), are purchased a nd the ir suppliers mana ged.
Inventories ha ve bee n slashed, ti me required for product design has been reduce d,
quality has i mprove d, and suppliers and customers find the msel ves in ne w and
unprecedented roles.
Business pressures and suppl y chain ma na ge ment are causing firms to also e valuate the
world of indirect mat erials and particularly M RO ( maintenance , repair and operating
supplies).
The path to i mproved perfor mance in this arena is not, howe ver , s o
straightforward as wit h direct materials. At the core, the M RO supply chain exists to
support plant operations. The supply s yste m is complex with ma ny, often thousands or
tens of thousands , of parts, pieces, supplier s and inventor y stoc kpiles. The a mount of
annual “spend” for a typical c ompa ny is significant (15%, or more of total spe nd).
Finally, there are ma ny decision-ma kers with different agendas who are often not in
close communication with each other. The net result of this c omplexit y and lac k of
coordination is hi gher cost and ser vice gaps .
Achie ving lower total cost of ownership for MRO ite ms requires t hat the following thre e
supply chain di mensions be addressed. Complete success invol ves integrating all three.
Strategic Sourcing/Procure ment
Physical Suppl y Chain
Technology Tools and Inte grations
The most effective approach to MRO suppl y chain mana ge ment includes a methodology
to achieve inte gration of these three ele ments.
It also incl udes an approach to
organi zational cha nge – which ma kes success ful i mple mentation possible.
100 Danbury Road • Suite 105
•
Ridgefield, CT 06877 • Tel:203-431-0281
www.GenesisSolutions.com
•
Fax:203-431-3643
Strategic Sourcing/Procurement
A ri gorous strategic sourcing process is the essential first step in MRO inte grate d
supply ma na ge me nt. In its si mplified for m, the process invol ves 7 steps:
High
Supply
Difficulty &
Complexity
Quadrant 3
Quadrant 4
Customized
Solutions
Strategic
Non-Strategic
Commodities
Quadrant 1
Low
Quadrant 2
Dollar Expenditures
High
1. Understanding the c urrent state of MRO procurement: This step invol ves
compiling data to det er mine where M RO purchasing dollars are spent. From this
analysis, c ommodit y groupings and classifications are made. Exhibit 1 illustrates
an approach to classification. The greatest improve ment i mpact i s typicall y found
in quadrant four.
2. Involve key stakehol ders in the process: Selecting a cross -func tional team of
subj ect-matter experts focused on one or more commodit y groups is a preferred
approach. This team, in essence, will be e mpowered to ma ke company-wide
decisions.
3. Understand total cost of ow nership f or the MRO item/f amily: This is
critical and will act as the foundation for subsequent commodit y tea m
decisions.
4. Establish busines s requirements f or the item/f amily: These requireme nts
typicall y relate to ser vice, quality, product development and collaboration.
5. Evaluate s upplier/str ategy options f or the commodity
6. Implement the sourci ng decision
7. Manage the relations hip using a supplier perf ormance management process
Through le vera ging a company’s purchas es, the strategic sourcing process will
typicall y yield sa vings of 5 – 25% of annual spend.
More i mportantl y, this
collaborative approac h builds a foundation upon which the relationship can grow, and
future total cost reduc tions can be reali zed t hrough customer -suppl ier integration.
Physical Supply Chain
The physical suppl y c hain is the lifeline of the MRO plant suppor t effort. The MRO
supply chain includes ma ny suppliers, inventor y locations and ordering/recei ving
protocols. Complexi ty, particularly uncoordinated complexit y between competing
suppliers, typicall y brings redunda nc y – in cost, time and effort. One of the essential
elements of MRO supply chain i mprove ment, and ultimatel y integration, is an analysis
of the inbound distribution syste m . . . incl uding the ke y ori gin points, interme diate
points and final destinations.
FACTORY
DC’s & WAREHOUSES
PLANT STORES
TRANSPORTATION
Physical Supply Chain
Addressing the inbound physical suppl y chai n invol ves the following steps:
1.
2.
3.
4.
5.
6.
