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ESS: MRO - Not a case for DIY?

01 September 2008

In these cost-conscious times, many manufacturers are looking for ways to rationalise their MRO stores and procurement activities. Even so, says Paul Jenno, there are still those that are unaware of the substantial benefits that can be achieved by outsourcing this area

The sourcing of spares and other equipment, and the operation of the stores are at the heart of Maintenance, Repair and Operations (MRO) activities in every manufacturing company. Traditionally, these key functions have been carried out in-house by the company’s own staff. Often, however, this is not the best approach.

An in-house purchasing team is unlikely to have sufficient capacity to investigate the market and get the best possible price on every order and is, therefore, likely to concentrate its efforts on the orders with the highest value. This is a perfectly sensible approach, but it inevitably means that smaller orders are placed without price negotiation, with the result that the best deal is not always obtained. On each order, the extra spend is likely to be small, but over a large number of small orders, it quickly becomes significant.

Further shortcomings of in-house purchasing are sensitivity to carriage charges when small orders are placed and the high cost of ensuring compliance with all relevant standards. In addition, few companies maintain accurate and up-to-date details of consumption, especially for low-value items. This lack of information can also result in unnecessary costs - a particular component may be purchased in small quantities, for example, when the actual consumption has risen, and economies could be achieved by buying bigger batches or equally through the right analysis increased consumption can be avoided or driven down.

The second aspect of MRO operations to consider is inventory. The biggest concern in most organisations is the amount of capital tied up in inventory. It is not, however, necessarily easy to achieve savings in this area, as the balancing factor is parts availability. A production process out of action for an extended period because the appropriate spare part was not in stock can quickly outweigh many times over the savings achieved by inventory reductions that are not properly planned. Therefore, plant critical items need to be identified, stored in the appropriate conditions ensuring they will be fit for purpose when required. Also, fast moving regularly used items can be consigned and stocked and only paid for on consumption.

That’s not to say that savings can’t or shouldn’t be achieved; merely that they must be very carefully planned. Almost all stores, for example, will contain obsolete parts taking up valuable space, and most will have duplicated items stocked under different part numbers. Once again, accurate usage information may not be available for all items, so it is difficult to ensure that adequate - but not excessive - stocks are held.

Let’s now move on to overheads, the third and final area that contributes significantly to costs in MRO operations. At the top of the list is the stores team where, without fully informed planning and operation of the stores, it is difficult to ensure that staffing is maintained at the optimum level. Providing cover for holidays and sickness can also be problematic.

Another significant overhead relates to purchasing and operation of the purchase ledger. In typical manufacturing companies, the purchasing and accounts departments are set up primarily to handle orders for the materials used in the manufacturing process. The sourcing of items for MRO functions, and handling the invoices they generate is an unwelcome, time-consuming and ultimately costly diversion. MRO can typically represent less than 10% of a company’s total spend, yet equate to more than 60% of transactional activity and supply chain maintenance.

Finally, the MRO operations in most companies have developed over a period of time, rather than being planned from the outset or regularly overhauled. This can mean that they have become inherently inefficient with, for example, manual inventory management systems that generate a lot of paper, but very little in the way of management information, and relevant budgetary control.

As we have seen, in-house MRO operations are usually far from cost-effective, but what is the alternative? The answer is to outsource MRO to an expert integrated solutions provider such as ERIKS UK, an option that is rapidly gaining popularity with many of the leading manufacturing companies in the UK.

The benefits of outsourcing are substantial, so let’s see how they address the shortcomings identified earlier for in-house MRO starting, once again, with purchasing operations. An established external MRO provider will be buying on behalf of many companies and, as in the case of ERIKS, may also be buying for its own activities.

This means not only that it will be buying in larger quantities, but also that it has tremendous influence with a very wide range of suppliers; allowing it to negotiate excellent prices even for requirements that, for a single company running its own MRO operations, would translate into a very small order. Due to its close relationships with suppliers, the MRO provider is also likely to be able to make further savings by negotiating lower delivery charges.

The best of specialist MRO providers will also have the manpower needed to stay completely on top of the latest developments in standards and compliance requirements, and will also be able to put in place efficient and effective monitoring and reporting practices - developed on the basis of its experience with many clients over many years.

Since the MRO provider will have wide experience of stores organisation and operation, it will quickly be able to address the issue of inventory control. A thorough assessment and, where necessary, re-organisation of the stores can be included as part of the MRO service, and will readily allow the identification and correction of such problems as the stocking of duplicate items under different part numbers, culminating in stores operations run on 5S principles to WCM (World Class Manufacturing) standards.

Accurate record keeping, where appropriate, based on modern time-saving techniques such as bar coding, will help to ensure optimum part availability while at the same time eliminating the overstocking that needlessly ties up capital.

Looking at the issues surrounding overheads, the leading MRO companies can, if required, handle the whole stores operation - including supplying the staff to work on the client’s site. This has a number of benefits. Firstly, the staff are well trained and fully conversant with best practice in stock management, control management and many of the products themselves. Secondly, the MRO company will ensure that the staffing levels are accurately matched to the client’s requirements and, finally, a good MRO provider will have a pool of available staff who can instantly be put in place to cover for staff who are sick or on holiday.

As we have already seen, the MRO provider will completely take over the purchasing activities related to MRO operations, freeing up the client’s purchasing department to concentrate on the other 90% of its spend. And the accounts department now receives just one MRO invoice a month rather than hundreds of tiny invoices from as many different suppliers of spares and similar items.

In addition, the best MRO providers operate very effective monitoring and reporting systems that, as well as facilitating efficient stock control, supply invaluable management information. The report might highlight, for example, a sudden increase in use of a particular spare part. This could point to a need for further investigation to locate a potential problem on a machine before it developed into a costly and disruptive full-scale breakdown.

Paul Jenno is managing director, ERIKS (UK) Integrated Solutions

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