Buyer interest in outsourcing MRO picks up steam in down economy
By Susan Avery -- Purchasing, 6/18/2009 2:00:00 AM
Results of Purchasing's annual reader survey on distributor performance shows purchasing professionals are taking a more strategic approach to MRO, consolidating the spend with fewer distributors and looking to the suppliers to provide ever more products and services. And, it appears now that the economic downturn is accelerating buyer interest in suppliers taking on more of the responsibility for MRO purchasing and inventory management.
Distributors and other companies that provide such integrated supply or outsourced services for maintenance, repair and operations (MRO) items say demand has picked up since December 2008. Under integrated supply or outsourcing agreements, a distributor or other provider, sometimes called an integrator, takes on responsibility for MRO purchasing, managing inventory and other related activities. Sometimes the terms "integrated supply" and "outsourcing" are used interchangeably. To define the term, providers say there is no one single definition and that each relationship is unique.
George Krauter, a vice president with Storeroom Solutions in Radnor, Pa., who has worked in the business of outsourcing MRO purchasing and inventory management for more than 30 years says integrated supply means "what the customer wants it to mean."
Some companies simply no longer have the resources to manage MRO themselves and they don't consider the spend category to be a core competency. They want to get out of managing the MRO storeroom altogether, Krauter says. "Purchasing is given a directive from management to significantly reduce costs of MRO and they don't know how to go about it."
For their part, many in purchasing start to worry about their jobs when they hear the word outsourcing, but it doesn't have to be the case, say buyers who manage such agreements. These buyers, in fact, have taken on more responsibility and their roles have become more strategic.
Randy Clark, a senior buyer with Volvo manages agreements with a number of suppliers that provide the automaker with MRO goods in North America and other regions of the world. Clark is a member of Purchasing's All-Star MRO Buy Team for 2005. And Scott Little, global commodity manager at United Technologies Corp., oversees the company's relationships with integrators that manage MRO and chemicals for its manufacturing and aerospace plants worldwide. UTC received Purchasing's Medal of Excellence in 2006.
COMMON CHARACTERISTICS. Reducing costs surrounding MRO purchasing processes is the overriding objective of entering into an integrated supply or outsourcing agreement. Some reductions early on can come from process efficiencies, lower prices through consolidated spending and better managed MRO storerooms. Later, suppliers contribute ideas in such areas as product standardization. Along with all this, buyers look for productivity gains through improvements in delivery, service and availability metrics. The biggest benefit is a freeing up of resources.
Here is a closer look at some of the big tenets of integrated supply and what buyers can expect from such agreements with MRO purchasing outsourcing providers:
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End user involvement. To help ensure success, the integrator or outsourcing provider will involve end users early on in the relationship, often even before an agreement is inked between buyer and supplier. "We align corporate objectives of consolidating the supply base and driving significant cost reductions with those of the plants for local support and service, product availability and expertise and lower transportation costs," says David Erimias, vice president, integrated procurement services division at Supplyforce in King of Prussia, Pa.
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A thorough analysis of the company's spending on MRO items. Integrators and outsourcing providers say when initially contacted, purchasing does not have a clear idea of what the company spends on MRO across multiple sites. MRO is a complex spend, often with a tremendous number of stock keeping units (SKUs) and manufacturer suppliers. Transparency is the goal here.
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A total cost of ownership (TCO) approach. The objective, Krauter at Storeroom Solutions says, is to spend less on MRO. At first, this means consolidating purchasing and leveraging the buy with fewer suppliers. Later on, the provider will involve manufacturing expertise. Regular reporting on TCO is a given.
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Systems integration. Because so many companies have disparate internal systems, integrators and outsource providers often will use their own systems for processing transactions and other activities. In other cases, they may be viewed by buyers as an extension of the purchasing operation and have access to their customer's systems. Either way, the provider's goal is to rid processes of duplicated activities. "We make sure our systems are completely aligned and that there is no redundancy," Douglas Markham, president of iPower Distribution Group of New England in Northboro, Mass.
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Help managing and reducing inventory. Integrators and outsourcing providers analyze current inventories across the company and manage the storeroom. They determine what's obsolete and what can be salvaged, determine optimum inventory min/max levels, and implement vendor managed inventory (VMI) programs. Turtle & Hughes Integrated Supply in Hamden, Conn. provides a point-of-use or breadman program that automatically replenishes stockroom shelves with MRO items, says Rick McQuatters, business development manager.
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Manufacturing/technical expertise. Integrators and outsourcing providers have close relationships with manufacturers and call them in when needed for their technical expertise. In some cases, a manufacturer maintains an onsite presence.
| Up | Down | Same | Index* | Change** | |
| * Index: Above 50 = rising; below 50 = falling ** From last month www.purchasingdata.com | |||||
| Gears | 17% | 8% | 75% | 54.2 | UP |
| Temperature controls | 11% | 5% | 84% | 52.6 | UP |
| Lighting fixtures | 12% | 8% | 80% | 52.0 | UP |
| Grinding wheels | 8% | 4% | 88% | 52.0 | UP |
| Speed reducers | 0% | 0% | 100% | 50.0 | NONE |
| Nonfriction bearing | 5% | 10% | 85% | 47.5 | DOWN |
| Electric motors:1–30 HP | 10% | 17% | 73% | 46.6 | UP |
| Lift truck batteries | 4% | 14% | 82% | 45.5 | UP |
| Test instruments | 0% | 11% | 89% | 44.4 | DOWN |
| Adhesives | 7% | 19% | 74% | 44.4 | DOWN |
| Valves | 11% | 22% | 67% | 44.4 | DOWN |
| Lubricants | 9% | 21% | 70% | 44.2 | UP |
| Motor controls | 0% | 13% | 87% | 43.5 | DOWN |
| Special fasteners | 8% | 22% | 70% | 43.1 | DOWN |
| Filters | 9% | 27% | 64% | 40.9 | UP |
| Pumps | 0% | 20% | 80% | 40.0 | UP |
| Lift trucks | 10% | 32% | 58% | 39.5 | UP |
| Cutting tool inserts | 0% | 22% | 78% | 39.1 | DOWN |
| Pressure instruments | 0% | 24% | 76% | 38.2 | DOWN |
| Seals & gaskets | 0% | 33% | 67% | 33.3 | DOWN |
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