Define success . . . i mprove ment tar gets, ti metable and reporting metrics
Incorporate s ourcing/procure ment strate gy as a ke y dri ver for desi gn
Define “business rules ” and internal custome r require ments
Baseline defined . . . usage, costs, inve ntor y levels, etc
Complete a n inbound distribution networ k modeling study
Desi gn/redesi gn the inbound s yste m
The improve ments from this acti vit y are as f ollows:
Defined strate gy for t he MRO inbound supply chain
Lower “total landed c ost” of MRO ite ms/fa milies vs. the bas e cas e
Lower inve ntor y value and carr ying costs . . . for suppliers and
customers
Equi valent or i mprove d service for MRO items/fa milies
Technology Tools and Integrations
Onl y after a strate gic sourcing and M RO operating strate gy ha ve been defined should
organi zations turn attention to the selection, deployme nt and full utilization of the
right technology tool s. Tools that operate within the custome r firm and betwee n
supplier and customer are the final element of Inte grated MRO Supply Mana ge me nt.
But, technology tools are j ust that, onl y t ools. The overriding obj ective is to use
technology to support and enhance business operations ~ no more technology than is
necessary, and no less. There are a myriad of options and no shortage of promises. In
the final analysis, a logical selection process based on business require ments and user
needs will lead to the right solution a nd mat ch the a vailable tools to needs.
The first step is to develop an e -Business plan to support the MRO strategy de velope d
above. Some (but by no means all) ele ment s of this plan are as follows:
Establish “direct” order processing interfaces with Strate gic Suppl iers
Define the role of “re gional” (s maller) suppliers and supporting t echnology to be
used
Establish electronic catalogs and maintenanc e protocols
Contract Mana ge ment approach and s upporti ng technology
Define the on-line Supplier Perfor mance Ma nage ment methodology
A te mplate for guiding the for mulation of an e -Business plan is summari zed below.
The goal is to have a defined approach to e mploying technology to support business
require ments. Pilot proj ects are a good wa y to ma ke i mprove ments in a relati vel y
short ti me, learn by doing a nd a void the ris ks of a “bi g bang” appr oach.
MRO e-Business Planning Tem plate
Supplier Commitment
Technology Investment
Co-training
Quantifiable Goals
Competitive Forces
Industry Trends or Standards
Second Mover Advantage
Linkage to Total Cost
Management
Technology Integration
Savings in:
•Unit Costs
•Administrative Costs
•Process Costs
Process Integration
Executive Support
Goals
Common Measurements
Timetable
User-buy-in
Available Technology
Tools and Applications
Software
Web Based Transactions
Network Infrastructure
Electronic Processes
Hardware
Training and Education
Back-end databases
Data Mining
Data Warehouses
On-going Training
Dedicated Resources
Procurement “Super user”
Analytical Tools
Technology support for Inte grated MRO Supply Mana ge ment is most often built upon
a firm’s maintenance mana ge ment s yste m (also referred to as an Enterprise Asset
Manage ment - EAM s ystem) . Suppliers such as MRO Soft ware (Maximo), DataStrea m
(MP 7i), SAP (SAP/PM) and others ha ve a substantial installed base of comprehe nsive
and sophisticated software packa ge s that are frequently integra ted into other core
syste ms such as accounting and purcha sing.
These s ystems, whe n properl y
imple mented and maintained, provide a treasure -trove of infor mation on assets, usage,
cycle -ti me and cost that can be used as the infor mation foundation for an Inte grated
MRO Suppl y Syste m.
Other technologies provide not onl y inter nal benefits, but also enable customer supplier integration through the use of e -Bus iness tools to streamli ne the entire “order
to pay” process for MRO ite ms. The software suppliers mentioned abov, as well as
companies such as Ari ba and Commerce One , are maj or players in this arena. Some of
the functionality a vailable includes:
•
•
•
•
Flexible architecture that allows for eas y int egration with bac k-off ice syste ms
Workflow technology that streamlines the purchase requisitioning process, and
enforces business rule s and buying policies
Easier search and fast er processing through supplier e -catalogs
Access to pri vate net works a nd e -mar ketplac es
These features can provide reductions in transaction and product costs, reduction in
cycle ti mes, and reductions in inventor y carrying costs and i mproved accurac y and
service.
A Typical M RO e- Bus iness Infrastructure
Private Network
Customer Systems
EAM
e-Procurement
(e.g.Maximo,
Maximo,
(e.g.
