“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.