Why is the entire MRO category overlooked?

MRO leaders know the impact their efforts have on the success of the enterprise. However, they may feel overlooked, even as they innovate in this complicated and essential category.

Overall, the MRO market is estimated at $1.7 trillion per year, including $200 billion in the industrial segment. For a manufacturing company, MRO may represent one-third of the overall procurement expenditures, including parts and support processes to utilize those parts.

Why has the MRO category been overlooked? Much of the spend is on low-cost and infrequently purchased items, so those small and uncommon expenditures are often underestimated. But that means there's a significant opportunity for MRO leadership in managing this inventory and the processes around it.

With production inventory, there's no question of relying on maverick spend or end-running the procurement system. That would upset KPIs like inventory accuracy and costing. But it's common for MRO spend to be done on an ad hoc basis with little thought for inventory management standards.

There is clearly an opportunity for improvement through a cutting-edge MRO strategy.

One of the critical elements in an MRO strategy is to define what products and suppliers fall into the category. The answers may be different for each company and industry. Identifying and separating MRO and indirect spends can simplifying internal financial, accounting and reporting structures. However, an enterprise chooses to define it, MRO spend shouldn't be an afterthought.

Raising the profile of MRO in an enterprise requires a strategic viewpoint and transition from an order-taking approach to becoming a trusted internal advisor for stakeholders. The best place to start is by comparing MRO activities against inventory management standards used for production procurement. It can be an eye-opening experience to analyze annual maintenance expenditures, costs of stock-outs and shutdowns, expedited freight charges and other expenses that occur under the radar.

After this analysis, there is usually a strong business case to modernize and centralize MRO management and processes across the enterprise. That's not to say that everything must be managed via headquarters. Local sites can maintain control for local decisions. But centralizing and standardizing processes, vendor relationships and contracts can dramatically increase performance with no decline in services.

To elevate the MRO procurement and supply chain process, the role that these activities play in the enterprise's performance must be quantified and explored. MRO inventory and procedures should be managed with the same rigor and focus as the rest of the company's inventory. A disciplined MRO organization will be driven by a strategic supply chain plan and won't wait for stock-outs to drive action. For example, MRO inventory must use an inventory management system so that products can be identified and located when needed.

To raise the profile of MRO in your organization, look at these three key indicators:

1. Streamlined processes

An effective MRO strategy leads to a reduction in the number of vendors and contractors to consolidate purchasing power across a smaller group of suppliers. These suppliers can be better managed for performance accountability. The MRO organization can develop a unified database for MRO purchases to drive analytics and future decision-making. Implementing an operating discipline similar to product inventory in terms of tracking inventory turns, or request-to-fill rates can help identify actual demand vs. the perceived need to carry emergency stock. Better inventory management will reduce costly spot purchases and expedited freight charges. Consolidating vendors and better planning for purchases can dramatically reduce the cost of processing purchase orders.

2. Reducing hoarding & maverick spend

Reduced hoarding of inventory and supplies and a maverick spend under 2 percent of the MRO budget indicate that the process is working. Internal stakeholders have confidence they can procure the required products and services in an efficient manner that supports their business goals. Sometimes maintenance technicians may be hoarding thousands of dollars worth of tools and parts to respond quickly to demand from production. Identifying and tracking these off-the-books caches can solve MRO inventory problems and reduce purchases.

3. Decreased MRO spend

The MRO spend should consume 3 to 10 percent of the overall procurement budget, and should decline as processes are streamlined and ad hoc spending eliminated. Delivering significant cost savings and improved support for production will undoubtedly lead to a higher profile for any MRO organization.

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If you'd like to find out more about MRO management strategies and practices that produce significant benefits for your organization, read more about sessions and speakers at the ProcureCon MRO conference.