Datastream,
Datastream
,
SAP/PM)
SAP/PM)
Update
Search,
Communicate
(e.g. Ariba,
Commerce One)
Plan &
Transact
Asset
Record
Asset Record
Requisitioner
Parts Catalog
Parts
Catalog
Suppliers’
System
Sales/Order
Management
RFQ & Small Orders
Quotes, Acknowledgements,
ASN’s
Operations
Approver
Inventory
Large Orders, Contracts
Inventory
Inventory
Shipping
Buyer
Work Orders
Work
Orders
Receiving
Receiving
Custom
Catalog
Invoices/Pay on Receipt
Transportation
Business rules
& workflow
e-Marketplace
Public
Catalog
ERP
Financial and other applications
(e.g. SAP, JD Edwards, PeopleSoft)
Search
&
Transact
Auctions
Update
Alternate
Supplier(s)
Organizational Change
It has been said that no i mpr ove me nt is possible without cha nge.
shown that s uccessful change requires the following:
Experience has
A clear picture of the future state
A need to change
Some logical first steps
The methodology for Inte grated MRO Supply Mana ge ment discussed above is
designe d, and has the prove n capabilit y to provide a strategy and r oadmap for c hange.
The “need” or desire to improve MRO supply mana ge ment must be present or be
created within the fir m’s and its supplier community.
Inte grating MRO suppliers into business is, in the end, an issue of aligning separate
interests, cultures, infor mation s yste ms , a nd technologies. In additional, years of
traditional commerce have created a basic lack of trust, which tends to keep supplier
and customer at arms -length. Overcoming these barriers to unlock the cost and
service gains possible in the MRO suppl y s yste m requires a disciplined approach to
change.
Or gani zational change has two critical compone nts and each can be successfully
mana ged to achie ve a desired outcome:
1. Business Processe s and Methods
MRO supplier inte gration will impact se vera l business processes. Compa nies must
review how materials are sourced, how suppliers are evaluated, a nd how common
business activities such as stoc k mana ge ment, requisitioning a nd invoicing are
handled. In addition, a Total Cost reduction strategy a nd trac king mechanis m must
be de veloped. Some difficult questions must be answere d.
•
•
•
•
Which ite ms should be stocke d?
Where should inventor y be located?
What are appropriate inventor y le vels based on de mand, criticality, and
obsolescence?
Who is better equippe d to own and mana ge i nve ntor y?
Suppliers can be a val uable resource while a ssessing processes a nd methods around
MRO ite ms , and shoul d be invol ved in various stages .
Genesis Solutions be gins by documenting a nd understanding curr ent internal and
supplier business processes.
A ke y to s uccess at this sta ge i s to include ke y
individuals to gather cross -or gani zational input in order to fully understand the
strengths a nd wea knes ses of current pr ocess es and acti vities. This approach also
helps build the case for change by calling att ention to situations that need attention
and by comparing the current situation to alternative approaches a nd methods used
by other fir ms or other industries. Ultimat ely, this input will be used to redesign
ke y processes to
responsive ness.
reduce
total
supply-c hain
cost
and
impr ove
speed
and
2. People
Inte grating the MRO s upply chain i mpacts people and how the y do their j obs. The
Inte grated MRO Supply Mana ge ment strategy described above s pans many
organi zational boundaries, both internal and external.
Ever y aspect of the
organi zation is affected and most e ver yone’s j ob is changed in some wa y.
A few ke y methods a nd tools are used to help people deal with the upheaval of
change.
•
Vision & Strategy Development - A clear , consistent and si mple vision (or
picture) is needed to help ever yone underst and where mana ge me nt is headed.
Strategy follows vision and provides the means by which the vi sion is to be
accomplished. Some logical first steps, including a pilot project, are ver y
useful to help people learn the new methods and ma ke progress at the same
time .
•
Work Redesign - As J obs are changed, or eliminated, ne w funct ions e mer ge ,
the ways people wor k together change. Work redesi gn is a methodology to
redefine roles and responsibilities, devel op new wor king rela tionships and
support the transition.
•
Measures and Compensation Systems - Defining success, me asuring it and
creating a reward s yst e m that reinforces the goals of the or gani za tion is also a
critical element of change . Measure ment is a ke y component of the Genesis
methodology and is e mbedded in all our wor k beca use it is funda mental to
sustaining s uccessful change.
•
Interest-based Soluti ons - Ever y person and organi zation is moti vated by,
a mong other things, the age -old question of “What’s in it for me?” An interest based process is used to discover and make visible the needs , wants, and
insecurities that stakeholders have re garding the changes. Obj ective standards
are adopted that fairly protect e ver yone’ s interests and creative win-win
solutions are de velope d.
Genesis Solutions’ experience with dozens of clients across many industries has
shown that na vi gating organi zational change is critical to the success of any business
initiative. These initiatives will naturally cause resistance, even from those who will
eventuall y benefit. Senior leaders ha ve res ponsibility to set the stage for change to
succeed. The need to communicate clearly and often is well documented. The
changes and benefits expected need to be carefully explained, a nd well understood.
As with any change e ffort, early successes should be used to de monstrate proof of
concept. This more than anything else will support the pilot tea ms and convince
others to j oin in the effort.
A Case Example
Recently, Genesis Sol utions consultants assisted a maj or paper-goods manufacturer
with the completion of a redesign of its MRO mana ge ment function, utilizing supplier
integration as a ke y i mprove ment compone nt.
Historically, our client employed literally thousands of MRO suppliers at a dozen
locations across the continental United States. There was no central control or
mana ge ment of M RO purchases, and each plant made its own s upplier and strate gy
decisions. Due to an e mphasis on price and negotiation, the supply base at each
location was large and diffused. With several suppliers supplying the same ite ms, and
pricing and supplier selection often handled on an ad-hoc bid basis, on-site
inventories were ver y high and often duplica ted by one or more of the suppliers.
An analysis of historical MRO purchas es by the multiple plants produced the
following:
Commodity Family
Bearings and Power
Transmission
Pipe, Valves & Fittings
Electrical
Pac ka ging Supplies
Specialty Machine
Consumables
Specialty Che micals
•
•
•
Annual Purchases
(mm)
$150
Number of
Suppliers
150
$75
$80
$90
$40
125
90
40
8
$29
29
Purchases were grouped into commodit y f a milies. Ke y M RO fa milies, and
relevant infor mation i s below.
Balance of MRO purchases: $15mm s ourced from 1000 suppliers
Storeroom inve ntor y t urn rate: 1.1 ti mes/ yea r
Cross -functional, cross -or gani zational tea ms were asse mbled t o address sourcing,
inventor y mana ge ment and order mana ge ment, for each of t he six ‘commodit y
fa milies.’ Each tea m was chartered with responsibility to c raft a compa ny-wide
strategy for its commodity fa mil y with a goal to reduce total cost by 10% to 20%.
Multi-discipline tea m me mbers were gi ven t he assignment of ‘wearing two hats,’ one
representing the intere sts of their respective plant locations, the other representing the
interests of the compa ny as a whole.
Through the initial phase of strategic s ourcing, the following resul ts were achie ved
over an 18 month peri od:
Commodity Family
Bearings and Power
Transmission
Pipe, Valves & Fittings
Total Cost Reduction
(mm)
$25
Number of
Suppliers
1
$8
1
Electrical
Pac ka ging Supplies
Specialty Machine
Consumables
Specialty Che micals
$7
$16
$6
1
10
3
$.7
2
Total cost reductions (as a % of purchases) were achieved a number of wa ys .
Depending on the c ommodit y fa mil y, re ductions were realized in the following
manner:
Supplier reduction ~ Levera ged buying
Inventor y ~ Eli minate supplier -customer duplication
Inventor y ~ Eli minate plant -to-plant duplicat ion
Supplier generated cos t reduction ideas
Value-a dded supplier services
Administrati ve costs
Improved upti me
5% - 18%
2% - 5%
2% - 4%
3% - 15%
1% - 3%
2% - 3%
difficult to quantify
Year over year cost r eductions ha ve continued each year in the range of 4% to 9%.
Supplier perfor mance and satisfaction continues to be greatl y i mpr ove d.
The technology platfor m for this initiative was a proprietary ERP syste m with
integrated Computeri zed Maintenance Manage ment Syste m (CM MS), Financials and
Huma n Resources s yst e ms. A wor kflow tool for Order Processing was evaluated and
imple mented as a “ bolt on” to the ERP.
Re gional (s mall er) suppliers use a
combination of blanket orders with verbal commit ments and auto-fax for order
processing. An e -mail syste m with a messa ge library and cataloging functionalit y was
selected and i mple me nted to supple ment communications a mong enterprise users and
strategic suppliers.
Supplier catalogs with proprietary ite ms and pricing wer e
established for enterprise -wide use. A data warehouse was establ ished as the engine
for data analysis, perfor mance tracking and the Supplier Performance Mana ge me nt
Syste m.